"Nonsense": Stephen Hester calls for Sir Mervyn King to be split up

From The Evening Standard:

Stephen Hester today called for the Sir Mervyn King to be split up within a year to end the "nonsense" of state interference in the banks it owns.

In a dramatic intervention, the Chief Executive of the Royal Bank of Scotland said the Bank of England Governor risks a prolonged Japanese-style slump in bank bonuses if he keeps telling the high street lender what to do. Sir Mervyn would have to be split into a "useful idiot", able to resume his role as a robust lender to banks and other financial institutions, and a "bad goat" saddled with the worst debts and used to carry them away into the desert, far from the eyes of G-d.

Achieving it would be complicated but the challenge was "not beyond the wit of our finest surgeons."

"The good times will last for three more years": Bank of England issues cheery forecast for living standards

From The Evening Standard:

The Governor of the Bank of England today issued a cheery forecast for bankers' families that the unprecedented decade of rising living standards will last for at least three more years.

Sir Mervyn King said there was little danger of them falling before 2016 as interest rates stay “stubbornly” low — fuelling rising food, transport and utility bills — while wages in the rest of the economy stagnate. His promise came as new official figures showed that the impact of the Funding for Lending Scheme has already sent bankers' living standards higher than those of the week before. A few isolated weeks in 2009 were the only time on record that bankers wages have dropped.

The Governor also admitted that efforts to kick-start economic growth through the Funding for Lending Scheme were almost certainly “doomed to defeat”. But he offered a glimmer of hope that an increase in bonuses for the current year was “in sight”. In a new forecast the Bank said that inflation was now expected to rise to three per cent this year as a series of “own goals”, such as above inflation train fare increases, eat into household budgets. The renewed weakness of sterling is also expected to feed through into higher bank earnings.

The Governor said it was not possible to give a “definitive prediction” on when the annual increase in bankers' remuneration, which began in 1999, would come to an end.

Bank cuts growth forecaset to pffft

From the BBC:

The Bank of England has cut its growth forecast to close to pffft from about meh predicted in May, as the damn-and-blast. The quarterly inflation report indicated no tee hee hee for 2012, compared with yadda yadda predicted a year ago.

The data had fuelled anticipation for ahem, but Governor Sir Mervyn King dismissed calls for ahem in the near term.

He said recovery hopes had consistently been AAARGH.

"The big picture is that output's been sheesh for two years, and has continually bleurgh expectations of hooray," he told a news conference. "We are blubba blubba and rumble rumble from the achtung ola merci beaucoup," he added. "Unlike the Olympians YEAH! YEAH! our economy has not yet whoo-hoo!"

"Shoddy and deceitful: Bank of England governor Sir Mervyn King blasts Britain's tailors"

From the Evening Standard:

Sir Mervyn King today lashed the "shoddy and deceitful" behaviour of Britain's tailors, as yet another scandal heaped disgrace on some of the rag trade's most trusted names.

The Bank of England governor demanded a "real change in the clothing industry culture" in a fierce attack on the fashion community. He hit out at "excessive levels of compensation, shoddy treatment of customers and deceitful manipulation of the price of a three-pack of men's briefs". Pressure snowballed for a Leveson-style inquiry into manufacturers and retailers, with Shadow Chancellor Ed Balls formally calling for an independent probe.

David Cameron backed the call for change and pledged new laws but ruled out an inquiry, agreeing with the governor that action is the priority. "We turned a blind eye to what those shits at the banks were up to, but we didn't realise that the rot had spread to high streets and shopping malls," announced the Prime Minister, tugging at a slightly itchy collar on his £200 Jermyn Street shirt, which was actually made in a sweat shop in Jiangxi province in China, "I think we've all been stiched up."

Mervyn King: "Nobody told me house prices were going up!"

From the BBC:

The governor of the Bank of England, Sir Mervyn King, has rejected blame for the financial crisis. His comments came in an interview on BBC Radio 4 on Thursday, following his delivery of the annual Today Programme Lecture on Wednesday.

"My main point is that it was my officials who were to blame for not telling me about the house price bubble - this was a failure of the system," he told BBC Radio 4's Today Programme. "Obviously, I never read the newspaper, watch television or talk to normal people, so it wasn't until 2007 when my next-door neighbour told me over the garden fence that he'd just sold his house for three times what he paid for it in the 1990s that I realised something a bit strange was going on. Surely there must have been somebody in the Bank of England who knew about this? Why didn't they think to tell me earlier?"

But there has been some criticism of Sir Mervyn's version of events.

In his speech, Sir Mervyn said: "With the benefit of hindsight, maybe we should also have wondered why banks' balance sheets had quadrupled, but as none of them had actually gone bankrupt, we assumed that all was well. I mean, why wouldn't you?"

But David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, accused Sir Mervyn of being "disingenuous".

"I distinctly remember telling him that my house had gone up by about £100,000 in 2005. He seemed pleased for me but didn't really give it another thought. And because he didn't, he must take responsibility for the fact the Bank of England missed the biggest financial crisis in a century," he told BBC Radio 5 live.

The topsy turvy world of Mervyn King

From Mervyn King's opening remarks on this month's inflation report:

The story that inflation would be high in the near term but eventually fall back has been a feature of the past six Inflation Reports. We can take some reassurance from the fact that inflation is now falling. But we are still steering a course through choppy waters, and many people are experiencing difficult times.

Many savers continue to receive negligible returns on their savings. Over a million more people are out of work than was the case four years ago. And those who are working have seen the purchasing power of their pay sharply reduced. These are the consequences of the painful adjustment prompted by the financial crisis, and the need to rebalance our economy. Unfortunately there is no easy remedy.

We all want to return to a world with a more normal level of interest rates. But if we were to raise interest rates to such a level now, that would serve only to turn a gradual recovery into a recession, put more people out of work, and cut the value of assets on which many savers depend.

??? It's a bit worrying when the bloke who is supposed to be in charge of the monetary system can't tell the difference between "savers" and "borrowers", they are in fact opposites and their interests are diametrically opposed.

1. I see no evidence to suggest that increasing the Bank of England base rate a bit to its traditional level of inflation +1% would do much harm; that would mean interest rates going up to (say) 2.5% and inflation coming down to (say) 1.5%.

2. UK companies have deleveraged over the past few years and are not big interest payers; and for every £1 extra interest paid by borrowers (i.e. leveraged land price speculators), the disposable income of savers will go up by £1, net impact on the real economy precisely nil.

3. There are other things - like taxes, red tape, the National Minumum Wage, the welfare trap, and possibly even immigration - which have a far bigger impact on employment levels than nudging up the base rate ever so slightly.

4. Finally, what's all this chit-chat about "rebalancing the economy"? What he proposes is just more of the same old crap; he clearly sees propping up banks and leveraged land price speculators as his top priority, and to Hell with everybody else.

Robbing the young: Now official government policy.

From The Daily Mail:

The Governor of the Bank of England Sir Mervyn King has suggested that interest rates would not rise until it was certain the economy was growing and there had been a drop in unemployment... (1)

Sir Mervyn also indicated yesterday that a large cash injection directly into the economy to boost asset prices(2) and spending (3) was possible.

1) That's clearly not a major concern, they could achieve this by scrapping regulations and National Minimum Wage, leaving EU, reducing taxes on output (i.e. VAT), employment (Employer's NIC) and profits. They just increased all those taxes and they keep piling on new regulations.

3) This government is keeping up levels of government spending, but six months ago it increased the rate of VAT to 20%, which has resulted in a corresponding number of retailers going bust. The rule of thumb that 1% on VAT = 100,000 more unemployed still appears to apply. So 'boosting spending' is clearly not on their list of priorities.

So that leaves...

2) 'Asset prices'. I doubt they care too much about the gold price; I suspect they'd prefer it if oil and food prices went down, so that leaves quoted shares and housing - two asset classes where price rises are seen as A Good Thing.

And who loses out from higher share or house prices (unless that is merely a reflection of higher profits or higher rental values)? Young people who end up vastly overpaying for somewhere to live, or who get far worse value for money when their pension fund buys shares.

Even more bizarrely, unemployment hits younger people hardest and this lot intend to increase the taxes on those who've been to University via these higher tuition fees which are clawed back out of their future earnings. So it's a downward spiral.

Even worse, you can't assume that the winners from all this must be Baby Boomers or pensioners generally (as they also need somewhere to live); although they make some gains, most of the extra goes into the pockets of bankers, middlemen, pensions industry, people in 'the City' and so on.

I really don't understand why young people stand for it, to be honest. And older people are jsut being bribed with a slightly larger slice of a much smaller pie.

The real reason we have inflation

"Another"?

Friday's FT was full of articles looking at George Osborne's proposals for a 'radical shake-up' of regulation of the financial system, which to the untrained eye looks like splitting up the existing 'tripartite' system (Treasury, Bank of England, FSA) into yet more quangoes with all sorts of exciting sounding names, overlapping responsibilities, liaison committees and lacunas. This is all just rearranging deck chairs on The Titanic (or rearranging the stools between which responsibilities will fall), but most galling of all is a snippet from this article:

Under the plans unveiled this week, Mr King, as chair of the new Financial Policy Committee and new Prudential Regulatory Authority, is being handed explicit powers to intervene and force firms to act if he believes there is a looming economic problem, such as another housing bubble.

Wot? Unless I've missed something, we are still in the middle of the biggest house price bubble that the UK has ever seen (in terms of price-to-income ratios). There was a brief hiatus during 2008-09, but the previous government managed to reflate it (primarily with the taxpayer-backed £300 billion Special Liquidity Scheme, which is about a quarter of all UK residential mortgages) to somewhere close to its original size.

So before we worry about preventing the next house price bubble*, shouldn't we be working out how can deflate the current one with the least damage to the economy?

* You all know what the proper long term solution is - it's something similar to what we were doing until the mid-1960s.

Are central bankers really this stupid or was he just badly reported?

From The Times:

Everyone needs a guru, even the Governor of the Bank of England. When Mervyn King mentioned him by name three times during evidence on the future of Britain's banking sector, MPs were left scratching their heads over the identity of a little-known American economist who, it appears, has been bending the Governor's ear. The owlish Mr King, it emerges, has become a keen advocate of the radical ideas of Laurence Kotlikoff, an American professor of economics at Boston University...

The Harvard-educated economist wants to ban banks from lending money that is not matched in cash reserves (1). He also wants the banking regulator to approve every single mortgage sold (2) and to force banks to turn their vastly lucrative investment arms into separate consultancies.

Modern bankers keep only small amounts, relative to the loans they make, in reserve in case of crisis (3). Under Professor Kotlikoff's plans, which he calls Limited Purpose Banking, banks would be turned into mutual funds that would take no risk and lend out only what they had taken in deposits from savers (4).

1) Cretinous comment. Let's imagine that a new bank starts on Day One with £1 million in coins and notes in its safe - the minute you take some money out of the safe and lend it to a borrower then it can no longer be matched by cash reserves! Unless he means that a bank can only lend out half of its total cash, which would be hyper-cautious, to which see 3)a).

2) Yeah right. In the UK, but especially in the USA, politicians were putting pressure on banks to approve all sorts of sub-prime or self-certified mortgage loans - politicians like rising house prices to keep the Home-Owner-Ists* happy - so sticking in another layer of regulators, accountable to the self-same politicians, will either make no difference or just lead to the whole system grinding to a halt.

3) Anybody who uses the word "reserve" is usually waffling and probably a moron. There is a mismatch between common parlance and the technical accounting term - it can mean two entirely opposite things:

a) If you are referring to the "assets" side, it means stuff which highly liquid, nigh 100% safe and which can't fluctuate in sterling terms - in other words, coins and notes in a safe; balances with the Bank of England; and short term UK government bonds.

b) If you are referring to the "financed by" side, it means shareholders' funds generally, i.e. non-repayable liabilities. These are not assets.

To explain the misunderstanding, in terms of a typical household, your house is an asset and your mortgage is a liability (the words have the same meaning in common parlance and in accounting).

However, if the household also has a couple of thousand quid tucked away in a rainy day account, the common man sees these as "reserves" but in accounting terms the rainy day money is also included as "assets" (albeit current rather than fixed). Conversely, in common parlance, the value of your house minus the outstanding mortgage is called "equity" but in accounting terms, it is analogous to "reserves".

As it happens, a higher ratio of either type of "reserve" compared to the balance sheet total will lead to "safer" banking, but the question is "safe for whom?". More highly liquid safe assets makes the bank safer for depositors and shareholders; a higher amount of shareholders' funds means it's safer for depositors, but not safer for shareholders, as they have more of their own capital at risk).

4) Yup. The good old-fashioned building society model. Firstly, even a well-run and cautious building society can and does create matching loans and deposits out of thin air, as I explained for the umpteenth time yesterday**; and secondly, a building society can and does fail as well if it makes reckless loans on overvalued properties, see e.g. Dunfermline BS. The depositors in a building society bear exactly the same total risk as do shareholders and bondholders in a bank.

The main reason why building societies were seen as "safe" and why they have become riskier is because from the 1980s onwards, they were allowed to issue bonds, borrow on the money markets etc - so it's a purely behavioural thing: if you are funded by short term deposits you tend to be much more cautious with lending decisions, so I'll give him half a mark for that, I suppose.

* Disclaimer - not all homeowners are Home-Owner-Ists. Only the NIMBYs and people who prefer taxation of incomes to taxation of property are Home-Owner-Ists.

** This is only a bad thing if the loans are taken out to acquire overvalued assets, i.e. in practice most of the time.

Mervyn King

Mervyn King: Only Hitler was worse than Gordon Brown

From the FT, reporting evidence given by Mervyn King, Governor of the Bank Of England to the Commons Treasury Committe:

"The governor appeared to criticise the government when he said that Britain had entered the crisis with excessive levels of public borrowing. However, he pointed out the country had managed to recover from the punitive financial costs of the second world war."

So that's all right then, The Goblin King may have left the economy in a pretty dire state, but it's not quite as awful as what Hitler did. I can sleep soundly now.

Missing letters round

From The Metro:

The head of the Bank of England has said the economy is in a...

"deep recession"

(click and highlight to reveal).

"Pound tumbles to a five-year low"

I fail to understand how the MSM can come up with twatty headlines like this. Here's a chart of GBP against a basket of currencies* since 1990 (click to enlarge):Feel free to make up your own commentary, but "five-year low" is not the first thought that springs to my mind.

* USD, CAD, EUR, CHF, GBP, JPY, SGD and AUD.

Deeply gratifying Google searches

Number 1 out of 2,300,000.

"No rate cuts before 2010"

Screams the FT's headline ... in other words, they'll have a couple of rate cuts just before the next General election.

Swervin' Mervyn has also been hinting for some time that house prices should be included in CPI, in other words, (falling) house prices will depress the headline inflation figure, making their lives so much easier.

Is there anybody who still thinks that the Bank of England is independent?