Okay, it’s not the same Fred Goodwin. This one works as an analyst at Nomura, apparently.

But the Tories have seized upon Goodwin’s report which suggests “the prospect of a UK fiscal crisis is a clear and present danger”. The report suggests that a fiscal crisis is “far more likely” in the UK than in the US - because the dollar is a reserve currency.

“The UK fiscal dynamics are unsustainable. The fiscal balance is plunging deeply into the red in a spectacular and frightening way. Who will fund it? Without QE (quantative easing) the possibility of failed auctions is not trivial.”

Apparently the government’s mega-programme of gilt issuance (selling bonds) has not yet been fully tested - because it has been exceeded by QE (buying bonds).*

When the government turns net seller we will see whether there truly is a market appetite for UK gilts.

George Osborne described the Nomura report as a “wake-up call” with Britain’s “international reputation” at stake. Privately, however, the Tories must be as worried as the government is - given that the situation may still be with us in eight months.

UPDATE

The exact figures are as follows:

* As of September 10 there has been £145bn of QE (assets purchased by the creation of central bank reserves), of which £143bn has been gilts. The process began on March 11.

* Since that date the Debt Management Office has sold £95bn of gilts.

A brief passage in George Osborne’s last Andrew Marr interview stands out: In it, the shadow chancellor heaps praise at the feet of the world’s central banks for preventing financial meltdown.

“But we say the most effective form of stimulus is monetary policy, is the low interest rates, which both here and around the world I think have been the most effective tool at bringing the world back from the brink of depression.”

A statement of the obvious, you might think. But was Osborne playing up the actions of Mervyn King and others to belittle those of Gordon Brown? A Tory MP suggests that this strain could grow louder as the party seeks to rob Brown of the credit for halting the apocalypse.

For some time now I have been asking the Treasury for an explanation of Alistair Darling’s Budget claim that government actions have saved “up to 500,000 jobs”.

My questions:

1] What research is this based on?

2] Is 500,000 at the upper end of a wider range of estimates; eg “350,000 to 500,000″?

3] How much of the 500,000 is down to political action and how much is due to the actions of the Bank of England - ie quantatative easing and interest rate cuts?

It’s been at least three weeks and the Treasury still hasn’t answered the question. Although they say they may provide more detailed analysis later in the autumn.

Lord Myners gives short thrift today to Tory plans to kneecap the Financial Services Authority and transfer many of its powers to the Bank of England.

In an interview with City AM (the freesheet) the City minister says the central bank neither wants nor has the right skills for the job. He portrays the Bank as an ivory tower full of chin-stroking academics.

“They (Tories) have misjudged the competence and culture of the Bank of England. The Bank is a very academic institution. It is not actually about doing things,” he said.

“The Bank is good at looking at the wider picture but it does not want to be supervising and reflecting on individual banks. Do we want the Bank of England distracted by supervising building societies and insurance companies?”

I was going to blog on Monday about the flaws in George Osborne’s plans but Paul Murphy on FT Alphaville beat me to it. And here is another colleague, Paul J Davies, making a similar point.

Ultimately the reason why financial regulation often fails is because the smart guys aren’t working for the FSA or the SEC: they are making millions of pounds/dollars in the banks.

Chief executives of banks didn’t understand some of the financial products cooked up by youths with PhDs in advanced mathematics. How can we expect low-ranking regulators to be on top of these innovations?

This point is made in a shrewd letter to the FT today by Tim Price of PFP Wealth Management:

“As to the likelihood of the Bank attracting a sufficiently experienced and qualified staff, this gets to the absolute heart of the problem. Short of receiving infinite remuneration, no regulator will ever realistically be able to compete with the so-called “talent” on Wall Street and the City, even if that talent amounts to self-enrichment rather than wider wealth creation.”

See the FT’s Arena blog debate: should the FSA be scrapped?

Attempts to clean up the financial system have become more urgent given reports of the banking world returning to normal.

There are suggestions that Goldman Sachs and Morgan Stanley could agree to pay out $34bn of bonuses between them later this year. I caught up with a friend at the weekend who works for a bank in the US: “Everyone is expecting a bumper bonus season, it’s going to be hugely controversial when this comes out,” he told me.

Of course lending has not yet returned to normal. But banks have been able to profit from recovery surges in some markets, for example stock markets outside Europe and the US. Soon it will be champagne time on some trading desks.

Today’s white paper on banking - issued by the Treasury - doesn’t seem to be greatly radical despite its broadly sensible tone.

1] It urges more sensible remuneration practices but fails to specify how pay and perks should be curtailed in any detail. The paper says “the FSA now has powers to penalise banks if their pay policies create unnecessary risk“. Every year the City watchdog will have to report on how banks are complying with a remuneration code of practice.

It will also “integrate oversight of remuneration policies into overall assessments of risk.” The Treasury is briefing that this means that banks with over-generous pay packages will have to hold higher levels of capital.

But how will they define “unnecessarily risky” pay packages? Herein likes the difficulty. I’m told the Treasury discussed the idea of a “maximum wage” and quickly realised it was unworkable. Let’s wait to see how this works in practice.

2] Alistair Darling (here is his speech today) will give the FSA a new statutory responsibility for financial stability but will otherwise leave the tripartite regime (Bank of England, FSA, Treasury) intact.

3] There will be a new “Council for Financial Stability” which will supervise meetings, three or four times a year, between representatives of the three bodies (who already meet regularly). These gatherings will be minuted and those minutes will be made public.

4] The FSA is strengthening rules to make sure banks hold enough capital as a buffer against losses.

Andrew Tyrie, a Tory MP on the Treasury select committee, said the white paper was “Rearranging the three key deckchairs on the Titanic”. There were questions as to why Mervyn King (governor of the Bank) only saw the report last week.

It was Lord Myners who hit the nail on the head when he told the committee this afternoon: “No amount of supervision will guarantee that you will make up for poor governance, poor management and a poor culture (at banks)”.

It is a difficult circle to square:

Ministers want banks to be responsible and risk-averse. They also want them to provide more loans for families and businesses.

The two are contradictory.

We had another insight into this puzzle this morning when the FSA, Lord Myners and John Healey (housing minister) were up in front of the Treasury Select Committee.

You may remember that Gordon Brown wants to ban 100 per cent mortgages. (”A new era of responsible lending“). The prime minister has asked the FSA to examine the issue. The watchdog is putting out a paper in the autumn examining whether mortgage restrictions are a good idea.

But the FSA executives who appeared this morning at the committee seemed far from enthusiastic about setting restrictions on loan-to-value or loan-to-income ratios.

Jon Pain, managing director of retail markets for the City watchdog, said that imposing “caps or collars” on mortgage lending based on income or deposit ratios could be a crude tool for measuring affordability.

Instead, lenders had more sophisticated ways to work out whether a household could repay a home loan, Mr Pain said. Assessing a loan on the basis of income versus mortgage was a “superficial” ratio, he said.

Mr Pain said that the level of a household’s disposal income - after paying mortgage payments - was a more appropriate figure than loan to value or loan to income ratios. (An argument used by many lenders in recent years to justify their more “liberal” lending practices).

Meanwhile another FSA executive, Leslie Titcomb, argued there were concerns about the potential impact on first time buyers.

“We are also concerned that having a fairly blunt tool like a cap on loan to values could have an effect of denying first time buyers access to the market, which would be unfortunate,” she told the committee.

Maybe I’m over-interpreting here but that seems pretty clear…..no ban on 100 per cent mortgages or banks lending six times your salary.

Sally Keeble, a Labour member of the Treasury select committee, said the comments proved that there was a “clash” between the two arguments.

“I’m fairly certain there is a clash about what the government wants to do,” she told the FT. “On the one hand, they want to see prudent lending, which argues for tight controls on loan to value ratios, on the other, they want people to be able to get loans.”

You would have thought that the prime minister would now have his public sector spending numbers at his fingertips - given that David Cameron has made the issue his focal point for three sessions of Prime Minister’s Questions in succession.

Apparently not. “Capital spending…will fall after 2011″ he said. Then, later: “Capital spending will rise to 2011 and then fall.”

This is less wrong than his previous PMQ claim that capital spending would keep rising until the Olympics (2012).

But it’s still wrong.

There was a clarification towards the end of the half-hour session when Brown said that in fact the figure would fall in 2010. His admission came after prompting by a Tory MP who reminded him that the Treasury’s own capital spending figures show £44bn this year and £36bn next year.

Some pundits are wondering whether Cameron should start following a different strategy and stop using up all his questions on the same theme. They ask whether the impact is blunted by repetition. I’m not sure. After all, Brown’s reputation was built on his solid grasp of numbers.

UPDATE

I forgot to mention Brown’s preposterous claim that the Tories were expecting unemployment to rise in the coming years - as if he was not.

Surely the Treasury’s own economic forecasts are based on unemployment rising substantially from today’s levels? Given that this is the consensus of almost all independent forecasters.

The charge against Gordon Brown is that his promise of future investment - instead of cuts - is cloud cuckoo land given the grim public finances. You may think this unfair.

But here is the verdict of the governor of the Bank of England today when asked about the national deficit:

Mervyn King:

“The speed of which the fiscal stimulus should be withdrawn has to depend on the state of the economy. …The scale of the deficit is truly extraordinary. 12.5 percent of GDP is not something that anybody would have anticipated even a year or two ago. And this reflects the scale of the global downturn.

But it also reflects the fact that we came into this crisis with fiscal policy itself on a path that wasn’t itself sustainable and a correction was needed.

There will certainly need to be a plan for the lifetime of the next parliament, contingent on the state of the economy, to show how those deficits will be brought down if the economy recovers to reach levels of deficits below those which were shown in the budget figures.”

Some grim developments on the public finances front. Alistair Darling prepares to acknowledge the biggest forecasting error ever made by a British chancellor (he takes the crown from Denis Healey). The IFS calculates that we’ll have to find £39bn a year in extra taxes or spending cuts till 2016, just to plug the fiscal black hole. And, perhaps scariest of all, one of the most powerful UK hedge fund managers warns that the “only policy option left” for Darling is to print lots more money.

This is not a cheap audition to be the next George Soros. Mike Platt, co-founder and chief executive of BlueCrest, Europe’s fifth-largest hedge fund, is a serious figure who usually shuns the limelight.

He predicted quantitative easing would be required six months before the Bank of England fired up the presses. Now he and other hedge funds are betting that Britain will have no choice but to print its way into an inflationary spiral.

This is the key quote from his interview with James Macintosh:

“The easiest way for the system to be saved is to print money. It is the only policy option left.”