Blog 2023 Malcolm Blair-Robinson

Yesterday Alistair Darling was arguing on the Radio that Northern Rock and Bradford and Bingley did not have investment banking arms and they both went bust, so separating investment banking was not all is was cracked up to be. This reveals an area which has not been talked about of late and which now needs an airing.

At the turn of the millenium the UK banks had their lending books more or less in balance. That is to say they led 1x the value of their deposits. When they crashed they had lent up to 20x the value of those deposits. To add to the problem of speculative trading they were also over borrowed. Northern Rock and others were not proprietary traders, but they borrowed massively to lend to people who could not pay, secured on assets worth much less than was supposed. This practice must stop and mostly has. It cannot start up again.

If lending and depositing are kept in balance, so is the economy. Growth is driven by saving which funds more growth. If huge funds are sucked in from overseas by institutional borrowing and not invested in industrial expansion, but in property, the value of which inflates to the point where the only way for consumers to spend is by more borrowing (equity release- what drivel), the outcome for this vicious circle is bust. Just follow the numbers, they can go nowhere else.

Whatever the ICB finally recommends, the Bank of England with its MPC, FPC and enhanced regulatory role, must not allow this vicious spiral to recur. As a nation we have to accept that if we borrow money we pay it back. Allowing asset inflation to create wealth is an illusion we cannot afford to repeat.

The toughest job in the Government at the moment is that of Andrew Lansley. He is paying a very heavy, but perhaps deserved, price for lack of candour during the General Election and screwing up on the communications for his important reforms to the NHS. The price he is paying is that the Tories are spooked, Cameron is running scared  and the Lib Dems are in headlong flight. Yet this is the moment when he must stand firm.

There can be concessions about the detail of who sits on the commissioning authorities, but the fundamental pillar must remain. It is that the health management of patients has to come under the control of GPs. Your own doctor knows what you need and where to get it. He fixes for you to see the specialists and receive the treatment. He is always at the centre and never leaves your side. 

At present the interests of patients are managed by shambolic and incompetent bureaucracies, calling themselves Primary Care Trusts, run by self serving and often overpaid career opportunists, obsessed by targets, procedures and practices, not to mention bonuses, whose ignorance of the real needs of patients and the natural flow of medical care, is almost total. This ghastly structure costs vast money and many lives. It must be shut down. For good.

The reason why the majority of GPs have signed up to the new deal is that they know it is much better. The era of medicine which allowed each supplicant, sorry patient, ten minutes before either a prescription or a referral is over. To bury it, Lansley needs the support of the GPs, which he has, but if the rest all run away, let them. Because once the box of this shambles of PCTs is open and it is now, no amount of threats, defections and resignations can close it.

The interim report of the ICB is welcome. The government can now consult and consider. In the autumn the Full Reprt will appear. The government will then decide what to do. Its record for sticking to its guns is beginning to look patchy. Osborne is weak on the banks while strong on the deficit. The Lib Dems are somewhat the reverse. It will be their turn to drive the coalition to do what is needed, just as the Tories pushed them on the deficit. Vince has long been a banking hawk.  For him the autumn could be golden.

Of course everything should have been decided by now and  be on its way to implementation. A sovereign debt crisis may well be brewing, not because the central banks will not cough up, but because the affected populations either will not agree to, or not enact, the terms of the loans. The resultant defaults will bust  more banks. To stop another meltdown, which could include taxpayers refusing another bank bail out by sacking governments which proposed it, ring fencing, or call it what you will, is urgent.

Essentially this must mean that depositors’ cash is used for conventional lending only and is in firewalled segments of the banks, guaranteed by taxpayers as an essential utility of the economy. Investment banking and proprietary trading must be separate. Shareholders, depositors and employees of these operations must bear all the losses of a failure, unrescued by taxpayers. Nothing  more is needed. Nothing less will do.

It is easy to mutter about the dithering MPC, but the hand of cards they hold is not easy to play.

There is a clamour from some quarters (including this Blog) to increase interest rates to combat inflation. There is an equally loud, maybe louder, cry to keep the record low bank rate on hold. The mostly Keynesian eonomists aruing for no change, declare the recovery will be put at risk if any rise is made now; the opposite view is that inflation, left unchecked, can take root and require not modest rises, but penal rates to control it.

Beneath these positions, evidence is contradictory, hence the uncertainty. Wages and house prices remain static or falling, so the traditional inflationary pressures are not there. Commodity, energy and raw material prices have risen, partly but not wholly because of sterling’s fall and VAT has gone up. The hope is that when these pressures work through the books, inflation will fall.

The problem is that inflation in the UK is now nearly double that of the EU and the US. These economies have similar pressures, which tells us that their underlying inflation is a good deal less. The issue for the UK is that with inflation at double the rate of its two main export markets, any export led recovery will soon be in trouble. This will hit manufacturing and suck in cheaper goods from overseas. That will be a disaster not only for so called recovery, but for the whole future of the economy.

At the heart of our crisis lies the fact that we do not make light bulbs, washing machines, televisions, computers, smart phones, tablets, game consoles, shoes, clothes; the list goes on and on. Keynes was a demand economist. His disciples need to wake up to the fact that when he talked of stimulating demand, he meant stimulating under producing factories in an industrial economy. Like fools we told ourselves that we had become a service economy energised by waiters and shoppers. Stimulate demand of that set up and you suck in imports, only to make matters worse. Because our balance of payments is in a record deficit as well, although too often overlooked in favour of the budget deficit. We have, in fact, a double crisis.

Both will have to be fixed to make any recovery real. This cannot be done by robbing Peter to pay Paul. The fundamentals have to be dealt with. The MPC has a busy time ahead.

There are at the heart of this military adventure a number of miscalculations. The rebels are not a competent military force. Gaddafi enjoys more support in depth among his population than the West thought. He is a wily and resourceful commander. His forces, with a backbone of mercenaries, have shown adaptability similar to the  North Vietnamese, whose tactics neutralised so much of  the superior US firepower. There is stalemate on the ground. But most important of all Gaddafi is stronger politically than when the operation began. He is by no means losing. Indeed as this Blog pointed out at the start, in a battle of wits he will most likely win.

Hague and others refer to multiple defections and declare that the Libyan government is collapsing from within. This is rubbish, based on another miscalculation. It is the supposition that the Colonel had modeled his government on conventional lines. Instead he has set himself up as a King.  A King needs two things to survive. A loyal army and a loyal family. Ministers are just window dressing and, in times of trouble, a nuisance.

To topple Gaddafi you have to get at his family and his army. If they turn on him, then it will be his end game. There is little sign of this now, not least because it is not part of the plan. Maybe it should be. But if it were, the military adventure would have to become a full scale war. Whatever resolutions may or may not be passed to invoke it, no paticipating Western government would survive long after its declaration. Washington has already calculated that Obama would lose in 2012 if the Administration is caught up in another foreign war. That would leave only London and Paris gung ho, but Sarkozy is too near an election to risk it and here the coalition would bust apart if Cameron, whose judgement is already in question, tried to go it alone.

The ideal outcome for many would be a drone strike on the Gaddafi family as they gather for evening cocktails. This is specifically against UNSC 1973, though if it happened, relief worldwide would mute the criticism. The trouble with that scenario is that the Gaddafis are more than savvy to the risk. They are rarely in one place together and the places change all the time without warning and pattern. There is a lack of good enough intelligence to guarantee a hit. A miss would involve collateral damage involving innocent civilians. That would be a disaster for NATO and a triumph for Gaddafi.

Over three weeks into this adventure without any resolution in sight, this Blog asks , once again, where is it going?

Slowly, very slowly, the truth is beginning to dawn. When borrowing gets out of hand it forms a dark and virtuous circle. Eventually the interest payments are such a drag on the economy that they hold it in stagnation, making reduction of the loans a sheer impossibility. Greece, Ireland and Portugal are already there. Without  defaulting, they have little hope of future recovery. As this revelation dawns in the financial capitals of the West, a new terminology is heard on the media more and more; debt re-structuring. This is default by another name. This will bust the banks, just as the third world defaults did some years ago. Then it was possible for the banks to write off the catastrophe little by little as their main business grew, so we never knew they were technically insolvent. This time round that will not be possible. This is why the EU and the IMF are piling a burden on these bankrupt economies, which condemns their populations to years of decline. 

Because they are not fools (any longer), having woken up to the reality of a financial crisis far greater than that of the Depression, the central banks and finance ministries are hoping to reduce the exposure of the banks by stomping up the cash to pay maturing loans, which would otherwise default. But in the end default will come and it will be the taxpayers in the solvent countries who will have to pay up. 

What this brings home is this. Debt is derived from spending above income. Therefore budget deficits have to be brought into surplus. This means cuts. Cuts are painful. The killer, however, is the debt mountiain. By slowing cuts and borrowing more, you can ease the pain for a while. But like a malignant cancer, the rising debt and the cost of servicing it will prove fatal in the end.

As the European Finance Ministers meet in Budapest there will be officially discussing baling out Portugal. This is strange when you come to think of it. Portugal is bust (like Greece and Ireland) and needs a fresh start. This cannot happen with the country weighed down by debt, which it will find it hard to service and impossible to repay. So why are they doing this?

Because if they don’t, they will have, once again, to rescue the banks, because it is the banks who have lent the money willy nilly and whose losses will be unsustainable if  Portugal (and Greece and Ireland) default. That will mean an even bigger bank rescue. Moreover the populations of Europe will tolerate, just, baling out a sovereign country, but they will not put up with another bail out of the banks. Not in the U.K. anyway.

If Osborne had to come on T.V. at breakfast, sleepless and stubbled, to say there had been another crisis with the bonus boys and the taxpayers were again having to cough up, he would only be able to say one thing for the government to survive. That all the offending banks had been nationalised in full for £1, with immediate effect their investment departments were separated from their conventional banking departments and the former would be put into liquidation forthwith with total losses to shareholders and shareholding employees. Further, emergency legislation would be introduced to suspend the application of civil law to the entire transaction, which would be treated as a national emergency and incapable of challenge in the Courts.

Oh, no never?

Wait and see. When Mervyn King, the Governor of the Bank of England, says, as he does often, that the banks remain fragile, he means that in the part of their balance sheets showing assets in property and sovereign debt, the figures have no foundation in fact.

Portugal’s arrival with its begging bowl was inevitable and foretold. Spain struggles on. It may be next. A hard nosed assessment of the state of its banks would predicate that it is next in line. Hovering at the side, it hopes that property assets will pick up in value to the notional figure that its banking sector thought they were worth, or near to it, to reduce to manageable, losses yet to be acknowledged. Maybe. Maybe not. Maybe pigs will fly.

In the Eurozone there are two systemic problems. The first is that, as this blog has stated so often, you cannot have a long term viable currency without a government. Modified slightly to accommodate many sovereign states sharing one currency, financial and economic policy must be under one central authority, over-riding fiscally the sovereignty of national governments. If you refuse to surrender that sovereignty, you cannot have the currency.

The second problem is that in some countries (including GB which is not in the zone) have developed what are, in effect, false economies based on continuous borrowing against ever inflating property values, while actual production of real goods and wealth slows and demand is met by imports. Once the property bubble bursts these countries are either bust or in trouble. If they have their own currency, like GB, they are in trouble. If they are in the Eurozone they are bust and lending them more money will make them even more bust.

Building an economy on the ever advancing value of assets, without matching this by productive capacity, is similar, but less offensive, to the economy of the Confederate States of America.  The asset and the economic driver was slavery . When the slaves were freed, the value of land and everything else dropped and the economy collapsed. At the end of the civil war 80% of all the wealth, real wealth, of the re-united States was in the industrialised North.  It took a century and oil for the South to recover and even now living standards outside the oil centres are lower. History is full of  lessons.

Meanwhile the ECB has increased interest rates, fearful of inflation running at half the rate in the U.K. In contrast the MPC, in disagreement and fearful of choking off the recovery, once again does nothing. If it is a recovery based on borrowing which will be ‘choked off” by a half per cent rise in base interest rates to control inflation, it is a recovery not worth having. Better to kill it and start again.

It is now clear why Ed Milliband hesitated to appoint Balls to Shadow Chancellor. He is no good.

Milliband has been playing well on the economy, voicing anxieties of ‘families up and down the ccountry’ and the ‘squeezed middle’. Having raised the anxieties, you have to offer a plan. This is where you turn to your shadow chancellor to set out the coherent and cohesive programme for economic recovery which the government in waiting, as oppositions like to see themselves, has ready. His first incumbent hadn’t a clue; the replacement has some clues but they are either false trails or misread. Add to this a rather confusing style of speaking (shades of Prescott) and you have the kind of mauling which Ed Balls received at the hands of Evan Davis this morning on Today.

In contrast, Nick Clegg, who, post tuition fees has had a terrible time, had yesterday a very good day. Coherent on the media, powerful in the Commons, first he  promoted the need for social mobility, which gladdened the hearts of his party, then he went to the rescue of the beleaguered Tories who are desperately trying to haul their health reforms out of the ditch. He is even beginning to exhibit some of the style of the political heavyweight. Perhaps this is because his image as the honest, fresh faced idealist, bringing a new openness to politics, is more than a little tarnished. If he morphs into a bruising big hitter, he could be an even bigger asset to the troubled Cameron. He could also be a problem for Labour, led by the gentle Milliband and post Big Clunking Fist.

This blog fully supports the NHS reforms. It is absolutely essential, in order to create a modern patient focused health service, to put the GPs at the centre, as it their ownership of the patient which will bring a much more logical thread to the way health care actually operates. This is all in my book, which was published in 2009. For some decades the NHS has bent the patient to fit its own bureaucratic shape. This has been costly, inefficient and too often given bad experience to the vulnerable.

I can speak with significant consumer experience. My father contracted TB when I was four years old. I suspect the disease had been dormant since his serving at the front for the whole of WWI. There was no treatment, only remedies. A partnership between the GP and my mother, who had a practical understanding of medical care, kept him alive through my childhood and almost all my teens, with a quality of life for all of us which was outstanding in the circumstances. Half a century later I put this experience to work as full time carer for my youngest (of six) children, who was born with a very rare congenital condition, from which, at the age of twelve, she died.

Calling on the experience of my father, I was lucky to be able to work through our GP for our daughter, since at the time our family doctor was in a fund holding practice and acted as conductor of the orchestra of clinical and other specialists involved in her care. Later on we moved and as this was after the Labour victories of ’97 and ’01, we found ourselves in a different medical relationship in our new location.

Our new family doctor was marvellous and we worked as a team, but he was for all practical purposes cut out of the loop with the clinicians at the hospital. Each was operating independently in separate trusts. Everything was divided into primary, secondary, tertiary and ancillary care. This structural arrangement was driven by organisational neatness, not patient need. It defied the logic of how illness, particularly chronic illness, evolves. In the resultant, confusion medical errors, made with the best of intentions, cost the child her life. On that dark day I saw, what few politicians dare acknowledge, that the NHS was no longer responsive to people, only to process, fail safe procedures and targets. It is not worth the money we spend on it. There is a better way.

To treat a patient, especially those with chronic conditions (as opposed to injuries) you have to know the patient well and treat them in the round. This cannot be done if you are a  respiratory specialist, if there are also kidney issues and digestive difficulties. There is also family impact. The GP knows (or jolly well should) the whole story and because of that can bring together all the other specialists and services in timely  fashion, with an efficiency and user friendliness which the current system is utterly unable to deliver.

Arrayed against the embattled Health Department is a daunting array of politicians, clinicians, nurses and other medics, all crying too much, too big, too fast. That this formidable opposition is assembled is due to the appalling way in which these reforms have been presented. The Tory end of the Coalition is, in fact, in something of a crisis over this. Now is the time for it to  gird up and re-explain, but at all costs stand firm. The government can listen but it must also challenge. It must challenge the BMA and its vested interests, as well as political ideologues, who confuse healthcare with religion based on folk memories irrelevant in today’s world, as well as Twitter, Facebook and rapper campaigners driven by fear of change, music sales and website hits.  There must be no retreat. That would turn a crisis into a catastrophe.