Is this the right medicine for the City?

Today the Bank of England (BoE) has unveiled its plans of a £50 billion lending boost. While I suspect that most bankers and traders alike will welcome this move, I’m mindful to point out that such governmental financial manoeuvrings is not without disquietude.

In broad strokes, the plan is that banks will be able to swap potentially risky mortgage debts for £50 billion of secured government bonds, thus allowing them to operate with some semblance of liquidity in the banking system.

Early indications are that the banks broadly welcome this move by the BoE; hitherto both the BoE and HM Exchequer seemed either unwilling or incompetent in the face of the current credit crunch. On a point of information, I’m intentionally refraining from referring to this as the “US” credit crunch, as I believe this to be an unhelpful misnomer.

The insatiable appetite of British banks for consuming exotic derivatives and more importantly, not correctly understating these financial instruments, is as much a causative factor in producing the current credit crisis as our American cousins.

My worry about this current action is the sense of timing. Are we now collectively paying the price of failure in the Exchequers deficiency in providing leadership at “first light” of the credit problems?

Just about every Central Banker in the world realized sometime ago the exigency of the moment, while the Bank of England lacking leadership from the Prime Minister and the Exchequer, seemed more intent on riding their moral high horse (moral hazard). The refusal of the Mervyn King to pump much needed liquidity into the markets as early as last August was an incongruous decision.

While it is true that financial ignobility should not be rewarded with the taxpayer cash, the balance of the public interest and private interest in this instance are deeply coupled. What the BoE should not do, is allow these banks to persist in this reckless mortgage lending.

Let’s be clear here, most of these banks pocketed large amounts of cash profits from partaking in subprime related financial instruments. As a fully signed up capitalist, I defend their right to make such money; however it must be made abundantly clear that the losses are theirs too, not the taxpayer!

If it is one thing that this current crisis should teach us, it has to be this – unrestrained cheap credit is “expensive!” Our collective predilection for credit has been a contributory factor for the current turmoil.

I know Liberal Democrats and hard left Labour members would like too woo us with their unabashed liberal narrative of the credit crunch as some capitalist conspiracy, but this can be safely ignored.

New Labour has a well document penchant of legislation, and I fear this will act as a cue for satisfying this urge. We should not rush into legislation for legislations sake. Calmness combined with vigilance is the more sensible route.

On reflection I would have to conclude while the action is late, I broadly welcome the move. I hasten to point out that the fallout from this credit crisis is far from over. For one thing Fannie Mae (http://www.bloomberg.com/apps/quote?ticker=fnm) and Freddie Mac (http://www.bloomberg.com/apps/quote?ticker=fre ) combine to make up the trillion dollar ticking time bomb. For my money, as long as these two institutions remain in credit limbo, the crisis is well and truly unfinished business. Let’s just say the “patient” is still critical.

Gordon Brown Schadenfreude

OK, so I should explain – Schadenfreude is the German word for “pleasure from misfortune”. I can’t deny that the Prime Minster current spot of trouble, is giving me pleasure.

Since October of last year the PM has gone from hero to zero, finding himself in a climate inimical to his political health. Who would have thought that after riding high in the polls last summer and his “Midas” like touch, Gordon Brown would now find himself bearing the fruits of his contretemps.

Cue the 10p tax battle! It now turns out that the Labour backbenchers have collectively woken up from their deep sleep with regards to the abolition of the 10p tax band. The reason why I suggest they were collectively sleeping is that this policy was made known a year ago by this Prime Minster, at that time masquerading as Chancellor of the Exchequer.

It now turns out there are 70 or so backbench Labour MPs whom have decided to sign a motion criticising the 10p tax band abolition which will cause further sleepless night for the Prime Minster.

Just when you thought it could not get any worst, the economy seems to be heading further South, with only the Prime Minister and Chancellor of the Exchequer holding the belief that we will weather the oncoming storm. Let’s hope for all our sakes this is not the case, continue to watch this space!

New Labour & the FSA Experiment - Res ipsa loquitur

The cacophony of background noise is a trademark of the political theatre a.k.a. - Prime Minister’s Questions (PMQ’s). But occasionally, one can make what I could only describe as rather telling observations.

David Cameron decided to use his “bag of six” – questions that is, to bludgeon the Prime Minster on the Financial Services Authority (FSA) inept handing of the Northern Rock crisis. Unfortunately for him, his observations on ineptitude were partially reciprocated, as he returned the favour; making a poor case for a valid argument.

The fact is we really need not look very far to see an excellent example of effective regulation in action – cue The Federal Reserve Board. Just take a look at how deftly the Fed dealt with the near collapse of Bear Stearns, and contrast this with the slipshod action or “inaction”, of the FSA in conjunction with BoE in dealing with a similar situation – the collapse of Northern Rock. Even as the dust is still settling, it is clear that the American approach of quasi-public regulation is far more superior. More importantly, the Fed as a unitary authority is an approach that while not perfect, has the benefit of pooling resources, and presenting itself to the banking industry as a sole place of reference.

While I am not quite ready to hitch my cart to the Tory economic engine, I most certainly support the Tories premise to hammer home the point that all this talk about New Labours economic prowess is just that – talk! Furthermore; the decision to split responsibilities of banking supervision and regulation between that of the Bank of England and the FSA have proven to be categorically short-sighted and economically sophomoric.

Yes, we all know the ability of Gordon Brown to verbally vomit statistics at will is amazing, if not of a mild autistic savant. However; The Tory party can rightfully argue that the decision to separate the powers of regulatory supervision between the FSA and the BoE was one of poor judgment.

I further opine that in light of FSA admitting in their own style that they are simply not up to the job, that the regulation of addressing:

• Banking panics;
• Striking a balance between private interests of banks and the centralized responsibility of the government;
• supervising and regulating banking institutions;
• maintain the stability of the financial system and containing systemic risk in financial markets;
• to be responsive to local liquidity needs
  

Be solely the domain of a quasi-public Bank of England. As a trader myself I have a keen interest in a stable and efficient market place. If the regulator of first instance can’t be trusted, relied upon or worst – proves incompetent, it affects us all. For all the talk from new Labour on prudence and stability, it’s only when things fail, that we get the accurate picture.

Res ipsa loquitur – it speaks for itself! The idea that the status quo of relying on the FSA to effectively deal with systemic risk and regulation in the banking sector, is clearly no longer a sustainable proposition. I fear however, that New Labours response to today’s report from the FSA will be genetically in the style of New Labour – more regulation! It really is the case that "less is more!"

More regulation in the area of banking would be the wrong response. What is needed here is calm insightful fortitude in dealing with issues in banking, against the current backdrop of “tight” credit markets. I know it would be the breaking of a lifetime habit for New Labour to instead look to the private sector for the experience necessary in dealing with and examining the types of risk that banks take.

The ability of the regulator to understand such operational banking risk, goes some way to pre-empting such catastrophic failures such as Northern Rock. The Bank of England is in the best position to understand this, it would be folly indeed to not re-examine this remit, and learn a few lesson from our cousins on the other side of the Atlantic – The Fed!

The Freshman’s Budget

A politician's words reveal less about what he thinks about his subject than what he thinks about his audience. George Will

The Chancellor today presented his budget to Parliament, and I have to tell you after watching and listing with keen interest, I was left recollecting about an interesting traffic sign I once saw – “slippery when wet”. This was a “budget”, and I use the term loosely, that was vexatious in the selective statistics used and intellectually pretentious.

Chancellor Brown, pardon – Darling, took my breath away, when he said: “Britain is more resilient and more prepared to deal with global shocks.” Inebriating incredulity on the Chancellors part comes to mind. The fact is, for all the right decision that the government took in 1997, such as giving the Bank of England its independence; we are now at a state where government finance is in bad shape. Why? Simple, this government failed to set aside or ensure preparedness for the “rainy season”, a staple of all economic cycles.

The government has stated, and nauseatingly so, their adherence to the “golden rule”
http://en.wikipedia.org/wiki/Golden_Rule_(fiscal_policy) - Huff and puff all you want Chancellor that rule is the only thing blown over. Mr Cameron was correct when he said, the trade deficit was set to rise to a record £72bn while the rate of investment was "slumping" by two thirds and debt as a share of GDP, if Northern Rock was included, was 43.8%. Clearly this would "bust" the chancellor's fiscal rules.

In October's pre-budget report, Mr Darling forecast growth at 2.0-2.5 percent in 2008 and 2.5-3.0 percent in 2009. This contrasted sharply with a poll conducted by Reuters of 60 economists, whom put economic growth at 1.8 percent in 2008, picking up only slightly to 1.9 percent in 2009.

The persistent conviction of the Chancellor that the economic weather can safely be described as a slight overcast seems to be grossly at odds with most economists who see the high risk of an oncoming storm.

One could not ignore the incessant use of the word “stability”, as if somehow repeated Ad nauseam would produce the result. I would have thought that if stability were desired, a posture of tax cutting to stimulate the economy would have been a more sane prescription.

I am incredulous of stories about “green taxes”. It is patently clear to me that this governments wish to relegate plastic bags, excessively tax alcohol and the automobile, is nothing more than government by authoritative decree. And anyway, we are not stupid; we know a tax jack when we see and feel one. This is really a case of – “I just need the money!

The European Beast is feeding again!

I have been following with great interest the ratification of the European Union Constitution as it makes its way through parliament. Yes, I called it the European Union Constitution, for that’s exactly what it is. Any attempt to refer to it as something else, is disingenuous at best, or dissembling at its worst.

You don’t have to take my word when I say it is the same old constitution that the liberal elite of Europe tried to pass and failed miserably in 2005, when it was rejected by the people of The Netherlands and France, here are some quotes worth repeating:

Germany

“The substance of the Constitution is preserved. That is a fact.”

(Angela Merkel, German Chancellor, Telegraph, 29 June 2007)

Spain

“We have not let a single substantial point of the Constitutional Treaty go… It is,

without a doubt, much more than a treaty. This is a project of foundational

character, a treaty for a new Europe.”

(Jose Zapatero, Spanish Prime Minister, speech, 27 June 2007)

Ireland

“90 per cent of it is still there... these changes haven't made any dramatic change

to the substance of what was agreed back in 2004.”

(Bertie Ahern, Irish Taoiseach, Irish Independent, 24 June 2007)

Italy

“As for our conditions… I outlined four red lines with respect to the text of the

Constitution: to keep a permanent president of the EU, to keep the single overseer

for foreign policy and a common diplomatic service, to keep the extension of

majority voting, to keep the single legal personality of the Union. All of this has

stayed.”

(Romano Prodi, Italian Prime Minister, La Repubblica, 24 June 2007)

Still not convinced? Here is one quote from the author of the original constitution:

“This text is, in fact, a rerun of a great part of the substance of the Constitutional

Treaty.”

(Valery Giscard d’Estaing, Telegraph, 27 June 2007)

This clearly reinforces my belief that the bureaucratic beast, a.k.a. The EU wishes to gorge itself further on powers hitherto the domain of member states. For the sake of clarity, and to ensure that there is sufficient “clear blue water”, between myself and others whom simply can’t stand or tolerate Europe at all, I need to make it clear that this is not the train I am hitching my cart to.

What I object to, and vehemently so, is the insatiable appetite of the European Union beast to emasculate national governments and their representatives of their fundamental purpose, of being accountable to the people they represent.

Proponents of this constitution can not argue with the fact that ratification would mean surrendering vetoes, in somewhere between 45 and 70 policy areas. The tactic of using gobbledygook to write and explain the constitution won’t work either. We the public can see this for exactly what it is – get the constitution through by any and all means necessary. Just look at what Belgian Foreign Minster said on the constitution:

"The aim of the Constitutional Treaty was to be more readable; the aim of this

treaty is to be unreadable… The Constitution aimed to be clear, whereas this

treaty had to be unclear. It is a success.”

(Flandreinfo, 23 June 2007)

This is breath taking! The politicians failed to win the argument and now they have decided in their collective wisdom, to precede full stop with their project irrespective of what we the public think. This can not be right! We are constantly told by New Labour and the Liberal Democrats that the EU is there for the people, which begs the question, which group of people?

Prime Minster Tony Blair in the last election promised that there would be a referendum on the constitution, and Gordon Brown went further as recently as June 24 2007, when he stated:

“The manifesto is what we put to the public. We've got to honour that manifesto. That is an issue of trust for me with the electorate.”

I will be most appreciative of anyone who can explain to me what part of “trust” did the Prime Minster have trouble understanding. Perhaps I just did not realize it was yet another “aspiration” of New Labour and not a promise. If we can’t count on the Prime Minster to tame the beast of Europe, we might as well pack up and go home.