Basildon Council has no money in Icelandic Banks

Just to be clear, Basildon District Council has no cash in Icelandic Banks. At the turn of the year members voted on an ultra-cautious investment policy, because we didn't like the way the markets looked at all. I am not saying that we were prescient, but it didn't take a great brain to work out that the international money markets were not working as they should. So, we elected only to have short terms placements at the best of the UK banks and building societies, and if we lost a quarter point of interest here and there it was a price worth paying. It is very sad that not everyone took this view, and it will be interesting to know how much of this poor-decision making was down to elected member policy, and how much was financial professionals getting it wrong.

'Superb David Cameron'

The world has tilted from its axis. Simon Heffer has written in glowing terms on David Cameron's conference speech:

David Cameron made a superb speech at Birmingham. It cast Gordon Brown's laboured effort at Manchester eight days earlier into the shade in terms of delivery, content and credibility.

Never mind the praise, the tone and the language has changed out of all recognition. It is 'David Cameron' or 'Mr. Cameron' not 'Dave'. Gone is the playground abuse and instead we have what is actually quite a good critical review of the speech. The problem that Mr. Heffer has is that he has to row back quite a long way from years of taking the mickey and, until a year ago, heaping praise on Gordon Brown. However, we should not be churlish, because this is actually quality writing. Actually, it is sad. What an excellent body of work Simon Heffer could have created over the years if he had put his mind to it.

Brilliant Speech from Cameron

That ranked as one of the best political speeches I have ever heard. Simple in style, devoid of rhetorical flourishes, incisive in its diagnosis of what is wrong with our country and firm in its presentation of solutions.

Highlights for me:

• Sound money, no debt binge under Cameron
  
• Individual responsibility and responsiblity for professionals and organisations outside of Whitehall
  
• An end to the health and safety culture though specific legislation
  
• 3p off Corporation Tax
• Calling on the government not to appeal the High Court decision on the Gurkhas, huge cheer from the floor on this one
• All Conservative Euro MPs to sign up to transparency of expenses, or they stop being Conservative Euro MPs
• Tackling parliamentary sleaze
• Referendum on the Lisbon Treaty

He told a story that perfectly illustrated the gulf between the Labour Party's inflated view of their own virtue and the grim reality. A man whose wife died under appalling circumstances in a hospital received a letter from Alan Johnson via David Cameron's office. It was read out and it was a ghastly example of apparatchik, bureaucratic Labour doublespeak that summed up exactly what was wrong with Labour in government. This to a widower. You just wanted something very bad to happen to the heartless scumbag who composed it and to the Minister who let things like that go on in their department. The sooner both are gone the better.

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Mislaid another bank

Bradford and Bingley has collapsed and it to be nationalised. This is for the same reason, broadly speaking, as Northern Rock: a dodgy mortgage portfolio sold without adequate credit risk control that was paid for from the money markets rather than retail deposits. So, when the money markets dried up no one would take the mortgages a security, or at all, and that was that. The government is probably right to step in, provided it does what it should have done with Northern Rock and immediately breaks up the business. It needs to sell off the good bits, shut down the bad bits, and reassure depositors. Sadly, that probably means the end for the B&B's loyal staff, most of whom were not a party to the poor decisions of their board, exacerbated by a tripartite regulatory system that is a new synonym for failure.

So, what needs to be done now? Well the Conservatives are starting to propose the sorts of measures that are needed in the form of a reform of banking regulation, and public finances that are not built on excess debt and off balance-sheet vehicles. I have no inside information, but this is what I think: first, we need transparent public finances. No more rubbish about 'borrowing only to invest across the economic cycle' or an 'end to boom and bust', with rhetoric replacing realistic public policy. Fortunately, the smart money is that is exactly what George Osborne will be talking about tomorrow at Conservative Party Conference. Then we need to revert to a system of banking regulation that actually works. That means an end to the Treasury, the FSA and the Bank of England collectively failing to notice a crisis until queues started forming outside of bank branches. So, one regulator, and I would plump for the Bank of England in that role. Then we need to look at Bank's capital adequacy requirement, which is how much cash they keep on hand relative to lending. This needs to be increased and banks cannot be allowed to sidestep it by securitising loan books, which takes them off the balance sheet in a way that avoids regulation but not risks. We also need a better way of measuring asset quality, though the markets are probably taking care of that, and a way of reflecting the underlying funding for bank business. So, there needs to be a limit on what proportion of loans can be funded out of money market activity as opposed to customer deposits or other long-term debt. Put simply, the timescale for most long-term lending must match the timescale for the funding. Otherwise institutions are exposed to grotesque market risks. It is not accidental that the banks that have failed had the highest exposures of this type.

As Gordon Brown said, the 'age of irresponsibility' is at an end. Given he is the architect of it then he goes too.

US bailout makes sense

The idea of letting bankers escape the consequences of their own folly leaves a bad taste, especially if the bailout is provided from public funds. Some people are dead against it, others have doubts, and the point is made that other businesses are allowed to go to the wall, why not banks? The answer is another question: do you have a bank account? As the answer is almost certainly yes then you can see the problem. If a carmaker or a retailer or an estate agent goes under then it can be very bad, but the damage is limited, at least on the national scale. If a bank goes under it can be catastrophic for a wide swathe of the country. That means people in fear for their savings, business denied the capital they need to survive, mortgages climbing to punitive rates and the very mechanisms by which the commerce on which we all depend getting done under threat. So banks, popular or not, have such an important role in a modern society that letting them crash is like refusing to put out a fire in your house just because the person you live with started it.

The thing is that the actual malpractice at the root of all this belongs to only a limited number of players in the world financial system. Some banks in the US invented a thing called the NINJA loan, which stands for 'no income, no job, no assets'. This is a loan product for people who have no prospect of paying it back, and yes, this is as bonkers as it sounds. You can do this sort of business in a rising property market because if the victim defaults, and they do in droves, you just reposses and sell on into a rising market. These mortages were securitised, sold on, and, well, you know the rest. There were some UK near-equivalents in the Northern Rock 125% 'Together' mortgage, but nothing nearly so bad. Most banks have been caught out be the problems in the Money Markets, not by bad loans, at least not to the point that they will fail. So, a bailout makes sense, and it doesn't even mean that most of those getting it are undeserving.

We do need better regulation though. Unfortunately, most of the horses are long gone.

It's not greed

Lots of soul searching in the Sunday papers about the current crisis in the world's markets. In particular there is a lot of railing against 'greed' as the prime cause of everyone's woes. Well, that allows journalists to get on their moral high horses and to preach to a willing congregation of readers who, let's face it, never liked bankers anyway. The problem is that is rubbish. Greed is a fairly basic human trait and has featured in at least some aspects of business since time immemorial. Or are we really saying that particular vice was invented at the same time as short selling? Assigning the present difficulties to greed is lazy journalism and lazy politics and there has been plenty of both.

The actual problem is not greed, it is complexity, and it is complexity that people mistakenly thought could be managed by computers. Modern IT systems can manipulate data by the terabyte and in a mass of the most complex algorithms, far beyond the scope of general understanding, to the point where only a few backroom experts really know what is going on. Now that is fine for some things, not everyone needs to understand exactly how that reactor core is kept stable or that satellite is kept on station. People do need to understand products in a market though, if they are going to make intelligent decisons about them, and this is where it all went wrong. Financial instruments were packaged and securitised and hedged against in a multiplicity of ways so that there was no intuitive understanding, even by the people who traded in them. It didn't matter though, because the underlying asset values, primarily domestic and commerical property, kept going up in value. Understanding risk is not important when in the short term there isn't any. We all know what happened next: asset values started to fall, because they are cyclic and they always do eventually. Then understanding risk was suddenly very important, and no-one did. The rest, as they say, is history.

It wasn't greed, it was plain old stupidity, the same old stupidity that comes periodically from people trying to adapt to a changing world. And adapt we must, learning the lessons, making the changes and so on. We have had a colossal failure of banking and banking regulation, because for this to have happened very large numbers of people must have nodded and smiled and looked the other way when some of them were actually paid to ask very hard questions instead. That has to change, but it must be remembered that the reaction to the last broadly similar convulsion of the financial sector in 1929 was so wrong-headed that it led to the Great Depresson, fascism, World War Two and the Cold War. We need decent leadership and a regulatory framework that does not crush the market's ability to create wealth, because if economic growth goes into prolonged reverse then the political downsides are too awful to contemplate. So, let's hear less moralistic sound-bites about greed eh? This is just a little too serious for posturing to be the only response.

Perspectives on the Market Crisis

A lot of nonsense is being talked regarding the current crisis. That short-sellers brought down HBOS, that the world is going to end, that Gordon Brown has got a grip. The reality is somewhat different. In the end HBOS was the victim of a business model that was not designed to deal with a severe downturn, short selling only amounted to a few percentage points of the activity on their shares over the last few days. That didn't stop Alex Salmond sounding off though in a concentrated whinge about the fate of a Scottish institution. Then we have had some predictions of the apocalypse, largely from the same sort of people who thought the good times would never end. The fact is that business cycles have existed since, well, ever. They are documented to at least the Middle Ages. So, what goes down does eventually go up. It would take a series of catastrophic misjudgements to prolong the current crisis beyond the norm, which, unfortunately does mean a slowdown of at least a couple of years. All of this leaves Gordon 'an end to boom and bust' Brown looking like a bit of a fool. Now the Labour Party is trying to spin a narrative that he is the man uniquely qualified to bail the country out. This is very, very high risk stuff indeed. Collapse the government's competence down to one man and you make the argument about him. If he doesn't, or can't, deliver then that is the game. If I were them I would really push policy, not personal factors, because policy can change but your people can't, unless you fire the Prime Minister of course.

Hmmm...

BNP come third in Noak Bridge

The results are in for the Noak Bridge Parish Council by-election. There were two independent candidates and the BNP, who put out three leaflets and canvassed extensively. It is in the context of all that effort that the result should be considered:

Party	Votes	%
Independent	244	49%
Independent	166	33%
British National Party	89	18%

They lost, and lost badly in a field that included none of the other parties that regularly fight elections in Basildon District. I am very proud of our people today.

Tories on 52%

Apparently there is going to be a Mori poll published at midnight putting the Conservatives on 52%. Two things spring to mind: firstly Simon Heffer will now start complaining that David Cameron has failed because he hasn't broken 60%.

Secondly, who are this 24% who still want to vote Labour?