Banking

This government’s love of quangos reached new heights in today’s Budget when Darling announced the creation of a ‘credit adjudicator service’. This will allow companies who feel they have been unfairly denied credit by their bank to appeal the decision to the credit adjudicator service which will have the legal power to order the bank to lend the money.    The Treasury is quick to stress that businesses will have to have claims referred to the credit adjudicator service by their regional business body. But this quango, which will cost five million pounds a year to run, strikes me as a quite absurd attempt to second guess commercial lending decisions. It is also unaccountable.

Brownies galore in our PM’s interview with the Economist. So many, in fact, that I thought I do a quick Fisk:   The Economist: The big worry seems to be the deficit—the deficit. What should the message should be? Gordon Brown: I actually think that the first thing that we’ve got to do as a global community—and I said it this morning and I’ll say it again—is that the reforms of the global financial system are not complete. As far as Britain is concerned, we are dealing with a one-off hit as a result of globalisation. FN: Let us pause, here, to consider the brazenness. Brown’s policies pumped the UK economy up with the steroids of debt. The banking collapse hit us harder than any country because he took the wildest risks.

As Mark Bathgate and Fraser warned, the economic crisis now has an added dimension: inflation. The government’s preferred marker, the Consumer Prices Index (CPI) rose to 2.9 percent in December from 1.9 percent in November, which as Andrew Neil notes is the biggest monthly rise in the annual index since records began. And the Retail Prices Index (RPI), used to calculate welfare payments and wage re-negotiations, rose to 2.4 percent from 0.3 percent. The underlying RPI rate rose to 3.8 percent from 2.7 percent.  We are now seeing the long-term effects of Quantitative Easing and the use of debt to finance further government borrowing.

Fraser outlined the problem with the British banks in his earlier post, but I’d like to suggest a three-step solution.   1. To deal with the problem, you have to admit to the problem. This is the First Step for Alcoholics Anonymous 12 step plan but holds true for politics. Say it out loud: the banking system is still broken. It needs fixed, and the process won’t be pretty. There will always be a political temptation to turn a blind eye, as there was in Japan during its ‘lost decade’. 2. Use an objective and credible third party to analyse the ability of banks to withstand losses, and to go through their balance sheet with a fine tooth comb.

The Tories have said plenty to dismay me in the last few weeks, so I was delighted to pick up the FT today to see George Osborne talking sense – and boldness. Given that we have to increase taxes, it’s an obvious one to raise. The “too big to fail” principle means that the state now provides de facto insurance to banks – so it’s reasonable that they pay for that insurance. The whole tone of Osborne’s interview is reassuring, especially as he indictates he is studing the aggressive Swedish reponse to the fiscal crisis. He indicates Tories are looking at plugging the deficit with 80 percent cuts and 20percent tax rises – even more radical than the 70:30 split which (as James told us back in October the Tories were then thinking about.

Oh, Darling, what hast thou done?  There are few more pertinent, or more damning, examples of what the government’s soak-the-rich policies could mean for the country than the news that JP Morgan is having second thoughts about developing a £1.5 billion European HQ in Canary Wharf.  Of course, the bank may still go ahead with it.  But just imagine if they don’t: the work lost for construction workers and a thousand other contractors; the tax revenues lost for the public finances.  The damage won’t just – or even mostly – be to the financial sector. Thing is, I imagine that Number Ten will be fairly happy with the story.  As the Ephraim Hardcastle column demonstrates today, Brown & Co.

The figure of £178 billion in the Budget – for 2009/10 – is by no means the full story. For that we have to turn to the Debt Management Office, which is in charge of flogging the IOU notes. It just now confirmed that it will need £223.3 billion by the end of this financial year - £5 billion more than expected. And a staggering amount, which I suspect the government simply could not raise if it did not have the Bank of England printing presses working overtime. Why the gulf between the two? Because of the bank crisis. This financial year a further £42 billion has needed to by pumped into the banks in various forms – not just Lloyds and RBS, but the smaller bank failures like Northern Rock and Dunfermline Building Society.

Moody’s AAA sovereign monitor was published today, and whilst the UK’s AAA status remains ‘resilient’ the situation is far from rosy. The report states: ‘The UK economy entered the crisis in a vulnerable position, owing to the (overly) large size of its banking sector and the high level of household indebtedness. Both continue to weigh on economic performance. Net bank lending to the UK business sector has continued to contract through Q3 2009, and repairs to household balance sheets (i.e. the rising savings ratio) may weigh on demand for some time to come. The depth of the crisis has been mirrored by the ongoing deterioration of public finances (with gross debt/GDP having risen from 44% at the end of 2007 to an estimated 69% at the end of 2009).