I can still remember John Eatwell coming to our Labour Club in the summer of '92 to tell us how they were talking to the Treasury and BoE ahead of a possible victory in April. Of course at that time, there was a real fear of a sterling crisis when Labour got in. In 1997, sterling rallied, and got very strong, so in a way there was a Labour sterling crisis, but a crisis for manufacturers, rather than for the government.
Since March, sterling has rallied with the rest of global markets, and is still looking quite good against the dollar, even if versus the euro it is very weak. However, looking at the graph below, I wonder at what stage we'll start to say that the weakness versus the euro has followed the increasing Tory lead. I admit that may be a bit too partisan, it's all about the macro after all.
But reflect on this, markets are forward looking, so no matter what the spot forex trader thinks of the Labour government stopping him from getting a bonus, he's trading on what the government will be in the future, and the polls suggest it'll be Tory. So if sterling drops, at some stage people will start saying it's because of Tory policies. And those policies are to cut public spending sharply, and this may not be the best thing. This is discussed in the US in the context of the policy mistakes of 1937, but as Prof Reinhart discusses here, cutting spending too quickly can be bad:
It has happened before, as in her example of America in 1937. But other episodes could be added to the list, including most recently the stop-and-start performance of the Japanese economy in the 1990s and early 2000s. Declaring premature victories have been costly, both in terms of output losses and their consequences on fiscal finances.
So, there are clear distinctions in economic policy, and it is quite possible that the prospect of Tory cuts means we get a (another?) Tory sterling crisis...
So, in July 2007, I wondered here if we'd reached a top. All the comments about the new rich etc. And I think now we've probably reached the internal top. By that, I mean it's about 60% likely that the high last week will be the highest the stock market will be for some time. In all likelihood what will follow is a lot more anger aimed at everyone who got us into this mess. I do hope I'm wrong.
My own view is that this crash is systemic of the form of capitalism that we've had for the last 30 years: free market capitalism. I'd like to share my favourite satire of what happened. So you have something else to watch if we do collapse.
I'd also like to ask you to think about whether we need to find another form of capitalism that isn't so prone to these booms and busts. "I'm through with standing in line to a club I'll never get in, it's the bottom of the 9th and I'm never gonna win" is always the problem, but free market capitalism gave you "a credit card that's got no limit." It's not that the FSA didn't have Billy Gibbons growling "butchya gotta pay it baaaaackk". It was that if you defaulted then the banks thought they could always flip the "big black jet with a bedroom in it" to someone else ... those boys needed Billy to tell 'em you can join the "mile high club at 37,000 feet" but sometime you gotta land.
In a better form of capitalism, I'd like to ask why do we need to have a queue? And since when did our rockstars have to lipsync? :P Forming a band and enjoying the music you make is surely the source for some sort of inspiration for a different way of organising our society.
In the meantime, if it gets really scary, I'm just going to switch off the shrill shouts from the press, and kick back and listen and remember when you could buy anything, and everyone would give you credit. Nickelback are from a country with a welfare state, aren't they?
Just found this on Wikipedia: "The song was re-shipped to radio for ads on 5 June 2007, and a video was made to accompany the re-release." Now that's market timing!! Chad Kroeger's first hedge fund will be oversubscribed... you heard it hear first.
Southwark Trades Council supported the Postal workers picket line at the Highshore office this morning, and I went along to support them. I hadn't realised that, in London, this was their 19th day of industrial action. They were still in good spirits, being very clear that the management needs to stick by the 2007 agreement: they hadn't received any upgrade to their equipment, only cuts that threatened service delivery.
We've been having double deliveries and Sunday deliveries for the past three weeks. I met our postie last week, and he told me how he was facing redundancy after 30 years of service, because the management were changing his round from 500 properties to 1,000, which he justifiably described as "impossible". He said the pressure for changes from management started in March and it is getting unbearable.
I've even received texts from Tory friends saying "the union's position seems reasonable"... I have to say that the Tory attacks don't make any sense, the Post Office must cross subsidise between rural areas and us in the towns. If you didn't have a Post Office you would have to invent it.
With 19 days of action behind them, it must be getting tough for individual post workers, but they have my support
It's been a while, too long. But I've been busy, happy to say we've had a baby, who's now 3 months old. Year of 2008 was terrible in the markets... And now I have a change in career direction, which means I can devote a bit more time to this blog. Did this mean I went away itrw? No, I'm now a director or trustee of 3 different Bermondsey community organisations. I kept myself busy. And now I want to chat again.
It’s been a great 6 weeks as the Labour candidate in the Riverside byelection, and there are two groups of people I’d like to thank.
To the Labour voters of Riverside ward: It’s been a real privilege to meet again so many of you over the course of the last 6 weeks. Together we’ll continue to campaign for improvements in the ward. The words of encouragement and support on election day has given me a real belief that Labour can win in Bermondsey. Thanks very much for voting on a day, 2 weeks before Christmas that was bitterly cold; you showed a solid turnout.
To the Labour family: thank you so much. I feel a huge debt to the many comrades who worked so very hard; you reminded the people of Bermondsey how broad and strong the Labour movement is. Harriet Harman has been an inspiration throughout the campaign, providing continual support. Val Shawcross, Kirsty McNeill and Peter John were fabulous. The campaign team (the leaflets and the data) gave me the best campaign we could have had. It’s been a real privilege to meet so many members who’ve given their support, from Unite and Unison trade unionists, Hackney, Lambeth, Luton, Tower Hamlets, (I think there were other boroughs – please add below) London Young Labour, National Young Labour, Parliamentary group, Labour LGBT, Patrick Stewart, Mary Honeyball, and Ken Livingstone.
My fondest memory is meeting Ken: as we were posing for our photo that Val took, he quietly asked me “Are you gonna win?” I shrugged, it’s a safe Lib Dem ward, “Well,” he said with a little smile, “good luck anyway.”
And as I wish one and all a wonderful Christmas season, just remember, even Alfred Salter, one of the great first Labour MPs, won Bermondsey for Labour in the end.
First and foremost let me say a big thank you to members from Riverside Ward for selecting me as their candidate in the up-coming by-election. The support I have received from the rest of the branch and CLP has been overwhelming. I'm really proud to have the opportunity be the Labour Party candidate in my own area.
We’ve had a really good start to the by-election in ward. The weather has been kind, allowing all our volunteers to get out and knock on thousands of doors and deliver leaflets. There’s been a great turnout by supporters over the last two weekends and from what I've seen I'm sure their dedication wont wane between now and polling day.
I’m really happy with the response on the doorstep to our campaign. The work we’ve done in the area over the last few years is having an impact. Response on the doorstep is people want to vote for a local councillor that is going to work hard for them.
The regulatory blame game over Northern Rock is missing the point.It seems to me that depositors still have their money.Northern Rock hasn’t had to close its doors, and business has continued as usual.That is what the regulatory regime is supposed to guarantee.The regulators are supposed to protect depositors from the consequences of the decisions that each individual bank takes; decisions that are taken for the benefit of shareholders and managers with share options.It’s 150 years since the last UK bank run, and so last time there wasn’t a 24 hour media cycle, and so for me it’s the end, not the means. And, although it was a little cack-handed, the regulatory regime managed to save depositors.
What I haven’t seen is a critical analysis of what Northern Rock’s board was up to.In fact, by contrasting how the US company, Countrywide Financial, contemporaneously responded to what I shall call the money market crisis reveals a number of questions that should be posed to the management of Northern Rock.Countrywide follows a similar business model to Northern Rock – it lends mortgages to customers, then sells them on to the wholesale market in the form of securitised instruments.It faced exactly the same problem as Northern Rock during the money market crisis: a swift withdrawal of liquidity from the money markets.
Countrywide’s response began a month ago.On the 17th August, Countrywide drew down on “bank committed facilities” to the order of £5.5bn from 40 banks.Then on 23rd August, Countrywide secured another £1bn of deeply subordinated financing, by giving the right to buy its shares to Bank of America.Following those actions, the CEO said this week that he was “very bullish” about the future for Countrywide.
Countrywide and Northern Rock receive their financing from the same markets, so I think it’s fair to ask why Northern Rock didn’t save their bank and do the same as Countrywide.I can’t believe that similar packages of financing were not being offered to Northern Rock from the moment Investment Bankers had seen how Countrywide had got out of their squeeze.
There are further questions to ask Northern Rock, and that relates to their access to retail deposits.Of course they had taken the strategic decision for the past number of years to underweight their retail versus wholesale deposits.In my view, contrasting with most commentators I’ve read, that isn’t what got Northern Rock into a mess.Northern Rock’s lack of action to change that strategy in the last 2 months is what got Northern Rock to where it is.
Probably not many readers pay much attention to the best buy tables for retail deposits, however, since late August there has been one aggressive taker of deposits, and that was HBOS.As I highlighted here a month ago, Birmingham Midshires (a trading name of HBOS) were offering at 6.7% deposit.That week I had visited a regional building society.This building society had offered a 6.7% deposit the prior week, and it was so successful they had to close it after 1 day.The building society treasurer disclosed to me that it had raised £150m.The weekend that I posted on this blog about the Birmingham Midshires offer, I recall the Guardian’s best buy table had 1yr Birmingham Midshires, followed by the best rates in 2yrs, 3yrs, 4yrs, and 5yrs all from Halifax (another trading name of HBOS).
£150m in a day for 20 days would give us £3bn.The FT estimated this morning that Northern Rock was borrowing £3bn from the bank of England.So, between my posting of Birmingham Midshires offer and now, I think it’s arguable that Northern Rock could have taken in a large portion of its funding needs from retail deposits.Even now, Northern Rock is only offering a 6.7% bond, whereas Birmingham Midshires are now 6.95%.Northern Rock has a number of branches, as we have seen from the queues all around the country.Why couldn’t they have raised their deposit rate and taken in deposits?
I would suggest that “shareholder value” is a plausible reason why neither the wholesale equity linked strategy nor the retail borrowing response to the money market crisis were taken by Northern Rock.In isolation of the events of last week, both a wholesale Countrywide-like strategy of a large draw down of committed lines and an equity linked issue, and a high retail deposit strategy would be very negative to shareholders.Countrywide’s drawdown resulted in a 10% fall in its share price.The high retail deposits would have crushed Northern Rock’s margins, and made them need a further profits warning (they had made on in July already).
Of course, ironically, the lack of action at Northern Rock meant they had to fall into the arms of the Bank of England.And their shareholders have suffered a near total destruction of their shareholding, probably 60% below where the share price would have been if Northern Rock had followed Countrywide’s strategy.
So, the debate now should be between Northern Rock’s shareholders and its management.The government should play a part in this.Indeed, they have a right to understand why Northern Rock felt unable to follow strategies that has so far prevented its competitors from needing direct government help. We need to hear from Northern Rock’s management about why they decided it was best not to follow a path like Countrywide, or HBOS, and why they believed that not following the strategy of their peers would prevent them from the catastrophe that they have inflicted on their depositors and shareholders.
At the same time the government should more robustly defend its regulatory regime.From where I am sitting, the regulators have done their job: depositors are saved, and all the other banks (that were pro-active in seeking deposits in the last 2 months) can continue their business.Furthermore, we need to be very cautious about the regulatory regime:
Don’t change government guarantee on deposits:perhaps the British Bankers Association should clarify what collective guarantee they offer, but by the government guaranteeing deposits encourages bad banks. Once deposits are guaranteed, all deposits are at the same price, and a well run bank no longer gets the benefit of a cheaper deposit base.
Don’t change the rules on secret mergers:I disagree with the Governor on this.It is not the regulator's job to save the shareholder.In fact, to quote the Governor back to him:that would encourage moral hazard;shareholders would continue to support banks with a similar business model to Northern Rock’s, because the Governor would just shoe horn them into another clearer’s shares.Instead, the City must be regretting not offering Northern Rock a rights issue, or encouraging its board to write-off 6 month’s net interest margin to preserve the share price at 600p. That Northern Rock's share price is in fact below 200p is the best evidence that there will be no moral hazard because of this intervention.
As I’ve told my colleagues in the last few days – it’s the job of regulators to save depositors; only in films do angels get their wings by saving bank shareholders and management.
