The true cost of the financial crash

UK unemployment is rising quickly. The last available data from the Labour Force Survey is for October, when the rate reached 6.2 percent. That number is going to jump when the December data is released.

Increasing unemployment is the last link in a chain of misfortune that started with reckless monetary policy. Low interest rates generated an unsustainable housing bubble. When it finally busted, it left in its wake a banking crisis, and collapsing consumer confidence. In turn, this led to a contraction in GDP and mounting job losses.

All UK housing bubbles have ended this way.

The true face of modern Britain

"Some companies that I work with would pay me £100,000 a year. That's cheap for what I do for them."

Lord Taylor

Brown wants us to be confident

Lets try and talk our way out of recession.

Gordon Brown has issued a passionate appeal to the British people for optimism in the face of the economic downturn, insisting that confidence will see the country through the deepening recession.

While admitting that Britain is “in the eye of the storm”, the Prime Minister said in an interview with The Daily Telegraph that the country will see off the worst of the slowdown if the public can harness the “British spirit” and remain resolute and upbeat.

International forecasters say that Britain is heading for the deepest recession of any advanced economy, with unemployment predicted to pass 3  million, but Mr Brown appeals against “talking the country down”.

In a striking show of optimism, he declares: “I am absolutely confident about Britain’s future. I have utter confidence in our ability to come through this. I have utter confidence not only in the British people’s determination to come through this, but that people will work together to make sure Britain emerges from this.

I don't know about you lot, but after reading this article, I am feeling so confident that I am ready to go down to Brent Cross Shopping Centre and start buying cheap Chinese tat.

A song for Gordon

This year's UK entry for Eurovision???

Another scary chart

Before the MPC consider cutting rates again, they should stop and think hard the amount of money held in non resident sterling time deposits in UK banks.

There are two things to highlight about this data. First, this money belongs to people who don't actually live here in the UK. This money is here because foreigners want to earn an attractive return. As soon as they see a better deal elsewhere, or if they fear that they might actually lose their money, then this cash is gone.

Second, these accounts are denominated in sterling, which means that before this money leaves these shores, it will be converted into foreign currency. The laws of supply and demand will work their dark magic. A large inflow of unwanted sterling into the foreign exchange market will lead to a collapse in the exchange rate.

The amount of cash held in these accounts is huge. In December 2008, it was an amount equal to 30 percent of UK GDP. The growth of these deposits is even more shocking. Between September 1997 and April 2008, they increased by 450 percent.

So it is a case of cut rates if you dare, because if foreigners pull out this cash, sterling will fall like a stone.

US GDP down 3.8 percent

The US economy slows at the fastest rate in 26 years.

Ironically, the number was "better than expected"; many economists were expecting a decline closer to 5 percent.

Which housing market crashed faster - the UK or the US?

Which housing market is in more trouble, the UK or the US?

According to the Case-Shiller index, the US housing market peaked in July 2006. Since then, the composite 20 index is down 25 percent. Moreover, it took 28 months to clock up that price decline. In other words, the US market fell roughly 0.9 percent a month.

Here in the UK, the market kept rising until October 2007. Since then the market has fallen 19 percent. That decline was accumulated over 15 months, which adds up to a monthly decline of about 1.3 percent.

In absolute terms, the US crash is ahead of the UK's, but we are catching up fast. If present trends continue, the UK should overtake the US by mid-year.

Europe stands ready to swallow up Iceland

The European Commission are ready to fast track Iceland towards EU membership. Images of flies, webs and spiders immediately come to mind.

If Iceland does reluctantly join, the EU will be getting a bargain. The country would have to submit to the strictures of the Common Fisheries Policy. Iceland would quickly find their waters invaded by ravenous Spanish and Portuguese industrial fishing boats, busily hovering up the last great fishing stock in Northern Europe. What would the Icelanders get in return? A bailout and the opportunity to convert worthless Kroner into euros.

Iceland's sorry predicament serves as a stark warning to the dangers of allowing irresponsible financiers to run the show. In return for a few short years of rapid economic growth, followed by a catastrophic debt-induced recession, Iceland is about to lose their independence.

It isn't hard to see a similar scenario here. Although the UK has already handed over much of her independence to Brussels, monetary policy is still under the control of London. However, as the crisis deepens, UK monetary independence looks increasingly vulnerable. The pound could quickly follow the Kroner.

Ireland faces rating dowgrade

That generous blanket deposit guarantee from the Irish government is starting to look a little silly.

Ireland has become the first western European country to have its top-notch credit rating given a negative outloook by Moody’s Investors Service, in a further sign of the strains being put on national economies by the financial crisis.

Ireland has already been given a warning that it could soon lose its triple-A status by rival agency Standard & Poor’s, which has already downgraded Spain, Greece and Portugal in recent weeks.

(from the FT)

Zim shows the way to euroland

This could a model for the UK as it gradually adopts the Euro:

Zimbabweans will be allowed to conduct business in other currencies, alongside the Zimbabwe dollar, in an effort to stem the country's runaway inflation. The announcement was made by acting Finance Minister Patrick Chinamasa.

BBC southern Africa correspondent Peter Biles says the Zimbabwean dollar has become a laughing stock. A Z$100 trillion note was recently introduced. Until now only licensed businesses could accept foreign currencies, although it was common practice.

(from the BBC)

I am feeling guilty

I must admit to feeling rather guilty when I look at this chart. All I wanted was a sensible fall in house prices. I wanted property to be affordable; that was all.

Prices have certainly come down, but as they fell, they seem to have brought the entire UK economy crashing to the ground. We are now looking at the worst recession since the 1930s.

If only someone had stopped the housing bubble in the first place.

It just gets worse....

Higher mortgage arrears today, lower house prices in the future.

UK homeowners are increasingly struggling to keep up mortgage payments, with the number of loan accounts in serious arrears in the third quarter of 2008 rising by nearly a quarter over the same period the previous year, according to data from the Financial Services Authority.

The FSA, which oversees mortgage lenders, reported that 340,000 arrears cases had arisen by the end of the period, equal to 2.92 per cent of the nation’s mortgage loan book, up sharply by 0.79 per cent over the same period of 2007. The FSA defines a mortgage in arrears as one which on average is behind on 1.5 per cent of outstanding balances or roughly three months behind in payment.

(From the FT)

UK house prices slide for 15th month

I will post a chart for the Nationwide house price index soon. In the meantime, you might want to meditate on this story from the FT.

UK house prices show no sign that they have hit the bottom as the Nationwide House Price Index recorded its 15th straight monthly fall in January with prices sliding 1.3 per cent,Thursday’s figures bring the year-on-year drop to 16.6 per cent, against a decline of 15.9 per cent in the year to December.

Go on, admit it. You never thought it would get this bad, so quickly.

But I need it, I need it......

Bankers are still having a little difficulty adjusting to the new reality. Two stories today illustrate the point.

First, from the FT....

The US financial sector’s new political masters began exerting their influence on Tuesday as Citigroup was forced to scrap the purchase of a $50m executive jet that was seen as a misuse of money at a time when the bank is reliant on public support.

Only a day earlier, Citi had insisted it would complete the acquisition of the aircraft. But it backed down after officials acting for Tim Geithner, the new Treasury secretary, expressed strong opposition to the move.

But will Citi execs end up slumming it back in coach class. I think not.

Over here, Lloyds execs are looking for a pay rise...

Lloyds Banking Group has sounded out shareholders about a change in its executive remuneration plans that could generate pay rises for its directors despite being bailed out by the taxpayer.

The bank, in which the government holds a 44% stake, is understood to have approached big City investors between a month and six weeks ago with outline proposals for a modified pay package for the executive team of the bank.

I have been trying to think of the pitch that the Lloyds management would put together to justify their pay increase. Adding shareholder value would not be a very convincing argument.

A 20 year recovery

From today's FT....

The UK will need to raise taxes or introduce spending cuts worth an extra £20bn annually by the end of the next parliament if it is to repair public finances to the level forecast in November’s pre-Budget report, according to the Institute for Fiscal Studies.

In its 2009 Green Budget, an annual analysis of fiscal policy, the IFS concluded that even with spending cuts and tax increases of that magnitude, public sector debt may not be able to return to pre-crisis levels for more than 20 years.

This is a welcome wake up call. Brown and Darling are diving, head first, into the shallow pool of a fiscal crisis. These jokers will not get away with three or four years of £100 billion public sector deficits.

More foolishness at the Post Office

According to the Times, post office savings account holders are not covered by the UK deposit insurance scheme. It turns out that Post Office accounts are managed by the privately owned Bank of Ireland. Therefore, it is the fiscally challenged Irish government and not HMG that will, in theory, end up footing the bill for any future deposit runs.

We are not talking small numbers here. The Post Office has some 2 million customers here in the UK, looking across the cold Irish sea for financial re-assurance.

What would happen if, mercy protect us, the Bank of Ireland failed. We would have frantic queues outside the state owned UK post offices, looking for cash held by a neighbouring country. What would happen next? The treasury and the Bank of England would suddenly wake up to the fact that this deposit run could spread into other banks. Within days if not hours, HMG would have to offer a blanket deposit guarantee.

There is, however, a deeper question here. What was the government thinking when it approved the out-sourcing of post office financial services to a foreign bank. Could they not see the obvious implications of an overseas banking crisis on accounts held at the Post Office. Whether they acknowledge it or not, there is an implicit deposit guarantee on Post Office accounts.

No doubt, out-sourcing Post Office financial services seemed like a good idea the time.

David Cameron calls for criminal actions against bankers

I like the sound of this.....criminal prosecutions for bankers. The boy from Eton wants the Old Bill to take a look at some of those merchants in the city.

David Cameron last night expressed disbelief that financial watchdogs were not pursuing criminal investigations against banks and bankers who have caused the financial crisis. He compared the vigorous nature of inquiries in America to the lack of action among the City authorities. It is the furthest the Conservative leader has gone in demanding closer examination of any potential illegal behaviour by bankers.

He also claimed that Britain was now "the most indebted nation on earth". Mr Cameron told Jeff Randall Live on Sky News: "I think that we need to look at the behaviour of banks and bankers and, where people have behaved inappropriately, that needs to be identified and if anyone has behaved criminally, in my view, there is a role for the criminal law and I don't understand why is this country the regulatory authorities seem to be doing so little to investigate it, whereas in America they're doing quite a lot."

(From the Telegraph)

But does Dave mean it, or is he playing to the gallery?

Another bailout

The generosity of New Labour has no limits, at least when it comes to taxpayers money.

Another day, another bailout....

Peter Mandelson, business secretary, has unveiled a package of measures to help Britain’s embattled car industry, by offering financial support for the development of low carbon vehicles with new loan guarantees.

The announcement outlined a new guarantee scheme to back £1.3bn of loans from the European Investment Bank, with another £1bn of loans that would not be eligible for such funding.

(From the FT)

What do you call this......?

In any civilized country, a conversation like the one below, between a business representative and a member of the legislature would be considered to be corrupt.

In Britain, this doesn't appear to be the case....

The Sunday Times: "Obviously, from our point of view, this would be something we would remunerate you for. And I don't think money is an object. But [what] I would ask you to do, I think, is to give us some idea of what a fee structure would be."

Lord Taylor: "This is absolutely difficult, this is very difficult for me because some companies that I work with will pay me £100,000 a year."

The Sunday Times: "£100,000?"

Lord Taylor: "Oh yes. That's cheap for what I do for them. And other companies will pay me £25,000. It all depends on what you are trying to do and how much time I think I am going to spend on it."

The Sunday Times: "Those fees are not impossible. They are all fine."

Lord Taylor: "Yes, but these are the sort of fees I get. I am being absolutely honest with you. I am not exaggerating. It's whether I want to do it or not. You've got to whet my appetite, to get me to come on board."

More ponzi schemes

So, Madoff wasn't the only one scamming the rich.....

NEW YORK (Reuters) - Authorities on Monday arrested the chief executive of a private New York financing firm on suspicion of running a purported Ponzi scheme that attracted $400 million in investments, U.S. law enforcement officials said.

Nicholas Cosmo, head of Agape World Inc on New York's Long Island, was said to provide commercial bridge loans, but was instead operating a traditional Ponzi scheme in which early investors are paid with the money of new clients, officials said.

"Nicholas Cosmo took the advice of an attorney and complied with an arrest warrant," said Al Weissmann, spokesman for the U.S. Postal Inspection Service, which is investigating Agape World and Cosmo along with the FBI.

It is the numbers that always surprise me. Everything about this credit crunch is big; these guys stopped dealing in small change and went for the millions, billions and gazillions.

New Labour declares war on deadbeat dads (again)

I woke up this morning to a no-name New Labour minister promising to crack down on deadbeat dads. On breakfast tv, she outlined the latest strategy for hunting down absent fathers. In future, a government ministry will have to power to confiscate a non-contributing father's passport and driver's licence. Furthermore, government officials will be able to confiscate these documents without having to go to court.

This is classic New Labour; it is both authoritarian and congenitially incapable of understanding the deeper problem. It is the same old legislate, confiscate and imprison strategy that has marked New Labour's approach to most social problems.

Why have men stopped being fathers? The vast majority of absent fathers have disappeared because the state is willing to take over as the primary breadwinner. Rather than recreating a role for fathers, New Labour want to use the heavy hand of the law.

This measure is such a sad indictment of Britain. The government think that preventing men from leaving the country is the only way to ensure that mothers receive their rightful financial support from their children's fathers.

Icelanders hoofs out their government

Frankly, it was astonishing that Geir Haarde lasted so long as he did as Icelandic Prime Minister. Rarely has a European government done such a comprehensive job destroying an economy. He, and the rest of his sorry cabinet, have hit the road after Icelander's patience with the currency and banking crises finally ran out.

I can see the same thing happening here. Just give it time.

The global economic crisis claimed its first leader yesteday, as Iceland's prime minister announced the immediate resignation of his government following the collapse of the country's currency and banking system. Geir Haarde said as recently as Friday that his coalition would remain in office until early elections, called for 9 May, after violent protests at its handling of Iceland's tottering economy.

Yesterday he threw in the towel, saying that his Independence party and its Social Democratic Alliance partners were quitting immediately as he could not accept a demand by the Alliance to take over the premiership.
(From the Guardian)

Its a funny old world

One minute you are on top of the stinking pile. The next, you are on the slide and no one wants to know you. I am beginning to feel sorry for Sir Fred Goodwin, the former head of RBS.

His reputation has been devalued as savagely as the toxic debts on the books of the Royal Bank of Scotland and the humbling of Sir Fred "The Shred" Goodwin, the bank's former chief executive, continues.

Yesterday, another battalion of troubles arrived – he is to leave his post as chair of the Prince's Trust; the Lothian and Borders police has launched an inquiry into his handling of the RBS rights issue; and he will have to appear before the tough Treasury Select Committee of MPs.

(from the Independent)

Brown is on the slide

The Independent reports that Brown's post-Lehman poll bounce is over. Just imagine his poll numbers when when sterling hits parity with the euro.

From bounce to backlash. The Conservative Party lead over Labour at the opinion polls has rocketed from five to 15 points in one month, with voters turning against Gordon Brown as the recession bites.

The ComRes survey for The Independent puts the Tories on 43 per cent (up four points on last month), Labour on 28 per cent (down six), the Liberal Democrats on 16 per cent (unchanged) and other parties on 13 per cent (up two). The research shows Labour at its lowest standing since September's survey; the party has slumped back to where it stood before Mr Brown won international plaudits for the Government's rescue of the banks last autumn.

Sorrow, sadness and disrepute

"Its cheap for what I do for them" These are the words of Labour Peer, Lord Taylor of Blackburn as he explained why companies are prepared up to pay him up to £100,000 for services rendered. According to the Times, these services include tabling legislative amendments for anyone willing to bung him tasty little earner.

According to Lord Taylor, he was actually following the rules when he offered to subvert the democratic process. Nevertheless, he felt obliged to simultaneously apologise to the House of Lords for bringing it into disrepute and deny any "wrong-doing". There were no apologies for ordinary voters.

However, one thought did occur to me when watching Lord Taylor on Channel four news. It is hard to imagine one of the old hereditary peer behaving in such an entrepreneurial manner.

Gold is back

Deflation or inflation? The gold price has spoken. It has reached $900 an ounce.

Meanwhile, sterling continues to slide.

It is all about supply and demand. There is too much supply of sterling and not enough demand.

bailout fatigue

What? Another rescue package? How many have we had so far? Is anyone keeping count? The Guardian reckons that it is just two, but it seems a lot more to me.

Alistair Darling has accepted that a second emergency package of tax and spending measures may be needed in this spring's budget to claw the economy out of a deepening recession, the Guardian has learned. Despite the deterioration in the public finances, the chancellor is willing if necessary to borrow more money to help strategically important industries and to help lay the foundations for economic recovery. He will start work this week on plans for a British answer to Barack Obama's green jobs agenda.

The Guardian say that the new package will "Lay the foundations for economic recovery" I call it building up a massive mountain of public sector debt.

Bring UK interest rates down to zero

A quick and perhaps obvious question; why would cutting rates down from 1.5 percent to zero would have more impact on the economy compared to moving rates from 5.5 percent down to 1.5 percent?

DAVID “DANNY” BLANCHFLOWER, the member of the Bank of England’s monetary policy committee (MPC) who consistently warned of the danger of recession, believes UK interest rates should “obviously” head down to America’s near-zero level.

Here is another, perhaps equally obvious question: if UK banks have a massive funding gap, how would lower interest rates help fill this hole with private sector savings?

Corus cuts 3,500 jobs

I was surprised to hear that there were still a couple of steel makers left in the UK.

Corus is set to cut up to 3,500 jobs, raising fears that manufacturers will unleash a fresh wave of redundancies this week. The steelmaker, owned by Tata, the Indian conglomerate, will announce cuts today in what is likely to be one of the worst single job culls since the recession took hold, it is understood.

It is not clear how many of the 3,500 jobs cut will be in Britain, but 24,000 of Corus’s global workforce of 42,000 people are based in the UK.

More scary banking numbers

From today's Telegraph:

The Bank of England says the average ratio of debt to equity within British banks is more than 30 to 1. In other words, the bank balance sheets are roughly 440 per cent of Britain's GDP.

As a result, the government is too small to help, in trying to bail out the banks, is in danger of chucking not just good money after bad but the entire economy after the banks.

RBS alone has a balance sheet larger than UK GDP.

Here is the paradox; UK banks need to downsize, but the smaller they get, the tighter the credit conditions. Smaller banks means a bigger recession.

Where will the credit come from?

The UK housing market is a monster. Last year, lenders extended mortgages amounting to £257 billion. That is equivalent to about 19 percent of GDP. Despite this huge inflow of credit, property prices nose-dived.

The year before, mortgage lending was much higher. In 2007, banks lent some £363 billion. The credit crunch extracted some £107 billion worth of lending out of the property market.

Here we come to a little difficulty for Brown and Darling. This year, they want to borrow £120 billion in order to finance the government deficit. If the housing market is going to recover, it needs to find a similar amount of credit. They also want to keep interest rates close to zero. Then there is the private sector, who also has a potentially enormous demand for credit.

How does the government intend to reconcile these competing objectives? It is going to ask the Bank of England to print money.

Another day, another bailout

It never seems to stop. Every day carries a story of another bank bailout. This time, it is a Belgian bank receiving the cash. From today's FT:

KBC Group, one of Belgium’s largest remaining banks, is to receive a €2bn cash boost from state coffers after it incurred a full-year loss of €2.5bn.

Meanwhile, over in America, Citibank has its hand out again. It wants the US government to take over its bad debts. From the BBC:

Citigroup's new chairman says that if the US government took bad assets off bank balance sheets, banks might be able lend more money.

With a mixture of threats and promises, banks around the world have extracted enormous amounts of money from taxpayers. They have pulled out so much money that long term fiscal sustainability in many countries has been undermined. In reality, governments have substituted one problem for another. Instead of banks going bankrupt, it is the public sector that is likely to default.

An almighty deficit

Her Majesty's Government is running a big old fashioned deficit. During the 12 months to December, the public sector borrowed £70 billion; roughly double the amount in 2007.

The chart above illusrates the cumulative monthly borrowing. In effect, it is the month tab, with each month's total being the amount of borrowing up to that point. The chart strongly suggests that things got a lot worse in the autumn, when borrowing really took off.

Running up a £70 billion deficit is bad, but there is worse to come. For fiscal year 2010, which starts in April, HMG intends to borrow something like £120 billion. It will be the largest deficit in the history of this island.

Northern Rock pocket 10 percent bonuses

Question: What is the price of failure in the UK today?
Answer: It is a 10 percent bonus, while the taxpayer is covering the loses on your loan book.

Come on, admit it; when you saw this story about Northern Rock staff getting a 10 percent bonus, you smiled. It is so ridiculous that you can't get angry.

This is Britain; financial services rule. Everyone else travels second class. Even state owned banks need their bonuses.

VAT receipts collapse

The VAT cut might not have kept us shopping, but it did a number on public finances. December VAT collection was down a billion quid compared to the previous Christmas.

We can't blame it all on Darling's 2.5 percent reduction. The actual fall in receipts was closer to 20 percent. Nevertheless, we can conclude that the tax cut did nothing to halt the calamitous decline of the UK economy.

It would have been better if Darling had done nothing. At least, he would have received a little more cash to cover the losses from the financial sector.

RBS - the problem

It is too big to fail, and extremely expensive to save.

Where did all that shareholder value go?

Over the last 12 months, the RBS share price has fallen 97 percent. In short, share holder value has been wiped out. It is a sad tale but should we feel sorry for RBS shareholders?

It is a tough question. One the one hand, shareholders should have paid a lot more attention to what the management were doing. Most of the problems at RBS are self inflicted wounds. It was a mixture of bad investments, ruinous pride and an ambitious acquisitions strategy that destroyed the bank. Shareholders could have stopped it, but didn't.

On the other hand, the capacity of shareholders to influence corporate decisions is now extremely weak. There were shareholders who spoke out against the ABN-Amro purchase, but RBS management simply ploughed on regardless.

Regardless of the culpabiity of shareholders, RBS offers a stark warning about what can happen to a great company if it falls into the wrong hands. Shareholders everywhere should wake up to the danger that lurks within every company; the ambitious and reckless CEO who is willing to risk everything for the christmas bonus.

The new dictionary of international banking

Now that the world's banking systems are going down the toilet, bankers have developed a whole new vocabulary for repackaging failure. Here are a few euphemisms that I have heard recently, coupled with my own translations.

Legacy risk = Worthless assets accumulated by the previous CEO

Fee pools = Investment bank scams designed to fleece unwary high-wealth clients

Selective disposals = A fire sale in order to raise some quick cash to meet regulatory capital requirements

Retail book re-pricing = Writing down worthless mortgages that currently pollute the bank's balance sheet.

Asset run downs = see selective disposals

Liquidity portfolio re-based to lower risk liquidity = Receiving emergency liquidity support from the central bank

Focused investment only in areas that add most value = Dumping mortgage assets and buying US treasuries.

Dramatic changes in the strategic landscape = a recession

“fast-to-market” deals = lend now, worry about the financial regulator later

Developing a less capital-intensive business = downsizing to a smaller office, with fewer staff and fewer laptops

Run-off CDO portfolio losses = Yes, we did a few deals with Lehmans just before Paulson pulled the plug.

Sterling hits 1.39

Sterling hits an eight year low. It was trading at over $2 less than a year ago.

The worst day in Irish financial history

"It's the worst day in Irish financial history and the government doesn't seem to be saying anything."

Brian Lucey, associate professor of finance at Trinity College, Dublin.

Share prices for Irish banks are in freefall. Yesterday, Allied Irish Bank dropped 72 percent while the Bank of Ireland plunged 48 percent. Anglo Irish bank - the country's third largest - is in now public ownership. It is an overused word, but the Irish financial system is close to meltdown.

There is something very odd about this collapse in share prices. A few months ago, the Irish government offered a blanket guarantee on all deposits. At the time, a great roar of approval went up in Ireland. The banks were sorted, the Irish government had come to the rescue.

Now, that generousity is looking rather ill-advised. Although Ireland may have recently enjoyed an extended period of unprecented growth, it still remains a comparatively small economy. Furthermore, the days of the celtic tiger are over; the economy is in recession, the housing market is collapsing and tax revenues are evaporating.

It is questionable whether the Irish government can make good on that promise to cover all deposits. Unlike the UK, Ireland doesn't produce its own bank notes. It gave up that right when it joined the euro. So when Darling promises to cover bank losses, he has the confidence of knowing that he can rely on the Bank of England to produce limitless quantities of money. The Irish finance minister has no such luxury.

So, while understanding Mr. Lucey's frustration, the silence of the Irish government is understandable. Right now, there is nothing useful that the Irish government can say. When a government is this deep in trouble, silence is definitely the best policy.

I expected more

Today's inflation number really should have been a lot lower. With the banking system imploding, and the real economy in freefall, prices should be coming down.

The December number came in at 3.1 percent. It should have been much closer to 2 percent. After all, we did see the 2.5 percent VAT reduction, massive pre-christmas sales, and the collapse in oil prices. Really, I was expecting much more.

So why didn't the inflation rate fall further? I am going to guess that the sterling depreciation is beginning to feed through the supply chain.

Today was a big day

Today was an historic moment. The RBS and its barely comprehensible loss signaled the end of an era. The days when finance was the engine of the UK economy are definitively over. The UK banking sector has become the 21st century equivalent of coal mining; over-staffed, over-paid, and profoundly unproductive.

When the RBS announced that loss, it shot a fatal arrow straight into the heart of the UK banking sector. This loss is equivalent to 2 percent of GDP. Think about that; one bank in just one year lost 2 percent of national income. Moreover, the bank's balance sheet is almost as large as the UK GDP. This is a bloated and obese behemoth. It can not survive in its present distorted condition. Everyone knows it and that is why the share price collapsed.

What is true of the RBS is also true of all UK banks. They are too big; they employ too many people and their funding model is unsustainable. No amount of government intervention can negate that reality. The government may have access to our collective handbag, but we as a nation simply don't have enough money to cover up the losses of our banks.

So what happens next? The government will continue to prop the banking system with liquidity. Whatever Brown and Darling might say in public, they now have the minimalist objective of preventing total collapse. It is simply inconceivable that lending could return to the 2007 levels. The heady days of near limitless credit growth have gone. The government would be doing well if it simply avoids another financial sector meltdown.

The UK banking system is going to have to shrink. The only question is whether this will be an orderly process. As the system goes into terminal decline, asset prices are going to adjust to a new and much lower equilibrium. Houses, commercial property, art, and football teams are all about to get a lot cheaper. This adjustment will be very unpleasant.

What about the real economy? This too will adjust, and it will be painful. The bulk of the adjustment will be in financial services, which has just begun to shake out all that value-reducing labour that created this appalling banking crisis. Currently, the sector employs about 6 million people. Don't be surprised if that number falls by half.

Over time, these people will find new and productive forms of employment. Wage rates will adjust downwards, and the UK manufacturing sector will slowly revive after years of neglect. The UK economy will again start to make things. Eventually, the economy will start to grow and we will recover from the terrible wounds inflicted upon us by our banks.

It is all starting to fall apart

Item one: Spanish public sector debt has just been downgraded. No more triple AAA.

Item two: UK bond prices fell sharply today, which is equivalent to saying UK interest rates went up. If I read the Bloomberg webpage correctly, 30 year gilt yields are up almost 15 basis points. Markets have just woken up to the fiscal risks of unlimited bank bailouts. Just how far is the UK away from a rating downgrade? Too close for comfort, I'd say.

Item three: There is talk in Ireland of leaving the euro. Irish exports are being crushed by that extremely unfriendly sterling devaluation. There is a whiff of default wafting around Ireland right now.

What do these three economies have in common? Housing bubbles.

RBS could lose £28 billion this year

The state-owned bank - RBS - warned today that it might report an annual loss of up to £28 billion. Potentially, it is the biggest corporate loss in UK history.

In today's trading update, the RBS board gave due respect to the "global economic downturn" which hit the bank hard. Market conditions were "challenging". Moreover, the RBS are not alone, many other banks are also in trouble.

However, be not afraid. The RBS assured us that "in this context, the support we are receiving from Government benefits all our stakeholders and enables us to provide more customer support in return."

Lets go over that last line again. All that government money thrown at RBS over the last year benefits ALL their stakeholders. The huge capital injections, the liquidity support, and the guarantees - it is all good.

So, when your tax bill goes up, and when you see your state pension crushed to a pulp as the UK government pays out massive interest payments on its banking related debt stock, just remember all those stakeholder benefits provided by RBS.

Irresponsible risks

”Almost all their losses are in subprime mortgages in America and related to the acquisition of ABN Amro. These are irresponsible risks taken by the bank with people’s money in the UK”

Gordon Brown, talking about the RBS today.

Oh Lordy, oh Gordy, where do I start?

At the heart of every bank is a dilemma - profitability versus liquidity. In order to be profitable, banks must take risks. However, banks also need hard cash to cover any losses from risk taking and ensure that when the depositors turn up looking for their money, there is something in the till.

When bankers salaries are linked to profitability, they will take enormous risks. The bigger the bonus, the greater the risk-taking. This simple relationship has been known since the earliest days of banking.

This is why banks need to be regulated by governments. It is the public interest that banks do not sacrifice liquidity for profitability.

Back in the mid-1990s, the UK had a world class supervisory capacity. The Bank of England did it superbly. The approach was a little clubby and masculine. A raised eyebrow from the governor was more than enough to put any banker in their place. Nevertheless, it is worked.

However, Gordon, you destroyed it within a week of coming to office. You created the FSA, who have incompetently allowed the likes of RBS, Northern Rock and the B&B to take "irresponsible risks with the peoples money".

Now, the UK taxpayer has to pony up with the cash to cover the greatest financial disaster in a century. It is a disaster that started the day you walked into 11 Downing street.

The ghost of Indymac

In the good old days, when the housing market was bubbling, regulatory reporting mishaps would go unnoticed. Today, it is a completely different world.

There is a shocking story peculating over in the US, alleging that US bank regulators encouraged a failing bank - Indymac - to falsify its records. Just one more nail in the coffin of US financial sector regulation.

At least that kind of thing can't happen here in the UK where we have the wonderful light touch of the FSA to protect us from failing banks.

A brewing fraud scandal at the Treasury Department may be worse than officials originally thought. Investigators probing how Treasury regulators allowed a bank to falsify financial records hiding its ill health have found at least three other instances of similar apparent fraud, sources tell ABC News.

In at least one instance, investigators say, banking regulators actually approached the bank with the suggestion of falsifying deposit dates to satisfy banking rules -- even if it disguised the bank's health to the public.

Treasury Department Inspector General Eric Thorson announced in November his office would probe how a Savings and Loan overseer allowed the IndyMac bank to essentially cook its books, making it appear in government filings that the bank had more deposits than it really did. But Thorson's aides now say IndyMac wasn't the only institution to get such cozy assistance from the official who should have been the cop on the beat.

I don't know much about football.....

.... but this doesn't look good......

ROMAN Abramovich, the Russian billionaire, has been taking soundings over selling Chelsea football club to Gulf Arabs.

I especially liked this bit...

He bought Chelsea for about £60m in 2003, taking over £80m in debts, and has since provided at least £500m in loans to buy new players.

What are the chances of him getting his loans repaid?

(From the Times)

New Labour are ready to tackle the next house price bubble

Margaret Beckett, our so-called housing minister, thinks we are on the verge of a new housing bubble. But don't worry, New Labour are thinking ahead. They are ready with "measures" to tackle the next house price explosion. They are going to "intervene" to ensure that we aren't squeezed out of the market.

How I hate that word "intervene" when it comes out of the mouth of a New Labour minister.

THE housing minister, Margaret Beckett, claims there are signs of an “upturn” in the property market despite official figures showing prices plummeting at an unprecedented rate. She disclosed the government was already worrying about the next housing boom, and was intervening to ensure any recovery in prices does not squeeze people out of the market.

(The Times)

We are living through chaos unleashed by the wealthiest

Here is a must-read article from Nick Cohen in today's Observer. I recently read one of Nick's. I disagreed with almost everything he wrote, yet thoroughly enjoyed the book.

In this article, he makes some very interesting observations about the UK today and the demise of the New Labour project.

Unlike the crisis of the Seventies, which shifted middle-class opinion rightwards, today's crash cannot be blamed on striking trade unionists. The worst you can say about the mass of ordinary people or, indeed, the mass of middle-class people, is that they allowed the bankers to persuade them that they could safely borrow to excess. Speculators running riot brought this emergency. The lazy regulators at the Financial Services Authority who did not and, if their lifting of the ban on short selling is any guide, still do not see the need to control financial capitalism, were their accomplices

The characteristic villain of our day is not a modern equivalent of Arthur Scargill, but Sir Fred Goodwin, who made £20 million from the Royal Bank of Scotland and NatWest, then left the taxpayer with an unlimited liability for the cost of cleaning up the mess.

Brown shocked at overseas lending

The longer this credit crisis goes on, the more surreal it becomes. Today, we were told that the Government has become angry with banks after discovering that 80 percent of lending activity went to overseas clients.

How could the government "discover" this now? For a start, banks are supposed to be regulated institutions. Banks are obliged to provide their balance sheets to the FSA, which is, at least in theory, a government agency. The Bank of England publishes this data, on a consolidated basis, every month. It is available on their website. Anyone with a computer and an internet connection can have a look at it.

Today's story is even more disturbing when we remember all that New Labour guff about London being an international centre of excellence for financial services. Did Brown and the gang ever stop and think who might be the customers enjoying all that excellence offered by city banks? Seems not.

Thus, it would appear that Brown and New Labour really didn't have much understanding about financial services. Nor did they have much idea of the risks involved by the unfettered growth of bank lending. Therefore, we shouldn't be too surprised if they are now struggling to diffuse the growing financial crisis.

Here is the story from the Telegraph

Whitehall sources said that they had discovered that some major UK lenders - including RBS, HSBC and Barclays - have had only 20 per cent of their balance sheets made up of "traditional" loans to UK households and firms.

Meanwhile, up to 80 per cent is tied up in loans to foreign nationals and companies, bond issues and other investments. The discovery is understood to be behind Gordon Brown's demand this weekend for bankers to come clean about the scale of their "bad assets" - including loans which have had to be written off at enormous cost.

The Prime Minister, speaking as ministers and officials drew up the second phase of their bank rescue programme, said in an interview: "One of the necessary elements for the next stage is for people to have a clear understanding that bad assets have been written off."

British banks increased their exposure to foreign individuals and companies during the booming financial markets of the last few years, a practice which raised few eyebrows at the time.

Lloyds - the next state owned bank

Soon, the Government will own it all. From today's Telegraph:

The group, formed from the merger of HBOS and Lloyds TSB, is determined to resist the prospective approach from the Treasury despite the fact that it will mean a continued prohibition on paying dividends to investors and maintain the onerous interest bill triggered by the two banks' participation in last autumn's £37bn industry rescue package.

Lloyds, which will be Britain's biggest retail banking provider from tomorrow, is 43pc-owned by the taxpayer. The conversion of the preference shares would leave the Government with a majority stake in Lloyds, which the bank's executives believe would lead to greater influence over its lending activity

Lloyds management need to understand that resistance is futile. Their balance sheet is about to crumble as the economy slides further into recession, and debt defaults increase. The bank will soon belong to the taxpayer, who will then have to cover the losses.

Modern banking is all about excessive risk-taking, followed by failure, finishing up with state ownership.

US industrial production falls 8 percent in December

Industrial production data provides a useful early warning indicator of problems in the real sector. It is a rough measure of physical production, and therefore has a strong bias towards tracking activity in mining, manufacturing and energy sectors.

The latest industrial production data for the US is horrifying. In December, the number is down 8 percent compared to the same month a year earlier. Taken together with the December US employment number, which was down half a million jobs, it is now clear that the US economy is in the midst of a terrible output decline.

The fourth quarter US GDP number is going to be really ugly.

UK bailout - £1 trillion - we deserve it

As I read this article from today's telegraph, one question kept cropping up. "Who is responsible for this disaster?" Just take note of the numbers, which I have highlighted:

In an attempt to restore confidence within the financial sector, the Treasury will tell the banks of its plan on Saturday. It aims to announce details of the rescue package publicly early next week. The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders' bad debts.

Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government's total commitment to solving the banking crisis to almost £1 trillion in taxpayers' money that has either been spent or pledged. That equates to about £33,000 per taxpayer. The total sum is equivalent to more than two-thirds of Britain's annual GDP of £1.4 trillion.

Two-thirds of UK GDP is now on the line. That is the current price tag for years of reckless lending and housing speculation. It is a staggering, scarcely believable amount of money.

The easy thing would be to hang the blame for this mess on the hapless leader and former Chancellor - Mr Brown, but that would be too easy. In truth, we are all to blame for this catastrophe. Collectively, we allowed the New Labour, the Bank of England, the FSA, speculators, banks, estate agents, property rampers and BTL chancers to grotesquely inflate house prices and destroy our financial system.

Perhaps it is right that the bill is placed unto the public sector. At least, we can be sure that we will all end up paying.

Florida fund manager 'missing'

I have a very bad feeling about this story; a fund manager goes missing, and there might a problem accounting for investor's money....

An American fund manager responsible for millions of dollars of investors' money has been reported missing by his wife in Florida. Police said they were searching for Arthur Nadel, 75, and investigating his investment company in Sarasota after clients complained of missing funds. Police described it as "a very significant amount of money".

(from the BBC)

Irish house prices to fall by 80 percent

I have seen some wild predictions, but nothing to compare with this one in the Irish Times. Morgan Kelly, a University College Dublin economist, reckons prices could fall by up to 80 percent. "Construction, but not demolition, of residential and commercial property will fall to zero for the foreseeable future," he said.

The casual observer might dismiss this kind of prediction as scare-mongering from a publicity seeking academic. Unfortunately, there is one killer fact about Ireland that makes the prediction credible - the country has something like a quarter of a million empty holiday homes. These houses are probably worthless.

80 percent? Could be; maybe; anything is possible.

HOUSING MARKET: IRELAND WILL see more demolition than construction of houses over the next decade, as the economy struggles to recover from the collapse of the housing market and the emergence of “zombie” banks, UCD economist Morgan Kelly told the conference. In a presentation that drew several collective intakes of breath, Mr Kelly predicted that house prices would fall by 80 per cent from peak to trough in real terms. Recovery will be slow: “It has taken us 10 years to get into this situation – it will in all likelihood take us 10 years to get out of it.”

Barclays for less than a quid

Barclay's share price was down 28 percent today. It is down 78 percent compared to a year ago.

Their price to earnings ratio is 1.9. That means if Barclays pays the same dividend to its shareholders over the next two years, as it did in last year, the share purchase would pay for it self. Just for the record, that previous comment does not constitute a recommendation to buy, sell or own Barclays stock.

More bank bailouts

The numbers get bigger and the financial system across the world continues to slide.

The BoA bailout

Bank of America will on Friday receive $20bn in fresh capital from the US government and a guarantee on most of a further $118bn of potential losses on toxic assets. The emergency bail-out will help to cushion the blow from a deteriorating balance sheet at Merrill Lynch, the brokerage BofA acquired earlier this month.

The Anglo Irish bank bailout

The Dublin government on Thursday night nationalised Anglo Irish Bank, the Irish Republic’s third largest lender, which has seen the collapse of its share price accelerate in recent days amid fresh reports of large-scale deposit withdrawals. The move, announced by Brian Lenihan, finance minister, ends attempts to keep the bank in private ownership. It was prompted by fears that the bank could be declared insolvent, which would trigger a state’s guarantee and leave the government responsible for settling close to €100bn of liabilities, including €50bn of customer deposits and €20bn of wholesale deposits.

Interest payments fall as a proportion of income

According to the Council of Mortgage Lenders, interest payments are consuming less of borrowers incomes. Interest payments typically consumed only 18.2 percent of a first-time buyer’s income in November, the lowest proportion since February 2007.

Does this mean that UK debt serfs can afford another housing boom?

Another quarter, another loss

Ho hum, Citibank reports another quarter of losses.

Citigroup confirmed on Friday that it would split into two businesses after reporting a fourth-quarter loss of $8.29bn, or $1.72 a share.The results were within the range of the $6bn-$10bn loss that analysts were expecting and compared with a loss of $9.8bn, or $1.99 a share, during the same period a year earlier. It was the bank’s fifth consecutive quarterly loss. Citi lost $18.72bn, or $3.88 a share, in 2008.

Lets create a bad bank

The immorality of this idea to create a dumping ground for bad loans - euphemistically called a bad bank, is staggering. Banks, who have paid their shareholders and workers extraordinary sums of money, are now going to offload their bad decisions onto a state owned bad bank. Toxic debt will be taken off bank balance sheets and given to the tax payer.

So instead of building schools, providing health care and looking after the old, the taxpayer will be covering up for the banking sector.

Gordon Brown is calling this a rescue package. What he really means is that it is a package to rescue him from consequences of years of New Labour economic mismanagement.

A big fat zero

There is a serious problem with guarantees, especially ones handed out by desperate and unpopular governments. The more they give, the less credible these guarantees become.

What happens if, as is likely the banks actually call on these new guarantees? Taxpayers money will be used to cover losses. The amount of guarantees on offer are so large relative to GDP, that it would only take a small loan default rate to generate a financial massive hit.

What will the taxpayer get in return for these generous guarantees? A big fat zero.

"Jan. 16 (Bloomberg)-- Chancellor of the Exchequer Alistair Darling will announce a new round of guarantees for mortgages and corporate loans to spur U.K. bank lending as soon as next week, a person with knowledge of the plans said.

The guarantees would exceed the 100 billion pounds ($149 billion) that James Crosby, the former chairman of HBOS Plc who is advising the Treasury, recommended to stabilize the mortgage market, according to the person, who spoke on the condition of anonymity because negotiations aren’t yet finished.

The plans add to the 250 billion-pound credit line Prime Minister Gordon Brown offered banks in October along with a 50 billion-pound recapitalization. Brown has expressed frustration that the banks are rationing credit and refusing to pass on Bank of England interest rate reductions as the deepening recession drives up the number of bad loans."

UK interbank market - no recovery

Back in August 2007, the UK interbank market crashed. Commercial banks stopped lending to each other.

Not much has changed since then. If anything, lending volumes have fallen, especially after the great September Lehman meltdown.

UK commercial-property firms need to raise $20 billion this year

Meanwhile, back in the UK property market.....

Jan. 14 (Bloomberg) -- U.K. real-estate companies may need to be rescued by shareholders this year to stay afloat. The largest commercial-property firms need to raise as much as $20 billion this year to restore their balance sheets at a time when financing is scarce, according to estimates by Bernd Stahli, an analyst at Merrill Lynch & Co. in London. The FTSE 350 Real Estate Index fell 7.3 percent, the biggest slide since 1987.

The five largest real estate investment trusts -- Land Securities Plc, British Land Co., Hammerson Plc, Liberty International Plc and Segro -- have combined debt of 19 billion pounds ($28 billion), according to their latest reports. About 700 million pounds of loans are due this year, research by Nomura International Plc shows. The banks that granted those loans may now be reluctant to provide more credit.

That could spur another year of losses for REIT investors. The FTSE 350 Real Estate Index of 18 stocks fell 46 percent last year, the most since the index was created in 1986. The worst performer was Liberty, which declined 56 percent.

UK commercial property - it is the crash that rarely gets a mention in the regular media.

Frightening economic survey from the British Camber of Commerce

Press releases are normally a waste of time, since they are invariably self serving. However, this one from the British Chamber of Commerce sent a shiver down my spine. It covers their latest business survey:

The British Chambers of Commerce is today publishing its Fourth Quarter Economic Survey. Nearly 6,000 businesses, employing over 680,000 people, responded. Results in quarter four (Q4) highlight a frightening deterioration in the UK economic situation – they are the worst on record for both manufacturing and services since the survey was first published in 1989.

There are no positive features in the Q4 results. Domestic demand is plunging, exports are falling, and confidence is plummeting. All the critical national balances have worsened in Q4, for both manufacturing and services, and all are in negative territory.

It is clear that the UK economy is facing a very serious recession, and the downturn is deepening at an alarming pace. The collapse in all the Q4 confidence balances to record lows is particularly ominous.

Key findings include:

The manufacturing sector’s balances for home sales and orders, employment expectations, investment, confidence, and cash-flow have plunged to record lows in Q4

In the service sector, all the key balances, without exception, are at record lows in Q4

Q4 domestic balances are particularly disturbing. Home sales and orders, in both manufacturing and services, are in negative territory for all firm sizes and for all UK regions

The economy is clearly facing exceptional threats. The marked fall in all Q4 export balances, and their move into negative territory, indicates that big falls in the value of sterling have not benefited UK exports, because of the adverse effects of the sharp global downturn

World trade crashes

This crash is no longer about financial markets, it is about world trade. From Maritime connector
They have already hit zero," said Charles de Trenck, a broker at Transport Trackers in Hong Kong. "We have seen trade activity fall off a cliff. Asia-Europe is an unmitigated disaster." The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.

US retail sales crash

Here is one of the less well publicized retail sales indicators from the US - the real retail sales and food index. This index measures sales in US shops and restaurants and then adjusts them for changes in prices.

The decline in US consumer activity is alarming. In November 2008, retail sales, in real terms, are down over 9 percent compared to the previous year. That kind of decline is more than large enough to send the US into a deep dark recession.

When America sneezes...

Remember that old saying "when America sneezes, the rest of the world catches a cold"?

In November, the US blew a great big green one in our direction. The latest external trade data for the US shows that their balance of goods and services narrowed massively in November, shaving roughly $20 billion off their external deficit. Since they were running deficits of around $60 billion a month for the last four years, that is one huge monthly correction.

Did UK exporters feel it? Absolutely. In November, UK exports to the US were down 21 percent compared to the same month last year.

The US is no longer the engine of the world economy. The rest of us better get used to it.

The crisis for the rich

It is the wealthy who have taken the greatest hit, at least so far. According to bloomberg, hedge funds lost $350 billion globally last year. About 90 percent of that money was lost in the three months to the end of November. Overall, the hedge-fund industry shrank by about a fifth.

Do you know anyone who has invested in a hedge fund? Thought not.

House sales - the lowest for thirty years

Where did that buoyant UK housing market go? Where are all those sharp suited estate agents with their cheap sales pitches? Don't you just miss the UK housing bubble?

Now it is all doom and gloom.

The housing market slowed to a virtual halt at the end of last year as the number of properties sold reached a record low, the Royal Institution of Chartered Surveyors (RICS) said. It blamed the lack of mortgage finance for the lowest transaction levels in 30 years.

Surveyors reported that potential buyers, including first-timers, had been unable to take advantage of falling house prices because lenders would not grant home loans at affordable interest rates to any but the most cash-rich investors.

(from the Times)

UK external trade account worsens

The UK trade numbers illustrate the growing economic crisis. Both exports and imports are falling. However, exports are falling faster than imports.

The UK’s deficit on trade in goods and services was £4.5 billion in November, compared with the deficit of £3.9 billion in October. The trade account also deteriorated, rising to £8.3 billion, compared with of £7.6 billion in October

The lack of growth in exports is surprising, not least because sterling has fallen through the floor over the last 18 or so months. UK exports are now much cheaper, and in principle, we should have seen at least a limited pick up in export demand. For some reason, it simply hasn't happened.

US consumer confidence crashes

US consumers have just had a collective nervous breakdown. In December, the University of Michigan confidence index hit a 28 year low. You have to go back to the depths of the Reagan recession to find a lower reading of the index.

The finance shakeout begins

Between 1978 and 2008, UK financial services added almost 4 million jobs. This huge increase was the counterpart to the growing indebtedness that infected UK households and businesses.

However, the credit crunch has put an end to this unsustainble growth in financial services. Employment is beginning to fall. The great shakeout has begun.

Rent crash continues

Mayfair rents; the top of the market on the monopoly board. Now they are crashing.

For a decade it was the preferred location for hundreds of hedge fund managers as they deserted the City and set up shop nearer to their well-heeled clients. Making the move to Mayfair and St James’s, they would think nothing of paying more than £100 a square foot for a few floors inside a Georgian townhouse, driving rents ever higher as they bid against each other.

Property experts described the rents as “eye-popping”, but investors’ money was flooding in and fee structures were designed to capture 20 per cent of the profits, so managers believed that the bills could be shouldered easily.

(from today's Times)

Begger thy Neighbour

This was bound to happen.....

The pound’s losses came as Brian Lenihan, Ireland’s finance minister, accused the UK authorities of in effect devaluing the pound by expanding money supply, action that was causing “immense difficulties“ in the Irish economy. “It is a question for all of us in the EU as to the extent to which a competitive devaluation can be used as any kind of weapon.” The Irish economy has been hit hard by the economic slowdown, with Dell, the US computer manufacturer, pulling production out of the country last week.

(from today's FT)

Mr. Lenihan, of course, is absolutely right. The recent slide of sterling has made UK exports more competitive, while at the same time, raising prices of Irish imports here in the UK.

What if every country pulled this trick? Suppose every country reduced interest rates, allowed their money supply to grow at around 16 percent a year (like the UK right now), and let their exchange rate sink like a stone, where would we end up? We would see a series of self defeating competitive devaluations that would only serve to raise world inflation and do nothing to resolve the world wide financial crisis.

How do deal with Chelsea tractors

No need for two-tier congestion charges in central London.

Time to move the capital to Hartlepool

Today, the Times reported that senior civil servants are receiving housing allowances of up to £40,000 to work in London. The story provoked a lot of understandable outrage. However, let's leave the indignant commentary to others. For me, the story represents the inevitable endpoint of a misplaced government policy designed to attract the super wealthy to London.

Our current tax laws give a virtual free pass to anyone who calls themselves non-domiciled. The result is an influx of wealthy international tax avoiders, who quickly bought up all available property in central London.

The non-doms hollowed out London. None of the locals, even the comparatively well off senior civil servants, can afford to live there. A senior judge or government minister could not buy anything in central London based on their current generous salaries. The non-doms have forced government workers to the dark corners of the capital with tedious and uncomfortable commutes into work.

A capital city is one where the government sits and works. However, London is a capital that has virtually all the government's key offices but can not provide reasonably priced accommodation for its civil servants. Once that fact is recognized, then it isn't too hard to understand why the government followed up the non-dom tax breaks with another ridiculous policy of giving housing allowances to senior staff.

It is self evident that the country needs a capital where its civil servants can live without impoverishing themselves. This means that rents and property prices in London must fall. In fact, this should be an explicit goal of government policy. This means planning regulations in London should be liberalized. It also means an end to this ridiculous and counterproductive policy of attracting unwanted tax-dodgers.

Otherwise, it is time to move the capital somewhere else. I understand that Hartlepool has a thriving, reasonably priced property market.

UK banks pull out of personal loan business

Here is some bad news for any D-list celebrity who had a nice little earner advertizing structured personal loans. UK Banks are pulling out. The total stock of this kind of credit fell throughout most of last year.

UK money supply growing at 16 percent

Since August, the UK money supply increased by almost 2 percent a month. During the 12 months up to November, it increased by over 16 percent.

It is hard to reconcile these numbers with the undoubted credit crunch going on in the housing market and the small business sector. The UK economy is seeing both rapid monetary growth and contracting credit.

M4 measures the growth of bank balance sheets. Since the banks aren't giving credit to the real economy, then who is getting all this new money? Yes, the banks are handing out huge amounts of credit to non-bank financial institutions. This is the unregulated shadow banking system which is at the epicentre of today's credit crisis.

Something tells me that this financial crisis is far from over.

Lloyds cough up $350 million

I couldn't help laughing when I read this story. From the FT......

Lloyds TSB will pay $350m to settle US investigations after admitting it enabled Iranian and Sudanese clients to access the US banking system in violation of US sanctions, prosecutors said on Friday.

Lloyds said it falsified business records by altering wire transfer information to hide the identity of its clients, said Robert Morgenthau, Manhattan district attorney, who announced the deferred prosecution agreement on Friday.

The process made it appear that transactions originated at Lloyds in the UK rather than the sanctioned banks, according to Mr Morgenthau, who conducted the investigation with the US justice department.

Think about it; there was someone on the payroll in Lloyds who sat down and thought through this seedy little activity.

This is what the Lloyds press release said:

“We are committed to running our business with the highest levels of integrity and regulatory compliance across all of our operations and have undertaken a range of significant steps to further enhance our compliance programmes,”

Indeed, Lloyds has always stood for the the highest levels of integrity.

UK fourth quarter GDP - a 1.5 percent decline?

A 1.5 percent decline - that is what the National Institute of Economic and Social Research predicts for the fourth quarter of 2008.

Thus, it would appear that last year's frantic rate cuts didn't save the UK economy from recession. In fact, those cuts, rather than restoring consumer confidence, scared the crap out of everyone. Those cuts told us that Government and Bank of England were in a state of outright panic. Unsurprisingly, consumers got the message, delayed discretionary spending, which pushed the economy downwards.

The UK is now nicely set up for an economic catastrophe. Output is shrinking fast; the government deficit is exploding; the banking system is dead, and sterling is in free fall.

Jan. 10 (Bloomberg) -- The U.K. economy shrank at the fastest pace in almost three decades during the fourth quarter as the recession deepened, the National Institute for Economic and Social Research said.

Gross domestic product fell 1.5 percent in the three months through December, compared with a drop of 0.6 percent in the third quarter, the London-based institute, whose clients include the Treasury and the central bank, estimated in a report today. That would be the worst quarterly contraction since 1980, when Britain was in the grips of a steel workers’ strike.

“The rate of recession increased sharply in the autumn of last year,” Niesr said in a statement. “Since 1955, when quarterly figures were first produced, there have been only five quarters in which output has fallen more.”

Northern Rock finance chief exits with £900,000

Don't tell me; let me guess; we need to pay high salaries to attract talent.

Northern Rock's chief financial officer, Ann Godbehere, is set to leave the state-owned bank in February after earning nearly £1 million for 12 month's work.

The bank announced today that Ms Godbehere will step down from Northern Rock's board next month, and leave the group in February.

Since joining 11 months ago when the Government nationalised Northern Rock, Ms Godbehere, the former finance director at Swiss Re, has been earning £75,000 a month, and will end her time at the bank with total pay of £900,000.

Ms Godbehere's pay deal, as well as the £3,000 a day negotiated by Ron Sandler, Northern Rock's non-executive chairman, caused outcry last year when details emerged after shareholders lost millions of pounds when the bank collapsed.

Property ramping evolves

I have noticed a disturbing trend developing within the property pages of newspapers. The dated "buy now or be shut out forever" article has fallen away. Instead, we are seeing a more insiduous series of articles claiming that "its a great time to buy because prices are lower."

The London Standard produced a classic example of this trend today, entitled "why we are plunging into a falling property market". Here is a little taster:

The Big Deposit Investor

Offer accepted on: three-bedroom flat in Fulham for almost £600,000 down from asking price of £800,000. Saving: almost £200,000.

Alex Daly and her sister were looking to invest around £400,000 to £600,000 that they have pooled from savings. “I've always believed in bricks and mortar, something you can touch,” she says. “And with prices where they are at the moment, I hope a property will yield better than a bank.”

Two bedroom flats in Fulham - priced at £600,000 - are still massively overvalued, even if they have fallen £200,000.

Still, the article had some nice examples of the bone-crunching price drops that have recently hit the capital. Definitely, the best bit of this article.

Brown should start to buy some houses

I just love the lunacy that this financial crisis has brought forth. Here we have two "economists" telling Brown to buy up homes on the verge of repossession. What is more, it is only going to cost ₤50 billion, which as we know, is chump change for the tax payer.

Was I imagining it, but two years ago, the UK had a housing shortage. So rather than build much needed new houses, the government will simply buy up existing ones. How will that help? Oh yes, it will keep the market from correcting and ensuring that housing remains unaffordable for the vast majority of first time buyers.

Truly, we live in an age where no idea is too stupid so long as the taxpayer is paying for it.

Do you think these two jokers would be so quick to put this idea forward if it were their own money that was put on the line?

Jan. 9 (Bloomberg) -- Prime Minister Gordon Brown should buy homes on the verge of repossession to add money to the British economy and save families from being thrown out onto the street, two former Bank of England economists said.

The plan would cost about 50 billion pounds ($76 billion) over five years, Fathom Financial Consulting economists Shamik Dhar and Danny Gabay said in a report today. The program would also provide a new economic policy tool as the central bank’s interest rate approaches zero.

Say goodbye to the housing shortage, say hello to the renter shortage

Remember those hairy stories a few months ago about rents increasing at double digit rates and how buy-to-let yields were increasing. Now, BTLers are offering free months as their frantically search for renters.

“Pay for 12 - get one free”: this is not an offer for tins of beans at the supermarket but the latest in creative marketing from lettings agents. A glut of rental property on the market has forced agents to adopt supermarket-style selling tactics to win over potential renters.

“Free” months are one of many incentives that tenants can now choose from. As house prices fall, the increasing number of homeowners who are opting to let rather than sell has given bargaining power back to people who are choosing to sit out the downturn by renting rather than buying.

It has never been a better time to rent.

Madoff runs off with UK cash

It appears that Madoff made off with some money over here in the UK:

Bernard Madoff ordered his UK company to transfer about £100m to his US firm just weeks before he allegedly confessed to running a $50bn fraud scheme, two former employees of Madoff Securities International said.

Mr Madoff, who chaired the UK firm and owned 89 per cent of it, called the office in London’s West End on November 12 and told employees that he was nervous about sterling and wanted to move £100m ($150m) of the firm’s capital from gilts into US Treasury bonds, one source said.

So Bernie was worried also about sterling. It is a wonder he had time to think about the declining value of the pound while running the greatest ponzi scheme in history. Obviously, he could multi-task.

Finally, a quick question; I assume that the FSA had a close eye on Madoff and his financial machinations. Or was this another case of the FSA's infamous "light touch."

UK recession deepens

What a falling off....

UK production is down about 6 percent compared to January 2006. The recession deepens.

The US recession deepens

The US economy lost jobs every month last year. By December, over 2.5 million jobs had disappeared on a net basis. Furthermore, the number of aggregate hours worked in December fell 0.2 hours to 33.3 hours, the lowest level since records began in 1964.

The US employment rate is now 7.2 percent.

The Bank of England statement in full

Where do you start criticising this kind of short term thinking? One thought comes to mind; reports concerning the demise of inflation are almost certainly premature.

Just in case anyone has forgotten this awkward little fact, the UK CPI increased by 4.1 percent during the last twelve months. That is still some distance from the 2 percent target.

The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.5 percentage points to 1.5%.

The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.

In the United Kingdom, business surveys suggest that the pace of contraction in activity increased during the fourth quarter of 2008 and that output is likely to continue to fall sharply during the first part of this year. Surveys of retailers and reports from the Bank’s regional Agents imply that consumer spending has weakened. The outlook for business and residential investment has deteriorated. And the availability of credit to both households and businesses has tightened further, pointing to the need for further measures to increase the flow of lending to the non-financial sector. But the substantial depreciation in sterling over recent months may help to moderate the impact on UK net exports of the slowdown in global growth.

CPI inflation fell to 4.1% in November. Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax. Measures of inflation expectations have come down. And pay growth remains subdued. But the depreciation in sterling will boost the cost of imports.

At its January meeting, the Committee noted that the recent easing in monetary and fiscal policy, the substantial fall in sterling and the prospective decline in inflation would together provide a considerable stimulus to activity as the year progressed. Nevertheless, the Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate. Accordingly, the Committee concluded that a further reduction in Bank Rate of 0.5 percentage points to 1.5% was necessary to meet the target in the medium term.