£23bn scandal of London’s housing bubble

October 1, 2013

According to the Bank of England, each year since 2010, £23 billion of foreign money has poured into the London property market. One would think that this is a good thing for the economy, but most of these foreign buyers have never been to London, or at least have no intention of spending any time here.

It’s all about the preservation of wealth. The residents of unstable oil-rich countries fear the Arab Spring. The residents of China and Russia fear their governments. All are looking for stability. It has become the fashion to “park” money in London. It’s what wealthy people do when they don’t trust the banks, they “park” their money through the purchase of an asset, as a store of value. In this regard, the London property market has become a gynormous piggy bank.

In 2011, Regent Street was valued by The Crown Estate at £2bn. Each year a multiple of over 11.5 times this in ordinary homes is being snapped up. That’s the equivalent, each single year, of Oxford Street, The Strand, Fleet Street, High Holborn, Trafalgar Square, High St Kensington, Old Bond Street, Berkeley Square, Park Lane and Knightsbridge, and more. That’s just one year.
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What’s the point of today’s Labour Party?

August 21, 2013

Way back in 1992, at the TUC conference, John Prescott stunned the socialist movement, by making a forceful speech in favour of John Smith’s proposed trade union reform. He attacked the unions for even questioning the motives of the Labour leader. He shamed them into submission. He showed that his loyalty is to the party over the unions and as a result, was rewarded with the deputy leadership when Tony Blair later rose to power.

He is the closest thing there is to Labour Party royalty, and he just accused the party leader of being ineffective. This is not unreasonable. Everywhere I look I see the government’s economic policy being attacked. The Economist magazine calls the Right to Buy policy “A daft new government-subsidy scheme”, but what did we hear from Labour? Nothing. Not a dickie bird.
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How Osborne is feathering his own nest

June 30, 2013

George Osborne is desperate to have some kind of legacy that he can tell his grandchildren about. Selling the state-owned banks would be that legacy. The only problem is that universal advice tells him that now is not the time.

Stephen Hester had earned great praise for his achievements as boss of RBS, with investors such as Fidelity’s £2.5billion fund manager Sanjeev Shah describing him as “doing a fantastic job.” But look at the reaction from the brokers since Hester announced his departure.

Investec Securities:
The manner of Mr Hester’s departure is deeply unsatisfactory. Since 2008, government inconsistency and mismanagement have hurt shareholder value and, as 81% shareholder, it reaps what it sows.

Espirito Santo:
Mr Hester’s departure was clearly against his wishes and it appears that Mr Osborne had different ideas as to how the bank should be run. The political wrangling has significantly impacted the franchise.

The Economist
[Osborne] shoved out RBS’s boss Stephen Hester, prompting a sharp fall in the bank’s shares. …It is politics not economics that underpins the government’s decision to privatise the banks.

The share price was 334p on 11th June and is now 275p (27/6/13) and continuing to fall against a rising market. That’s an 18% fall so far. Placed in context, that is roughly a £20 billion loss to the British taxpayer in the space of a couple of weeks. (see footnote)
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Both QE and FLS are in a mess

May 11, 2013

George Osborne’s nanny state policy responses are failing our banks and perverting our markets. In the midst of the political rhetoric on welfare and debt, there is one economic policy that the chancellor has implemented which has a genuinely significant impact: Quantitative Easing (QE).

This has had a profound impact on the economy.

The normal way for the money to be supplied into the economy is for banks to provide loans. If ten £1k loans are made for every deposit of £1k, then £9k of new money has been put into circulation. The banks are liable for it if it isn’t paid back, so they have become expert at judging risk. The supply of money makes a good demonstration of the private sector achieving a public good, normally.

The problem is that lending is too slow. As a result there is a lack of new money going into the economy but people are continuing to repay the loans they previously took out. The net effect is less and less money in the economy. If money is the oil on the cogs, then without it, the machinery will grind to a halt.

As a policy response, we’ve had QE. The Bank of England is creating money on a grand scale. Under Quantitative Easing they have so far produced an extra £375billion. In this respect it is the largest nationalisation of private sector service since the 1945 Labour government. I wonder if George Osborne realises that.

For a long time the banks have been receiving contradictory instructions from government. They must lend more, but they must increase their capital reserves. It’s like telling a schoolboy to spend his pocket money then scolding him for not saving it.

As a result, innovative policies are not only proving expensive but also potentially counter-productive. The government driven Funding for Lending Scheme (FLS) aims to subsidise bank lending for small businesses.

It is bad economics. It has lowered the interest paid to savers, but achieved little increase to the loans given to small businesses. With the state competing with savers, the banks no longer need to attract deposits as they have cheaper source with government cash.
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A Gift from Alistair to George

November 13, 2012

The funniest line of George Osborne’s letter to Mervyn King begins with the words, “As you are aware, my predecessor agreed…”

The predecessor is Alistair Darling and the letter concerns the £35billion of interest payments, or coupons, that would have been paid on the gilts bought up by the Bank of England, under the policy of Quantitative Easing.

The agreement struck by the Labour Chancellor, is that the Treasury would not make coupon payments on the gilts, since it would be pointless for the Treasury to pay interest to the Bank of England (the state to pay the state).

The reason the letter is amusing is that Osborne won an election on the promise to reduce the deficit at spectacular speed, but has spectacularly failed to do so. However, he has done a good job of blaming his predecessor for his own failure. In this letter he has been forced to admit that his predecessor has delivered a £35billion gift to the public purse.

All this means that George Osborne must be tremendously happy. You can picture him getting out the bunting in Number 11 Downing Street. He’s probably kissing a photo of Alistair Darling at this very moment. There must be a proper spring in his step.
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Danger! George Osborne’s “Credit Easing!”

October 6, 2011

There is something very strange about George Osborne’s “credit easing” policy. He proposes to use a complex financial instrument in order to bring the UK economy out of a recession which was caused by a complex financial instrument.

When you look closely at the proposal, it sounds awfully familiar. The UK government will sell loans to small businesses, then package them together, and sell them onto the bond market in tranches.

In other words, his proposal to get us out of this mess is to use the same financial instrument as that was used to package the securitized mortgages, which then became toxic, and got us into this mess in the first place.

I’m not saying it wouldn’t work, but I am saying it’s ridiculous to blame the bankers for their complex financial instruments, when the Tory Chancellor of the Exchequer is proposing exactly the same instrument as a cure.
The other proposal is to use Quantitative Easing to buy the bonds of British banks. He hopes this will boost their capital which will cause them to lend to small businesses.

He hopes. How he must hope. There is no guarantee that the banks won’t hoard the money. And besides, why would they lend to small businesses in this country, when they could do safer lending to bigger businesses abroad? I mean, they’re not exactly civic minded.

The new QE idea is that if we pay over the odds for bank bonds, this will raise their market price, causing the yields on those bonds to fall. With a lower interest rate to pay, this makes it attractive for the banks to issue more bonds. In other words, a second bank bail-out, but done on the sly. Further to that, with no equity in return, it’s a free gift from us to them.

The Bank of England governor, who has been very quiet of late, has refused to issue the QE to private businesses, saying that he doesn’t want the BofE to be politicised. Can someone explain what he means by that? However, he has today agreed to print £75billion and pass it onto the Treasury, for them to purchase of the banking bonds.

So the proposal is to supply the banks with debt, in the hope that they supply more debt to small businesses. At the same time as this, the government will directly supply loans to small businesses, through the “credit easing” policy. These proposals are in direct contrast to the Prime Minister’s insistence that it was debt that got us into this mess, and that the only way get us out of this mess is to pay off the debt.

According to the Bank of England’s own analysis, the last bout of QE boosted the consumer prices index (CPI) by between 0.75 and 1.5 percentage points. In other words, it caused 1.25% inflation. The difference between then and now is that then it was necessary to create liquidity in the economy. Everyone agrees that the problem now is one of demand, not liquidity. This bout of QE will certainly be much more inflationary than the mere 1.25% last time. And as people get used to inflation, they get used to demanding higher wages, which causes inflation. This is how governments lose control.

It’s the elderly and the poor who pay for inflation. Women are especially sensitive to prices. So by bailing out the banks with free money, it will be these groups that pay for the bail-out, not the wealthy supporters of the Conservative Party.

However, this is the biggest hypocrisy of Osborne’s policy: Inflation would affect holders of government debt. By stoking inflation, Osborne would be inflating government debt away. The international markets know this and, in normal times, would flee to preserve their capital. But the market doesn’t have anywhere else to go and Osborne knows this. The Euro is in a mess, and so are the Dollar and the Yen. Emerging markets are hardly risk-free, even if they were accessible. The safe haven of gold has far further to fall than it has to rise. There is no obvious place of refuge. So Osborne can stoke inflation without much fear of the markets turning against us.

This blows a hole in his entire raison-d’etre. His continued opposition to Labour’s economic strategy has been, and still is, that the markets will turn against us if we spend to create growth. So why does he not fear the markets now?

Come out of your bunker, George!

March 1, 2011

Laugh? I almost spunked myself, when I read George Osborne’s hilarious piece in the Guardian yesterday.

Writing under the heading, “I’m somewhat rattled” Osborne claims that the American economy cannot be compared to the British, “because of the dollar’s status as the world’s reserve currency, [means that] the US can increase its deficit this year without fear of a sovereign debt crisis.”

Isn’t it funny that Osborne is suddenly comparing Britain to the US economy? I thought he only ever compared us to Portugal and Greece: Two countries that are in the Euro and therefore unable to devalue on the foreign exchange.

The odd thing is, he never offered the “Euro qualification” when he compared us to Portugal and Greece and even Ireland. Everyone else always did. The Euro economies are in a fundamentally different circumstance and are not comparable to the British economy.

So he makes himself look foolish for producing this argument now, only a couple of days after the Office for National Statistics redefined downwards the shrinking of the British economy in the fourth quarter of 2010.

He is clutching at straws to justify his failed policy.

One has to wonder what is happening behind the scenes. Is he receiving “Plan B” advice from all and sundry? Has best mate Dave been slow to answer his calls of late? Perhaps Ken Clarke was caught wandering about in George’s office with a tape measure, as if considering a furniture move?

Whatever his motives, he couldn’t possibly have believed that his lonely argument was likely to change his lonely predicament.

As Ed Balls said, “Come out of your bunker, George!”