How Long Do We Have to Wait for Europe’s Black Wednesday?


Norman Lamont
Treading in Mr Lamont’s footsteps – image by scatterkeir via Flickr


Through all the travails, indeed through the slow motion train crash of the collapse of the Euro, the EU integration juggernaut is grinding on.

The European Commission is now proposing what the BBC calls “an EU-wide banking union”.

This plan includes:

  • A single EU regulator to oversee banks across the whole of the EU.
  • A new bank bailout fund, financed by a tax on financial institutions.
  • An EU-wide deposit guarantee scheme to protect savers.

The BBC says

But the UK government has indicated its reluctance to sign up to closer EU ties.

It prefers a body that only covers banks in the 17-member eurozone.

Yeah right. “Reluctance.” The negotiations have already begun:

However [the UK government] would support a strengthened single market in financial services for all 27 EU states.

A “strengthened single market”. I guess that means more European regulation of our banks.

The BBC fatuously comments that

This would also remove the possibility of one set of taxpayers, for example, in Germany, having to bail out savers in another country such as Spain.

which is completely untrue, since for example if the new fund has to bail out banks in Spain, then the banks in Germany would in effect be paying via that levy. The only difference would be that the bailout would be co-ordinated by European bureaucrats instead of European politicians.

In any case, none of this would explain how to stop a systematic debt problem that afflicts all countries.

The problem is DEBT. And that means the problem is our politicians. The answer though, is not to take power from them and give it to the likes of European Commission President Jose Manuel Barroso. The answer is instead to change the politicians.

No matter. This is all light relief. This whole proposal is so far off into fantasy-land as to call into question the sanity of the European Commissioners.

The pressure on the Euro itself is not abating. The latest bailout, of the banks in Spain, ended up being as much as €100 billion. It unravelled within hours, with Spanish 10-year bond yields reaching 6.8%. In other words, the markets believe there is a high risk that loans to the Spanish government will not be repaid – or not in Euros, anyway.

The whole Southern part of Europe – Greece, Italy, Spain, Portugal – is right now where Britain stood just before “Black Wednesday”, when the country fell out of the Exchange Rate Mechanism. Remember Chancellor Norman Lamont telling everyone that Britain’s commitment to continuing in the ERM was unshakeable? Remember his telling us all how essential it was for the credibility of our country’s economy that we stayed in? Remember all the great and the good loudly telling us that leaving would be a disaster and a humiliation for Britain?

Remember Mr Lamont’s bumping up interest rates on Black Wednesday to 12% and then within hours to 15%, to try and defend the pound against the wall of market speculation that Britain would leave the ERM?

And remember that just hours later he was forced to capitulate and announce Britain’s withdrawal anyway?

Here is how Wikipedia describes that day:

The UK’s prime minister and cabinet members tried vehemently to prop up a sinking pound, and withdrawal from the monetary system the country had joined two years prior was the last resort. [John] Major raised interest rates to 10 percent and authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets but the measures failed to prevent the pound falling lower than its minimum level in the ERM.

The Treasury took the decision to defend Sterling’s position, believing that to devalue would be to promote inflation. On 16 September the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 19:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent (however, on the next day interest rate was back on 10%). It was later revealed that the decision to withdraw had been agreed at an emergency meeting during the day between Norman Lamont, Prime Minister John Major, Foreign Secretary Douglas Hurd, President of the Board of Trade Michael Heseltine and Home Secretary Kenneth Clarke (the latter three all being strong pro-Europeans as well as senior Cabinet Ministers), and that the interest rate hike to 15 percent had only been a temporary measure to prevent a rout in the pound that afternoon.

Disaster! Calamity! Er – no. That day was followed by a surge of economic growth and the resolution of the economic slump that had afflicted the country for a couple of years.

If the Southern European countries whose economies are being destroyed by the Euro – Spain, Italy, Portugal, Greece – don’t leave the Euro, then Europe itself will face a bleak future. Their leaders ought to understand that this isn’t going to stop. This is not a question of getting through the next week, or the next month. The financial and economic pressure will be as great or greater in a week, or a month, or a year, or a decade. Sooner or later their citizens will decide they’ve had enough and hang them from the nearest lamp-posts.

Of course Britain could have a referendum and withdraw from the whole sorry business of the EU. In fact, that scenario is looking increasingly possible. We could watch from the sidelines as Europe rips itself apart. But we are intimately involved – partly just for historic and geographical reasons, and partly due to the disastrous misjudgements of a series of British leaders. Even though we might escape the worst of the pain, collapse in Europe would hurt us very badly.

Some leadership from David Cameron would not go amiss. He ought to be urging those Southern European leaders to go for broke and make plans to leave the Euro. But of course he won’t. Leadership and Mr Cameron do not go together. He and his mate George Osborne will just sit on the sidelines hoping it’s all going to go away. After all, they might get a kicking from their European masters if they do otherwise.

Banking Regulation – The Turf Wars Begin


Andrew Bailey
Image by Bank of England via Flickr

This Man Wants You to Pay for Your Banking – And He’s Not Even a Banker


Andrew Bailey is shortly to become the head of the Prudential Regulatory Authority, the new banking regulator that has been set up to replace the Financial Services Authority. He has been telling us that the banks rip us off – by providing free current accounts.

Yep, you heard that right. Free current accounts are one of the few things that most people like about our banking system. Mr Bailey says the regulators, i.e. the government, are thinking of intervening legally to stop them.

Reform of retail banking in this country cannot move ahead unless we tackle the issue [sic] of free in-credit banking, and have a much better sense of what we are paying for and how we are paying.

Mr Bailey said that he recognised that no bank could independently impose current account charges without losing customers and that the industry could not act together “without appearing to collude”.

“So, it may require intervention in the public interest, not least because it is a way to encourage greater competition,” he said.

The banks would be accused of running a cartel if they did it on their own. So Mr Bailey wants to give them legal cover for doing it.

He wants to help the banks collude against consumers. Even more astonishing, his given reason for helping the banks collude against consumers is to encourage greater competition.

He wants to get them to compete more – by forcing them not to.

Why on earth would he want to do that? Well, Mr Bailey reckons that current accounts are “cross subsidised” by other bank activities, He reckons that free banking is a “myth” that “encourages the mis-selling” of products such as payment protection insurance.

Is that right? Is free banking a myth? Or do the banks make money out of running current accounts?

The Office for Fair Trading produced a report in 2008 into the market for current accounts. That report estimated that the banks make £8.3 billion from personal current accounts. Of that, £4.6 billion came from offering little or no interest on credit balances, while £2.6 billion came from overdraft charges.

So Mr Bailey is being tendentious. Yes, of course “free” banking is not really free. There are charges for people who go into overdraft, and also the banks offer little or no interest on current accounts, meaning they are borrowing your money for nothing. But it is not the case that current accounts are cross-subsidised by other banking activities.

What is even more interesting is the implications of Mr Bailey’s fatuous remarks for the banking regulatory system.

The Coalition reforms of banking regulation consist of abolishing the Financial Services Authority, and creating two new regulators to take its place.

One, the Prudential Regulation Authority, will be part of the Bank of England and will be in charge of regulating financial institutions at a macro level – the extent of the capital they hold for example. The other, the Financial Conduct Authority, will regulate retail services – preventing misselling for example.

This “issue”, of free banking, doesn’t really fit into either of those quangos. To my mind, it is more a matter for the FCA than the PRA. But Mr Bailey will be head of the PRA, not the FCA. The turf wars between the two, it seems, have already begun. And the new system isn’t even up and running yet.

Adam Posen – the Bank of England’s Tame Socialist

American economist Adam Posen, member of the M...
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“Bank of England’s Adam Posen calls for credit boost,” says the BBC.

Mr Posen wants the Government to set up a new publically-funded bank to lend to businesses:

Mr Posen proposed two institutions: a public bank or authority for lending to small business and an organisation which would package loans made to small and medium-sized businesses.

Think about that for a minute. Basically, he wants the Government to set up a new public sector bank in competition with the private banks.

But where would the Government get the money to fund the new State Bank?

Well, obviously, they would borrow it.

They would create gilts, and sell them. The buyers would obviously take the money from wherever else it previously was – maybe from their bank accounts, or out of alternative investments, or even by borrowing themselves in competition with the small businesses who want the loans from the new State Bank!

This is silly on so many fronts that it is hard to believe a member of the Bank of England Monetary Policy Committee has suggested it.

First, if the Government borrows money, it will tend to push up interest rates. That will in turn hurt all the businesses who are borrowing.

Second, the banks are experts in their field. They lend to the businesses that are the best risks. By definition, Mr Posen’s plan would result in money being lent to businesses that otherwise would not be able to borrow – in other words, to less credit-worthy businesses. In short, his plan would divert resources from sound businesses to less sound ones.

Third, the Government borrowing yet more just might be seen as a tad risky, given that it is already borrowing more than a tenth of national output.

And fourth, the credit crunch was transmitted around the globe by systemic risk distributed all around the economy and indeed the world. Mr Posen actually wants the Government itself to get tied up into the whole system. You can’t get much more systemic than the Government. His idea would, in fact, increase the risk of a collapse of the banking system.

But fifth and most devastating of all, the Government already owns a big bank. Well, 84% of it, anyway. It is called Royal Bank of Scotland. And the last time I looked, it was indeed “lending to small businesses”. So why create a new public bank? Why not just pour even more taxpayers’ money into RBS and have them do the lending? That would actually be exactly the same as Mr Posen’s suggestion – except that RBS are, at least, banking professionals, and therefore might be expected to have some competence at least in lending the money.

Somehow I think that if George Osborne proposed lending RBS further billions of public money, his idea would be met with a huge raspberry by the public.

In fact, why even bother with a bank? Why not just lend direct to businesses? Why not just pick winners, create national champions, and nationalise the means of production? That worked so well with British Leyland, after all.

Coal Queen 1973

Mr Posen is a closet socialist, even though he may not even realise it himself.

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German Banks Generously Agree Not to Bankrupt Themselves

Deutsche Bank
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Generous to a Fault

It is said that if you owe your bank £1 million, you have a problem.

If you owe your bank £1 billion, on the other hand, the bank has a problem.

The BBC reports that the German banks have agreed to take part in the new “rescue package” for Greece. Which is generous of them considering that Greece owes them €20 billion, and if Greece is not “rescued” there would be a default that would bankrupt those German banks.

So the German banks will re-lend Greece €3.2 billion over terms of up to 30 years. In other words, if Greece can’t pay, they just won’t ask for the money for a while – a long while.

And that means the loans stay on their books, they don’t go bust, and everybody’s happy. Even the Greeks are spared the pain of being let off their debts.

Whoever said banks aren’t generous?

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Half a Cheer for George

Gordon Brown in 2007
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Gordon Brown Nationalised Northern Rock. Now It is to be Privatised.

The Chancellor has announced that Northern Rock is to be privatised. That’s certainly good news, and a little step in the right direction. Says the BBC:

The auction of Northern Rock is expected to raise about £1bn, which is less than the £1.4bn the government injected into the bank, although not all of it is to be sold.

The former mutual has been split into a “good bank”, containing customers’ savings and about 70 branches, and a “bad bank” containing the more toxic loans.

The former is set to be sold, while the latter will continue to be owned by the Treasury.

That doesn’t sound half bad, does it? They’re getting only £400 million less than they put into it. And they will still own those “toxic loans”. Maybe some of those are worth something. They might even make a profit overall!

But wait. That BBC article is grossly misleading.

The “good bank” is called Northern Rock. The “bad bank” is called Northern Rock Asset Management, or NRAM. On 31st March the BBC itself reported Northern Rock’s financial results. In that article, it noted:

NRAM said it had repaid £1.1bn of its government loan over 2010, reducing its balance to £21.7bn.

£21.7 billion! Which is quite a bit more than £1.4 billion actually. But of course, it was lent by Gordon Brown’s government to Northern Rock Asset Management and not Northern Rock. How silly of me.

Getting the “good bank” off the government’s books for £1 billion is great. But the main part of the Northern Crock millstone is still hanging around the government’s neck.

And that’s before we even start on Lloyds Banking Group, 42% owned by the taxpayer, or Royal Bank of Scotland, over 80% taxpayer-owned. It would be nice to hear something from Mr Osborne along the lines that he expects to start selling Lloyds, at least, soon.

In the same speech, Mr Osborne announced that he is going to make the banks hold much more capital even than the new international rules say they have to, perhaps as much as 10% of their “risky assets”. (The new international rules say 7%.)

That will mean an even more extreme credit famine, because the banks will be forced to cut their lending further to protect that capital ratio. You can hear the squeak of stable door locks being closed and the thunder of hooves as the horses disappear over the hill.

During the unsustainable boom years, the banks were allowed to keep hardly any capital. Now that there is a credit famine, they are being forced to hold a much larger amount. The government has talked quite a lot about counter-cyclical rules, that would tighten up during booms and loosen during recessions. This qualifies whole-heartedly as pro-cyclical regulation.

Next time you hear the government claim that it is putting pressure on the banks to lend more, bear it in mind.

The final measure Mr Osborne announced is that retail arms of British banks must be protected from the investment banking arms. The idea, apparently, is that in a crisis the government would be able to step in and save the retail part, while letting the investment banking part fail.

Does anyone really believe the government would let that happen? The failure of a big investment bank would send shock waves through the financial system, just as the failure of Lehman Brothers did. In practice, I believe the government would step in to save the complete bank anyway.

Overall, then, only half a cheer for Mr Osborne. On second thoughts, only a quarter of a cheer. The significance of his announcements today is minimal.

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Uncle Vince, Our Saviour From The Big Nasty Banks

Vince Cable has asked Lord Browne to consider ...
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Damned if They Do and Taxed If They Don’t – Yes, Uncle Vince is in Charge

Uncle Vince has been championing the little man against the Big Nasty Banks again.

He has been telling those banks that if they don’t give more loans to small businesses, he will put up their taxes.

We do have the option of approaching the taxation of profits or bonuses or balance sheets in a more forceful way – that’s certainly is one of the sanctions open to government

he said. Putting them in the Naughty Room is probably the next step after that. And yet, at the same time he is also pushing them in the opposite direction by threatening other sanctions.

The government, at the behest of internationally-agreed and EU banking regulations, is requiring the banks to hold more capital and to keep more liquidity. Loans to small businesses, or indeed any businesses, do not count as “liquid assets”. Gilts (loans to the government) do. And of course the government has been doing rather a lot of gilt sales over the last couple of years.

This year, government borrowing is down a bit. But the QE programme has also ended – so almost all gilts are being bought by commercial banks rather than the Bank of England. The money they could be lending to small businesses, is being invested in government debt instead.

Basically, Uncle Vince is telling the Big Nasty Banks to lend more to small businesses, otherwise they’ll get caned by higher taxes. At the same time he is telling them not to lend so much otherwise they’ll get caned for infringing banking regulations.

And all the time the government (through the Bank of England) is also holding official interest rates down at record low levels. That increases the expectations from businesses that cheap loans will be available. It also encourages bank customers not to hold bank deposits (due to the derisory interest rates they get). And it hits banks’ profits on the loans they do make.

The government seems to think that these low interest rates are boosting economic growth by encouraging borrowing – that loans are available but people need to be encouraged to take them. Yet here is Uncle Vince telling us all that the problem is that people who want to borrow cannot get loans from the banks.

Uncle Vince is like a Nanny who tells a child to share his sweets with his friends – while at the same time beating him up if he doesn’t let her eat most of the sweets herself.

Our problem is not the Big Nasty Banks. It is our dysfunctional and incompetent rulers, of whom Uncle Vince is a prime example. Both the government and its pseudo-independent Bank of England are at the heart of the problems we are facing.

The problem is not the Big Nasty Banks. The real problem is the Big Nasty State that destroys everything it touches.

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If You Work for a Bank Nick Clegg Wants to Wring Your Neck

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If You’re a Banker, This Man Wants to Wring Your Neck

Nick Clegg has been digging himself ever deeper into the hole in which he finds himself.

He has now given an interview to BBC Radio Sheffield:

I am like anybody else: you want to wring the neck of these wretched people who behaved so irresponsibly and then we are now having to bail them out.

Apart from being utter nonsense (the causes of the crisis cannot simply be blamed on the banks), this is really dangerous talk. Whenever a politician starts to sneer at a class of people, and tries to blame them for all the country’s woes, you can be sure they’ve lost the plot.

Setting our people at each other’s throats is not the answer. Bankers are no worse than the rest of us. They enjoyed Brown’s boom as much as we all did.

They are now being vilified and made scapegoats for the inevitable morning after the party, by a small-minded politician who clearly has no real ideas to offer.

For the record, we didn’t have to bail out “the banks”. It was the Labour government’s decision to do so. They nationalised three banks in Britain – Northern Rock, Royal Bank of Scotland and partially Lloyds TSB (or more accurately HBOS, since Lloyds merger with HBOS, encouraged by the Labour government, is what did for Lloyds TSB).

It is blindingly obvious to all but the most blinkered commentator that Northern Rock could have been allowed to fail – while protecting the depositors, of course. It would most likely have been bought by a competitor, possibly by Virgin, who were interested at the time. The government later followed a more sensible course with Bradford and Bingley.

And what about the big two supposedly bust banks – RBS and Lloyds? Did we really need to bail out their shareholders and bondholders as we did? Remember, bailing out the banks is not the same thing as bailing out depositors.

So what was the alternative? Well, RBS could have gone into receivership. The Bank of England would have provided the liquidity to protect depositors and enable the bank to continue running while the receivers looked for a buyer for the business. In receivership, the assets could have been disposed of in an orderly way and the bank broken up and sold off. Yes, the bank’s lenders would have lost a proportion of their money. But that’s a risk you take when you lend to a company.

As it is, those lenders risks and potential losses have been transferred to taxpayers. Note the irony of a government that, when it nationalised RBS, proclaimed that it would eventually make a profit by selling it.

Gordon Brown tried to have it both ways – arguing that RBS was bust, but it was a great investment for taxpayers and he could sell it at a profit.

Regardless of all that, what of the more sensibly run banks like HSBC, which is very much solvent and thriving? Was the crunch their fault too? Was the crunch the fault of the teller behind the counter of your local Barclays?

According to Nick Clegg, it was. He wants to wring all their necks. I guess he would deny that. “Of course,” he would say, “I wouldn’t wring that teller’s neck, just the Big Bad Bankers whose fault everything is.”

But he didn’t distinguish, did he? If you work for a bank, don’t forget. We all know you work for Britain’s most successful and crucial industry, and have a right to be as much a valued part of our country as anyone else. But the Liberal Democrats want to wring all of your necks. Remember that in May.

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