...a blog by Richard Flowers

Friday, April 18, 2008

Day 2661: Gideon Goes for Gordon


Mr Frown announces that he is NOT having a "Crisis Summit" with a Wunch of Bankers… it's just some sort of "Unexpected Apogee" I suppose.

According to young Master Gideon Oboe, though, Mr Frown's reputation in is tatters.

It's all very well to spot that the Prime Monster is ROADKILL, and only six months behind the rest of us with the news as usual, but shouldn't he REALLY be answering the question: "is there anything Master Oboe would do to make the economy better?"

Or even: "Wouldn't we all be better off with Mr Vince "the Power" Cable, anyway?"

Master Gideon's position is neither CLEAR nor CONVINCING.

We heard on the radio his Chief Secretary and Best Conker-Polisher, Mr Philip Hammond-Eggs, telling us that the Conservatory promise to match the Labour's spending was only good for the current spending round, i.e until 2010… so they promise to match the Labour's spending only so long as they are not actually in power. A Conservatory promise you really CAN rely on, then.

"Of course it's fine to have no fiscal policies this side of the election; it won't matter 'til we're actually making real decisions!"

said Mr Timothy Montgomeryshire, author of Conservatoryhome, in order to defend Mr Oboe's stance.

(I presume that means that Conservatory attempts to reverse the doubling of the 10p tax band are not REAL, then… just more OPPORTUNISM.)

Anyway, Master Gideon has made a speech to explain it all.

He starts by attacking Mr Frown's character, which is an easy target, and then talks about the Labour being divided. He sites Mr Jack Man'O Straw for opposing Mr Frown's criminal justice plans (or criminal plans for justice) and Mr Ed Balls for opposing his own education policy, but most of all the backbench rebellion on 10p tax

"…exposed within hours as a giant tax con when the 10p tax rise was revealed"

I'm SURE that it just slips Master Gideon's mind that that was "exposed" by Sir Mr the Merciless – he and Mr Balloon having missed that one.

Then he says that Mr Frown's reputation rests on three pillars: stability (low inflation), prudence (borrowing to invest) and productivity (improving).

And, he says, each of those pillars is broken.

Mr Frown's plan for economic stability comes in two parts: one, concentrate on keeping inflation under 2%; two, make it someone else's responsibility.

Now, that's actually quite a GOOD idea – at least as far as it goes. Inflation has been the MONSTER that has devoured the British economy many times since the end of World War Part Two; and keeping the responsibility for controlling OUT of the hands of politicians i.e. people who might avoid taking the difficult decisions because they want to be popular*, is more likely to lead to success.

(*"popular" here being an entirely relative measure, for comparison see journalist)

In PRACTICE this means half-inching the Liberal Democrat policy of independence for the Bank of England.

Mr Oboe, showing he TRULY wants to be Mr Frown's shadow, tries to steal that idea too with his claim that independence for the Bank of England "built on Conservatory policy".

(Actually, the Conservatory "inflation targeting" policy was to shadow the European Exchange Rate Mechanism… and we all know where that went; perhaps Mr Balloon can tell Master Oboe what it was like in the Treasury backrooms that day.)

There are two key WEAKNESSES in MR Frown's approach though.

The first is that the Bank of England only has one lever to pull: the interest rate.

Mr Oboe calls this "monetary policy" but it's really a knackered form of monetarism. Mad old Sir Keith Joseph's full-blown monetarism is about limiting the supply of loose money rattling around in the economy, the idea being that if there's less money available to be spent then prices can't go up. (Conversely, in a depression you're supposed to flood the country with cheap credit… gee, look what the Federal Reserve is doing!)

Raising the interest rate a little cuts back a bit on the cash in the consumer's pocket… so long as they have a mortgage, credit card or have consolidated all of their debts with Loan Sharks Direct™. But, of course, the BIGGEST borrower in the country is… the Government and THEY can go and borrow overseas (again, lookie at those big money offers from the Fed! And a free pen with every billion dollars you borrow, too!)

So if the government is off on a spending spree – as Mr Frown has been – then there's not so very much that the independent Bank of England can do.

(Fortunately, so long as the expanding Chinese economy has been pumping imports into the country it has kept prices down.)

The second and more important weakness in Mr Frown's approach is that inflation is NOT the only part of the economy you want to keep stable. This is SUCH a big thing that even Master Gideon has spotted it:

"everything else in the economy - the exchange rate, the current account, debt levels, and the structure of the economy itself - were all left to find their own balance"

Quite right. Though I don't recall the Conservatories proposing specific policies to tackle government or personal debt or the trade gap or the exchange rate or the housing market bubble or etc…

Hoping to pin even MORE of the BLAME on Mr Frown, he claims that Great Britain is ESPECIALLY VULNERABLE to the current crisis, and criticises the extent of our exposure to sub-prime borrowing.

Of course, we're more EXPOSED because:

a) so many big banks have been tempted to come to the City by our "relaxed" attitude to deregulation ever since Queen Maggie set off the "Big Bang"
b) so much of our economy now rests upon the profits that those banks make
c) our "relaxed" attitude to deregulation means that, well, they're not very highly regulated
d) all of the above.

Is Master Gideon REALLY planning on reversing the Big Bang? Or reducing the banking sector? Has he mentioned to Suicide Boris his plans to scupper London as the pre-eminent financial capital of the world? He doesn't say.

Instead he derides the Government's offer of help for first time buyers. It's "an inaccessible irrelevance to most first time buyers" according to the chair of the Mortgage Council.

Gideon's idea – for which he claims to have been gifted with prescience (rolls eyes) – is to abolish stamp duty for first time buyers entirely, but this isn't much help either. It will almost instantly be absorbed into the price of the house, which is an INFLATIONARY measure, and not really likely to add to STABILITY.

In the short term it would see an arrest in the falling housing market but that won't be much use for first time buyers and doesn't address the real problem which is shortage of supply.

"The centrepieces of tax and spend policy were to be the fiscal rules - the golden rule and the sustainable investment rule"

Now, Mr Oboe claims that these rules have FAILED – I think that this shows basic ILLITERACY.

Mr Frown has CHEATED and FAILED to KEEP to the rules repeatedly, but that doesn't meant the rules THEMSELVES are wrong.

The basic, fundamental rules of "kitchen accounting" are the same as they've always been, and they are not difficult to understand: don't spend more than you earn; it's okay to borrow a bit in the tough years so long as you pay it back in the good years; long term borrowing should be for long term investments, never to pay the monthly bills.

Mr Frown's tests are SUPPOSED to make sure that he doesn't break those rules, or at least that he doesn’t break them without it being EMBARRASSINGLY apparent.

In that sense they've worked VERY WELL, as everyone has SEEN him shifting then trying to wheedle out of them by moving the goalposts all over the pitch.

Where Mr Oboe is RIGHT is that Mr Frown's figures lack CREDIBILITY. What he LACKS, though, is a policy like the Liberal Democrats to have proper independently audited accounts for the nation, which would give exactly the CREDIBLE and INDEPENDENT figures that Mr Oboe says we need.

The rules – says Gideon – have allowed Mr Frown to get away with pre-election SPLURGES and post-election tax-rises.

"taxes have gone up by more than seven billion pounds since the last election alone"

…actually, let me just put that into some CONTEXT.

According to Office of National Statistics figures, the United Kingdom's Gross Domestic Product (what we EARN) for 2007 was one-thousand-three-hundred-and-eighty-five BILLION pounds, an increase of one-hundred-and-fifty-one billion pounds from the Gross Domestic Product for 2005.

So out of that one-hundred-and-fifty-one billion Mr Oboe says seven has been taken in taxes.

But the Government takes about 40% of GDP in taxes: that's about five-hundred-and-fifty-five billion pounds for 2007, or a bit over sixty billions more than 2005. Yes, the government SHOULD get sixty billions more in taxes JUST from the growth of the economy.

So let's be generous and assume Mr Oboe means seven EXTRA, ABOVE what the increase would have been anyway.

That EXTRA seven billion pounds is an extra tax increase of… a half of one percent of GDP, or 50p for every hundred pounds that you earn. That's not necessarily INSIGNIFICANT – it's a tenner a month for someone on average wages – but let's not fool ourselves that it is BIG MONEY in terms of the Government's accounts. Of course, Mr Oboe WANTS you to think of it as a STAGGERING increase, but it's not.

And have the rules ACTUALLY enabled Mr Frown to do that? No, not really – and remember they HAD to put up taxes in 1997 because of the CONSERVATORIES' pre-election spending SPLURGE.

In fact, the Labour kept spending firmly SAT UPON for the whole of their first term – longer than necessary, many people think.

It IS true that Mr Frown has spent WAY too much SINCE 2001, but there was nothing concealed about it; he did SAY he was going to.

So Mr Oboe's criticism is short-sighted and unfair.

He also claims that, in spite of the tax rises, we have "the biggest budget deficit of the developed world…"

Blink, blink! Sorry, Gideon, have you SEEN the USA???

(Great Britain's budget deficit c £38 bn, or 3% of our GDP; Americaland's budget deficit c £400 bn or 6% of their GDP. I know that LESS is supposed to be MORE, but somehow Mr Oboe has lost me in the math!)

Anyway, cutting to the punch, in spite of Mr Oboe's crude and stupid sideswipes, we HAVE ended up in a bit of a state because Mr Frown abandoned his Prudence. Which means, says Gideon, we have taxes going up just as public spending is going down.

This is TRUE but, again, what magic can Mr Oboe render to make it not the only thing that can be done?

America is giving away tax rebates, says Gideon clearly gagging to do the same, while Sooty can barely make ends meet with the tax receipts he's getting now. (In fact, he can't, hence yet more borrowing.) But if Mr Oboe is suggesting a Monetarist solution to recession of injecting cash into the economy, then increased government spending (and borrowing) is as good if not better than tax refunds (some of which will go into savings rather than spending).

Essentially, either Mr Oboe AGREES with the Government's STRATEGY (but not its chosen method) or he doesn't have a CLUE what his own economic theory IS.

I leave it as an exercise for the reader to decide which!

"Using the Government's own measure of productivity, the average annual growth rate of output per worker has been less than 1.8% during the eleven years since 1997, down from 2.0% during the previous eleven years. That's a 10% fall in the average rate of productivity growth."

Next, Master Gideon bends over backwards to redefine growth into a fall.
What he MEANS is that productivity has increased by 21.6% in the last eleven years, compared to 24.3% in the eleven years before that. That is, our employers have squeezed more than an extra fifth of work out of us under the Labour compared to – but also ON TOP OF – not quite a quarter extra work forced out of us under the latter half of the Conservatories.

So look at it like this: if the Conservatories increased our output from 100 to 124.3, then the Labour have increased our output from 124.3 to 151.1, an increase of 26.8 on the same base. Yes, the Labour have actually made labour EVEN MORE HARD.

But according to Mr Oboe, "Far from raising the sustainable growth rate of the economy, the evidence suggests that the last ten years have if anything reduced it".

Well, only if you can't COUNT.

It simply has to be said that there comes a point where you cannot squeeze any more blood out of the stone. Once both parents are working triple shifts just to pay the mortgage and council tax, there are no more hours in the day.

And frankly, wouldn't it just be NICE to hear from someone offering the same pay for less work? I think we'd all rather REDUCE our productivity and increase our time with family and elephants. This was called the WORK/LIFE balance when Mr Balloon was hooting about it a few years back; I guess that they've given up letting the sun shine in on THAT.

Mr Oboe is more interested in FRIGHTENING people:

"Yet once you strip out the rising cost of living, real take-home pay has been falling for more than two years. That is the longest sustained fall since records began in the early 1990s."

This assertion, oddly enough, is another piece of mathematical legerdemain. Salaries aren't really falling; Mr Oboe just makes it SOUND that way. "Real" take-home pay means increase in average salaries MINUS increase in average prices. Now, average prices have been galloping away because they include mortgages and therefore the housing bubble. So in fact a house price collapse, the very thing that Mr Oboe – with his eye on the front page of the Daily Hate Mail – says would be the worst that can happen, would actually correct this.

It is TRUE that salaries are not keeping up with the cost of living because of the overheated cost of housing, and that (relatively) higher interest rates (to fight inflation) and higher food and fuel prices are HURTING some people a LOT.

But it is ALSO true that we remain a prosperous nation and have done very WELL in the last decade, much more so than in either decade under the other Conservatories.

The problem is NOT that we haven't been doing well; it is that we have been living it LARGE and mainly on TICK.

This current economic pain comes from the INEVITABLE tightening of belts all round after a truly MASSIVE binge and blow out.

So, does Mr Oboe have any political ALKA-SELTZER?

Well, it's less Anadin-extra and more cold flannel. And for the Banks a jolt of hair of the dog.

To restore stability, Gideon thinks that: "A broader collateral swap programme supported by the Treasury could help. This would allow banks to swap their illiquid mortgage backed securities for liquid government bonds".

Essentially, he is suggesting that the Bank of England should give the banks billions of pounds of AAA+ guaranteed investments in exchange for sub-prime assets that could be worth, well, nothing. All the risk transfers to the British taxpayer and in return we, er, get to see the people who gambled all that money away have another go for free at our expense.

Naturally this is SUCH a good idea that Sooty has already stolen it.

Forgive me for NOT agreeing.

Greater liquidity in the housing market really ought to be realised by helping people to help themselves, though support for collective, co-operative and credit union schemes: smaller bodies that are controlled by the people who they serve rather than the banking elite in the City. It is the sheer SIZE and REMOTENESS of the banks that has driven the unsustainable credit FRENZY, with branch staff reduced to little more than telesales operatives pushing the next product for commission.

Bailing them out is jut throwing MORE of our money after the last lot that they BURNED!

What we need is a LOCAL Building Society, where you can TALK to your manager in PERSON and work out what is the best deal that is appropriate to you. The manager should be concerned with the welfare of their customers, and making sure that they do not get into crazy levels of debt, and at the same time be interested in maintaining a good supply of savings deposits to cover their liabilities, rather than some gambling club set up in Hoopla, West Virginia!

Needless to say, Gideon is still obsessing about rescuing his mates in the City:

"we will give the power to rescue banks to the Bank of England, instead of the FSA as Alistair Darling wants to"

Mr Oboe doesn't think that the FSA DESERVES to be the white knight because, he says, bank failure follows regulatory failure.

Apparently improving the regulation is not a solution then?

The problems of the FSA certainly include not being very good at regulation, but that's as much because they do not have the resources or indeed the legal powers to do anything about it as because of native rubbishness.

Master Oboe further suggests helping out the banks by varying the requirement for their Capital Adequacy Ratio (which is the bank's capital, i.e. how much its shareholders have invested, divided by the bank's debts adjusted for how risky they are). This is your basic limit on how many times more than what the owners are risking that the bank can gamble loan out.

So what Master Gideon is actually saying is "let's let the banks make MORE and RISKIER loans when times are difficult".

Is this COMPLETELY wise… especially since he's just said he'll be handing over OUR money for them to play with?

And isn't that what caused the US meltdown in the first place?

Meanwhile, and probably thinking he's being Prudent, he promises that there will be independent monitoring of Government performance …which is exactly what Mr Frown promised. Why should we expect he will be any different? I suppose we should at least give him SOME benefit of the doubt. Though you MIGHT want to make sure that there is a SUBSTANTIAL Liberal Democrat presence in Parliament in order to keep him HONEST, should he ever worry the Treasury benches with his short trousers.

To wind up, he regales the audience with a flourish of the Old Nu-Conservatory Tune:

"…over a cycle, we will share the proceeds of growth, and so reduce the proportion of the economy taken by the state. Government will grow more slowly than the economy does."

And then a real blast from the Old OLD-Conservatory Hymn Book:

"And finally we will we improve competitiveness through dynamic supply side reform"

…which means lowering taxes. Not that they're promising that. Ooooh no.

Next thing you know, he'll be claiming that lowering taxes will increase revenue!

(Which is nonsense – see Mr James Tobin's 1992 article "Voodoo curse" from the Harvard International Review if you can find it online.)

And then, to finish, he says with a flourish that the Government should be doing more: "…more where it's needed, like improved transport infrastructure, better skills, and more active support for businesses. I want the attitude of the Government to be a service to business, not a burden".

Or, to translate: "In conclusion, ignore EVERYTHING I've just said about monetarism and prudence and let's just put up Government spending… like what Sooty is doing! Buns all round! Yippee!"

Sometimes words just aren't enough, are they? We SO need to have an alternative Chancellor who actually offers an ALTERNATIVE.

Paging Dr Cable!
Paging Dr Cable!
Emergency in Ward No. 11!

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