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?

Gordon Brown in deep trouble

This from Nick Robinson's blog a couple of days ago:

The PM, it seems, has been saved for now at least not by anything he's done but by an atmosphere of weary resignation that has taken over much of his party.

Robinson has, to be fair, recognised that this is the equivalent of the Michael Fish 'no hurricane' forecast just before the south of England was hit by a, well, hurricane. Gordon Brown is now in deep trouble, with up to 23 backbench MPs doing to him what he did to Tony Blair, that is to create an environment where he can no longer function as Prime Minister regardless of what the party rulebook says. Labour's arcane system requires 70 odd MPs to precipitate a leadership contest, but the current rebellion calculates that far fewer than that number can put Gordon Brown under enough pressure that he goes. His options are limited: cannot ask for loyalty, because he showed none to Tony Blair; he cannot rely on his electoral mandate within the Labour party, because he and his cronies engineered it so that there was no election. All that is left is force and so far, the response to the rebels has been brutal, with sackings from whatever position held for the crime of, wait for it, asking for a ballot paper as allowed under Labour Party rules. It also begs the question of how the names of the requesters have become know to Gordon's operation, and that is the subject of much debate in online political circles. These heavy-handed tactics might keep Gordon in position in the short term, but they come at a cost of moral authority both within the party and the country.

Politically, Gordon Brown is finished, but at this rate he will drag down his party too. Margaret Thatcher and Tony Blair stood aside because, ultimately, they were not prepared to do that. Does Gordon have that sense of historical perspective and moral courage, or is he a dictator who cares not what comes after him as his foes close in on his bunker. If it is the latter then the focus of history has become needle sharp on the events of the next few days. Always remember that political parties can die.

BNP on our doorstep

We have a by-election for Noak Bridge Parish Council, and the BNP are standing. Now, in Basildon the political parties don't usually stand in Parish elections, leaving the politics out of it at that very local level. The BNP don't play like that though, and they are quite happy to run an election campaign full of lies and on issues that a Parish Council can't do anything about. Hot flash: Noak Bridge Parish Council can't affect immigration policy, not that you would believe that based on the BNP leaflets. As for claims that the 'Council' wants to build 10700 houses in the fields around Noak Bridge, helpful map provided, that is the Labour government's housing target for Basildon and Basildon Council's policy is to build in the existing urban footprint, not on the Green Belt. This is also another thing that is nothing to do with a Parish Council.

Of course, the BNP have form in all of this. Up and down the country the BNP has managed to win the odd election through a mixture of lies and distortions. When elected, their Councillors show little interest in public service, and anyway they cannot deliver on their promises. After that the electorate usually wises up and they are dumped. Hopefully, we won't have to see that cycle in Noak Bridge.

Why Labour isn't dumping Brown

Simon Heffer writes a piece in which he suggests that the obvious course of action for the Parliamentary Labour party to get of Gordon Brown:

...Labour MPs know what to expect when a party continues to be loyal to an obviously defeated and discredited leader. The party soon loses so heavily that it is out of power for several terms. For many MPs, it is the end of a political career. Many ministers suffer a similar fate, eventually clawing their way back into employment only after two or three years of misery and humiliation. Does Labour want its own 1997?

Self-interest should dictate it does not.

If it was that obvious then why is nothing much happening? Gordon Brown is an electoral disaster who possesses none of the policy and character strengths of a John Major. That he has to go is indeed obvious, but it might not happen, and there is a reason for this. According to a parliamentary friend of mine, you have to think about who Labour MPs actually are. For most of them being an MP is the best job that they have ever had, more responsibility and better pay then they could command in the private sector. Most Conservatives on the other hand take pay cuts to enter parliament. So, let's say you are a Labour MP. You are on a majority of a few thousand and mathematically virtually certain to lose your seat at the next election. You have been told that a change of leader means an early election, which will make you unemployed. So, you back Gordon because at least that means nearly two more years in work. If there is going to be a coup it will come from those with majorities in the 6-8000 range who have everything to play for, but given Labour's arcane rules there aren't enough of them against the small majorities and the huge majorities who have no particular reason to dump Gordon. That is why he clings one.

Just where did you think the 'a new leader means an early election' stuff actually comes from?

Wat Tyler project well underway

Basildon's Conservative Council regeneration portfolio is not short of major projects. This reflects our activist approach to improving our community. Basildon Tories don't just sit about, we get things done despite jibes from our local Labour party. I remember a comment from a Labour Councillor a while ago while we were discussing our plans in a Council meeting along that lines that 'you haven't built anything yet'. Well the George Hurd Centre opened recently, a £2m centre for the elderly housing a day centre and offices for voluntary organisations working with the elderly. We have now been asked by the Audit Commission if they can use that project as an example of best practice by Local Authorities, because of the way we managed to get it built at no cost to the Council as part of a land swap deal that also saw the provision of affordable and social housing for our people. Our next opening is likely to be the Heritage Centre at Wat Tyler park, which has been paid for largely by Lottery funding and which will boost the attractiveness of what is already an excellent public asset. Building work is progressing well and the project is on time to complete for an opening next year. This compliments the other regeneration efforts in Pitsea, which are also proceeding apace.

The only cloud on the horizon is the general economic malaise, which has hit the property industry especially hard. This has had the effect of winnowing out poor projects around the country, and all of ours are still in progess, but recession and uncertainty are not friends of large-scale regeneration. Better national leadership can make a real difference here. Can we have some please?