Credit Crunch

Jim Pickard

I haven’t had a chance to number-crunch today’s unemployment figures yet. But there was an interesting chart in the Audit Commission report – also out today – on how councils are faring in the recession. Read more

Jim Pickard

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. Read more

Jim Pickard

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

Jim Pickard

It is a difficult circle to square: Read more

Jim Pickard

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: Read more

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. Read more

Ever wondered what the IMF would demand from Britain? Simon Johnson, the former IMF chief economist, offers a good guide to an organisation that “specializes in telling its clients what they don’t want to hear”. His piece in the Atlantic runs through a typical IMF solution for the US, but most of the points apply to the UK too. Here’s the nub of his argument, which would be painful reading for Gordon Brown and “oligarchs” in the City.

Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support. Read more

His allies admit it will have to happen. Ministers just think he should just get on with it. The Tories, meanwhile, are licking their lips at the prospect of Gordon Brown stubbornly refusing to give way. The longer he holds out, they say, the more painful the eventual capitulation will be. The pressure is building. At some point, Brown may be forced to break the unspoken golden rule of his political career and say sorry.

It is unlikely to be straightforward. When it comes he will probably admit that mistakes were made, or some suitably unspecific formulation. But it will be the gesture of “humility” that even the Alistair Darling now says is required. In his interview with the Daily Telegraph, the chancellor takes the significant step of acknowledging that everyone — even his predecessor — must accept some responsibility for what went wrong. Blaming the US, subprime bankers, global forces or shirt-sleeved speculators will no longer wash with the public. Read more

We’re all looking forward to Gordon Brown’s lecture speech to the joint session of Congress on Wednesday. This is his big chance to tell America’s lawmakers that they were responsible for the global financial crisis. His regularly repeated thesis, after all, is that the economic catastrophe started in the US (because of lax national regulation) and infected other economies (because of lax global regulation). He’ll surely take this opportunity to tell Congress how it is, to their face – won’t he? Read more

One of our readers is clearly upset. I’ve just been sent a diatribe against the (Tory) claim that it is cheaper to insure the debt of McDonalds than Britain. Here’s the sanitised version:

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The London summit is in the first week of April — which happens to coincide with US banks putting out first quarter results. It could be messy. Nationalisation is rising up the Washington agenda. There is a chance — albeit small — that Obama will have to seize the banks around the time he’s due to hob-nob at the G20.

Here’s some background from Ed LuceRead more

There is a certain irony to David Freud’s defection. When he first unveiled his plan to massively expand the role of private providers in finding work for the jobless, the ideas were compelling but largely ignored by politicians. He now joins the Tory frontbench at a time when his welfare plans are as popular in Westminster as apple pie. But his ideas, out in the real world, are facing their first real test.

The early evidence from Freud-style welfare programmes suggest the reforms are harder and more expensive to implement than first envisaged. Freud designed them in the good times, when credit was easy and jobs were aplenty. The core ideas are still sound. But neither Labour nor the Tories have really come to terms with how they will need to be changed to cope with a severe recession and credit crunch. Read more

Jim Pickard

This morning’s papers were full of info about the new insurance package which will help out any British bank which accepts the government’s offer. Here is the story on ft.com.

The real news to emerge since then is the fact that banks will be able to pay for this insurance using either cash or equity. In other words, we may see taxpayers taking an even bigger stake in RBS or Lloyds/HBOS. In theory the state may even take stakes in other banks – such as HSBC or Barclays - although this seems unlikely for now.

Jim Pickard

Tony Blair might have acted to avert financial catastrophe if only the regulators had warned of the extent of the problems. In the absence of such warnings, the boom meant tough statutory regulation was virtually impossible.

That is his claim, at least, in this FT interview.

The Financial Services Authority has itself admitted its failings, in particular over its failure to stop the implosion of Northern Rock. Here is the FSA’s self-flagellating report from March on how and why it performed so badly.

But other authorities were aware of certain problems building up as long ago as late 2004, even if their warnings were wrapped in the usual fog of ifs and buts. Here is a link to a financial stability review by the Bank of England in December 04. Read more

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It is often wrongly claimed that Gordon Brown failed to spot the housing bubble. In fact, he called the bubble as early as 2005. The trouble was he believed he had addressed it. Brown thought he had successfully managed a boom without a bust. Read more

You don’t need to be in Berlin to take a swipe at Gordon Brown’s economic record. Members of the monetary policy committee have started to put the boot in too. Andrew Sentance, one of the MPC’s external members, recently gave a thought provoking speech demolishing the idea of a “bust without a boom”.

While we may not have seen a classic inflationary boom-bust cycle on the 1970s-1990s model, it would equally be wrong to deny that the current bust was preceded by a boom of some sort….We are now appreciating that the earlier years of this decade saw an expansion of various forms of financial market activity which have subsequently proved unsustainable. Read more

Jim Pickard

I am starting to wish I’d spent yesterday afternoon in the Lords rather than following the navel-gazing Commons debate over the structure of the committee looking into the Damian Green affair. (Why do MPs always turn up en masse when talking about themselves?)

Some real gems in the Lords’ Hansard. Read more

Jim Pickard

We spotted the rapidly rising cost of insuring UK gilts against default in this blog on November 24.

Today the Tories pointed out that the relevant figure (credit default swaps) is now twice the cost of insuring the debt of McDonald’s, the fast food chain. Read more

Jim Pickard

The 15 bills in the Queen’s Speech are as dry as dust*.

But Alex and I have been told that Gordon Brown is about to reveal the big surprise. Read more

Jim Pickard

James Crosby’s report on Monday recommended state guarantees for £100bn of new mortgage-backed securities to help get banks lending to home-buyers once again. I pointed out here that Crosby himself had reservations about this idea when he wrote his interim report in the summer.

Treasury officials tell me that the situation has become more desperate since then. But surely the fundamental pros and cons remain the same.

Mervyn King seemed unimpressed with the idea when he spoke on Tuesday, describing securitised mortgages as a ”form of lending that for rather good reason has fallen out of favour”.

The final Crosby report says the government guarantee would only be used for new mortgages, not for re-financing existing ones. It would be available to banks and building societies. Only “prime” mortgages would be eligible: excluded are high loan-to-value loans, second charge loans or those to people with impaired credit histories.

How else would taxpayers be protected? The answer seems to be the ratings agencies. Read more