The Curse of Low Interest Rates

The Bank of England's Monetary Committee was this week split but Interest Rates have again been held at record low levels of just 0.5%. Surely this is good news for us all and the economic recovery?

The reality is that there is a ticking bomb in the system as those people who either are already on standard variable rate (SVR) mortgages or are due to be on them soon, have a nasty shock in store. The fact is that interest rates will rise - it's just a matter of when not if. SVR today is from 3.5% to 4.95% and many people have budgeted the affordability of their mortgage and lifestyle based on this rate. If base interest rates should raise by just 1%, then it would constitute as much as a 29%% rise in SVR and, therefore, repayments which is a huge increase. And let's face it, given past SVR levels, a 1% rise is trivial.

The saviour for people in this predicament in the past was to grab a fixed rate mortgage around now and lock themselves down on repayments. But the problem is that new fixed rate offers are factoring in what banks think will happen to interest rates and in many instances these deals are unaffordable already for people on SVR. There is a ticking bomb in terms of potential repossessions in the future.

The indicators in the economy are not good. The retail sector is suffering as 4%+ inflation rates hit. Jane Norman, Thorntons, TJ Hughes, Carpet Right, Habitat amongst others have suffered terminally in a raft retail of bad news. And only part of this can blame the internet changing buying habits or out of town shopping growth. You can tell when it gets tough when affluent London commuter towns like St Albans have boarded up shops in the High Street and Poundworld is the most thriving shop. Consumers are already reining in their credit exposure and spending. The news gets worse as only yesterday British Gas spoke of yet another hike in gas prices of around 20% as a strong possibility and we already are seeing upward pressure on food costs.

The fact is that inflation figures are misleading. The real inflation rate amongst people with average or lower disposable incomes is actually much higher as those goods which are increasing in price faster represent a higher proportion of average spend to these people as it may do to richer people. The rising cost of energy hits average incomes much harder than higher incomes as these people may spend the same on energy but it is less of a proportion of their average spend than lower paid people.

And today, Public Sector workers are striking over austerity measures which threaten their pensions which are gold plated compared to the real world of the Private Sector. But here's another reality. The Government does not invest lump sums over the long term 'saving and investing' to pay for Public Sector pensions, they actually come out of the current account paid for by National Insurance. So Public Sector pensions are paid directly out of our taxes, there is no magic fund or annuity to pay this. You and I, everyone, pays for Public Sector pensions directly in our tax bills today - and this is only going to get higher. So while in the Private Sector we have a crisis looming in terms of retirement income, we are paying for the gold plated, premium Public Sector pensions in our tax.

And the Public Sector workers think we will support their strike? They must be joking.

So people stuck on SVR mortgages have it in all directions - higher interest repayments to come, more taxes to pay for Public Sector pensions and the like and higher inflation on staple goods. It's not a pretty place to be. Add in greater uncertainty on jobs, particularly in the banking and retail sectors and the picture is very gloomy.

In many respects, the damage caused by the economic disasters in the financial sector has yet to really bite. The next 24 months could see some very tough times and a band of people are right in the firing line. By keeping the interest rates low to kick start the housing market, many people who got new mortgages based their affordability assumptions based on lower interest rates continuing.

This is the curse of low interest rates.

The Public Sector Bonanza

If we needed more evidence that costs are spiralling out of control in the Public Sector and that it has not, in any way, shared in the need to cut costs to reduce the budget deficit, the article in yesterday's Daily Telegraph said it all.

A small, but prominent paragraph on the front page indicated there is now a record gap between Public and Private Sector pay which is over £2,000 on the average salaries in each sector.

I have beaten on about this but the Private Sector has borne the brunt of cost cutting and job losses in the last year while the Public Sector has remained fat and happy, negotiating unrealistic pay deals and sitting on overly generous pension schemes. The Government has postponed any cost reviews until after the election and our borrowing as nation rises daily - it's as if people who control these things either don't get it or, worse, don't care .

The Public Sector cost is a massive ticking bomb and the longer we leave tackling it, the worse it will get. Meanwhile, as National Debt goes onto the open market, credit agencies around the world will be questioning the British ability and appetite to deal with its growing public costs and repayments.

As we, the taxpayer, contemplate the price of all this, it is encouraging to know that right in front of our faces, our 80%+ publicly owned bank, RBS, is a principal lender to Kraft to acquire Cadbury - which no one seemed to know until after the deal was struck, while Mandelson now wants to see the detail as he wafts it through to conclusion. Further, those banks, who we bailed out are enjoying a wonderful resurgence as the wider economy still struggles - prompting new, higher pay deals and wonderful profits.

You couldn't make this up - the taxpayer gets the entire bill for economic failure to see banks whooping it up thanks to our generosity, while the Public Sector gets fatter because costs are not cut which could save the taxpayer some money.

Having just got my Corporation tax demand within minutes of posting my accounts and still waiting for my personal rebate since October, it seems that taxpayers have become the new 'Bank of England'.

Is There A 'Real World' Anymore?

I hadn't realised that there was a famous Economist who has been credited with predicting the world financial crisis. There is one and his name is Nouriel Roubini, from a New York University.

Although I know of several people, including myself, who reasonably accurately predicted that there would be, in my own terms, 'A hole in the economy', largely as we believed that asset values had lost all connection with the world's voracious creation of money, we had no idea of the real technical issues. There was one other minor problem - none of us were world famous or economists and therefore we were not allowed to have such opinions, express them in public or have any credence attached to them. That's just a fact.

In fact, even as a shareholder in RBS, Lloyds, Northern Rock and Bradford & Bingley I have no say as that shareholding is managed on 'our behalf' by UK Financial Investments plc, a company that has not issued share certificates to any of us or in which we have any rights to vote. I have an unnerving feeling that we probably will not not get full value for our 'stock holdings' as the staff associated with that company will not only get a salary but bonuses too. Just like the FSA who received bonuses to a person as the world economy melted down on their watch.

But we should be grateful, because the politicians who did not want my opinion then do not want them now - not because I would probably start each sentence with, 'I told you so' but because they really could not give a flying fig what people like me think, even if we are vaguely right. We are the 'programmables' - the people who are fed the information and soundbites and duly absorb and believe them. In a single weekend of spending our future tax to an extraordinary and unprecedented extent just to save the skins and bonuses of a group of greedy bankers to the tune of £1.5 trillion, the Government now believe that the enormous debt burden they have put us all under can be halved by 2014. Yeah, right.

It's complete cod's wallop and I know it. But they rely on the fact that no one will listen to me as I am not a world renowned economist and nor is anyone else in the front bar of a pub.

I have talked about Joseph Stiglitz before. He's not a personal friend, and you probably would not like to get caught in a lift with him, but I feel a kind of kinship with the Nobel Laureate for economics as he could have come into the front bar of most pubs and been greeted warmly as a person who we might have described as not having his head up his arse. And so too Nouriel Roubini. Again, I probably wouldn't recognise him if he walked into the White Lion in St Albans. I might have even nudged a friend and nodded toward him and said ,'Isn't that the bloke off Bergerac' and gained 10 points for a good lookalike, but if he joined into our conversation then we may forgive him that he knew nothing of rugby but as long as he could name at least 5 films with a memorable song in them then he probably would have got a fair hearing. If he spoke of the economy, then I would expect a hearty pat on the back and a pint of Black Sheep would be bought for him. Assuming, of course, that even a lowly economist would stump their round at some point.

Roubini is supposed to have predicted this financial meltdown. He also points out that we are not out of the current financial crisis yet as the world economy looks very weak - his words not mine but, without blowing my own trumpet, I would agree. He claims that in a general sense shoppers are 'shopped out' and 'debt burdened' - this despite the fact that last month saw the first reduction in the £1trillion unsecured debts that UK consumers have for years. Roubini believes that we all should 'cut back consumption and save more'.

Hear, hear from the front bar. Wise words, another round on the slate or my debit card, please. What? I can't have credit? Well Roubini then goes into techno-speak claiming that the financial system is damaged and that not much corporate spending on capital is going on. That's true - and most companies are reining in expenses too as credit is scarce as well as the markets depressed.

But here comes the real blow in his message. He reckons that US house prices have yet further to fall. That's a worrying comment as the problem of inflated asset prices was far more acute in the UK than in the US. Our prices had soared uncontrollably over the last 10 years and our drop has only really been 20% or so during the crisis. Enough to send everyone into a panic and many into negative equity exposing the stupidity of the markets for buying debt but there you go. So Roubini is saying we have not seen enough of a fall in house prices yet - that's really bad news. It's really bad as that is just about the only financial instrument that has propped up the economy for the last 10 years and is currently our barometer for recovery. Wages have fallen over that period and so household income in real terms fell, but we leveraged our rising assets a great deal to supplement our spending spree.

We lost sight of the 'real world' where you only spend according to what you earn. We participated in a new 'unreal world' where we all discovered the new banks - our homes - and the world of cheap credit it released. So when the financial system went into meltdown, our homes were right in the middle of it.

You see, while property prices in the US have fallen just 13%, there has not really been a corresponding spread of price decreases into the commercial property market. That would cause chaos as that is where the big pension funds that we invest in for our future have all the money. The chaos so far has affected those who largely backed only the housing world. Should the price of commercial properties also fall, then we will have a very gloomy world to live in.

Roubini clearly has, at some time, been in the front bar of a pub as he believes the current 'froth' in the world markets which has seen the FTSE rise some 40% in a year is due to the manipulation of the Federal Reserve and the Bank of England. As Roubini puts it, "There is a wall of liquidity cashing assets, but I think that there is a growing gap between what is the asset prices and the real economy."

The 'real' economy. The real world. That's really the issue. This is why armchair sages like me struggle to communicate our thoughts - we have no formal economic education, I am a humble scientist by training and a salesman at heart. The economy is something that I glaze over when people start mentioning the 'Broad Money Supply' and, to me, M4 is just a motorway I use to go and see my family in Wales.

But Roubini is right. We have disconnected what are the underlying economic things from the new world order where we can create money out of nothing, profit out of profit. Even our solution to the problem compounds it all as we create money out of nothing to buy our own debts as Quantitative Easing has done. There is a real concern in the US that Government Bonds will not get bought as interest rates are too low. Meanwhile, when our Government stops buying its own debt with fake money, will there be a market for our bonds?

What the solution to the global economic meltdown has been, across the board, is an exercise in saving a small number of wealthy individuals' careers and re-fund them to make more money for the future. In doing so we stopped a collapse that could have taken us all with it that's true, but in reality we have just resupplied these individuals with the means to carry on creating more of a fake economy, very distant from the real economy.

Instead of these individuals using our precious cash to provide credit to business they have used it to buy the reduced value 'toxic' debts at the very companies that crashed in order to rekindle the whole fake economy and get their bonus train going again, making vast profits from effectively barrow loads of manure - worthless debts. The one thing that could really exaggerate all this is if house prices do start to rise because this will just get us all back into the groove and contribute by withdrawing from our equity and forgetting that in real terms we are getting worse off - as we forgot for the last 10 years.

The likes of Roubini and Stiglitz are the 'turds in the swimming pool' of new economic thinking. Stiglitz may have offered his advice on the solution to the global economic problems for free but that was his mistake - Credit Suisse knew the British Government was willing to pay and so they made sure they bid accordingly and have been paid handsomely for their advice. You see, in the new world of economics your value is not perceived by the number of Nobel prizes you have won but by the pounds you can bill or the value of your bonus. Porsches and Bentleys count in that world and that's what Gordon Brown asked for and got. So it's little wonder that we have a set of solutions which effectively threw enough faeces against a wall until some stuck in the form of incredible sums of money instead of resetting the 'real' economy by making sure banks did what they were supposed to.

But that is the issue. The banks have carte blanche to carry on as before. Oh yes, we can posture about bonuses, we can moan about imposing taxes, we can even supposedly turn on our friends as Peter Mandelson has done and accuse them of the very things he applauded, benefited from and whose advice he has paid for not months ago, but until you get to the root of the problem banks will carry on producing a fake world in which only a very few benefit and the world becomes a far more precarious place to live in.

Has, indeed, the fake world of the new financial order taken over from the ;real' world of fundamental economics of supply and demand?

If we do not reform the whole banking industry, there will be more than money to pay in the future - as Roubini puts it, 'We are already planting the seeds of the next crisis'. At the heart of it is the stability of the world as, if the financial system does break to an extent where mere money cannot repair it, then those with the most valuable commodities will rule.

My God, David Icke WAS right.

Who Should We Believe?

Depending on which set of figures you look at for the economy, you could be verging on the suicidal to the ecstatic. Certainly, we seem to be clutching at straws if we think Britain has emerged from its recession yet.

In the week, I highlighted The Sunday Times Appointments Section as being devoid of private sector jobs and full of public sector senior appointments, arguing this was a bad sign. Yet for the second month on the trot, there has been a marginal increase in the number of appointments available generally according to Government figures. Encouraging, if fragile.

But, the National Institute of Economic and Social Research (NIESR) has calculated that our GDP did not rise a jot in this last quarter. This falls in line with the worrying industrial output figures reported for August which were sharply down on July. True, we could argue it's holiday time but the level of drop, some 2.5%, surprised most economists. Bizarrely, the Government's response was to say that this prediction of stagnated GDP showed that the Government's policies are working.

We have also heard that house prices are now nearly back to levels experienced in 2008 - certainly there are plenty more placards up in my area - but this is still some 15-20% down on prices in July 2007. The number of mortgages being approved has risen but we know that lending to small businesses, despite Government indications to the contrary, is reckoned by the Bank of England to be £14.7bn down on last year. Are we putting the credit in the wrong places, you might ask?

Bank profits and bonuses are sharply rising, the price of gold has hit a peak (perhaps I should have followed those persuasive TV adverts), car sales are up 11.4% from this September to last, inflation has fallen to 1.6%, and the Services sector, such as restaurants, showed expansion for the 5th successive month and is now at a two year high - trashing my comment on empty tables for pre-theatre meals in London last Saturday. Or so it would seem.

The figures are all slightly baffling. The reality we see is a great deal of uncertainty as we face a great many cuts to public services no matter who gets into power which will inevitably hit jobs after 12 years of growth in bureaucracy in the public sector that now accounts for 1 in every 4 jobs in the UK. Our population is rising faster than expected due a new birth rate explosion, 25% of that growth coming from couples not born in the UK as immigration takes its toll on the UK. Unemployment continues to rise to nearly 2.5m and there are predictions of over 3m by this time next year which is well above 7% of the working population.

The budget deficit continues to rise and at a greater rate predicted by the Chancellor, indicating that it may well be getting out of control, which will see Britain borrow an extra £175bn this year - and rising. Many predict, contrary to Government promises to halve it by 2015, that borrowing will be nearly 99% of GDP by 2014. As we are faced with a rising Welfare bill due to more people on the dole claiming benefits, and greater immigration numbers than ever predicted, and therefore a shortfall in tax revenue, the squeeze is on. And there will be a need, due to the heavy borrowing, to find big cuts, some 10%, to try and manage the situation down.

I find the whole situation baffling but the one thing I believe to be true is that we are paying for 12 years of unsustainable and unreal economic growth that was based on a flawed financial system that relied on the unchecked ascent of asset values and the instruments which relied upon that principle. And we have set up the remedies to start the exact same cycle again, despite posturing to the contrary - banks are once again out of control.

It seems that even if we halt the decline this quarter, we are a full 6 months behind our competitor nations in recovering despite all reassurances to the contrary before we hit the recession - the one that we were reassured that we would not hit - and I believe we are focusing on the wrong areas to manage the situation. Time will tell, but the comedy of errors by the Government, Investment Banks and the FSA in calculating a bailout of the financial system literally over a few late nights and some pizzas will haunt us for a generation. Last Sunday's article in the Times was meant to reassure us that the parties took the banks on and dressed them down for 10 years of excess. What it showed was that having ignored the banks for 10 years, they suddenly became experts in their business to save them.

If you believe that, then you will believe that little green men have invaded Uxbridge and put up the price of rail tickets.

Scam After Scam

The reason we put up with it is because we have no say in how our own money is spent.

What the hell am I referring too? Of course, it is our 'investments' in UK banks amongst other things - the sort of investment that needs to be managed by some cerebral high-brow who can watch when the cursor gets above the value 'bought' and press the button to 'sell'. For that, one of the top headhunters have snaffled a former RBS banker to lead the intrepid search for the person who has the right sized digit so that they don't press 'buy' - the same headhunters who the TCCB paid a fortune for in order to select the acting coach of England's cricket team to be the coach - the one and only Odgers. Money well spent, indeed.

Well, you may be happy to know that as the banks gear themselves up to do ever more risky deals with our cheap money and then pay themselves massive bonuses like the one I reported on at Barclays on Friday, the scam works equally well with our money at the opposite end.

Let me explain. You see we bailed out the likes of Lloyds and RBS, the former having bought HBOS, has 28% of the UK mortage market. Now we injected some £70bn into them in new capital, guaranteed a load of debt, ring-fenced a load of toxic debt, gave them loans at virtually no cost and walloped a load of Quantitative Easing money down their gullets too. You might possibly think that might be good for us. Well, if you want a mortgage, it isn't.

Last week, the Bank of England voted to keep interest rates at an historic low of 0.5% for the fifth consecutive month. The cheapest mortgage you can get today, even with 40% deposit is 4.95% - that's nearly 10 times the base interest rate. If you wanted a five year deal with RBS or Lloyds, then you are looking at shelling out on their new, 'highly competitive' deals of 7.49% at Lloyds or 7.25% at RBS - some 15 times the base rate. The shrewd people amongst us would note that the current superb mortgage rates are now higher than prior to the credit crunch. The best rate you will get on a 10% deposit mortgage in the UK is 6.19%, a whopping 12 times the base rate.

There aren't many industries where you can charge such rates. And this is at the time when the public owns a share in at least 5 High Street banks, two of which who offer mortgages we own outright (the Rock and Bradford & Bingley). For all the blustering and piffle from Cabinet Ministers and Gordon Brown himself, we are being racketeered by the very companies we so very generously were proxied to bail out.

If you sat down and tried to try to write the worst case scenario for a financial mess, you could never have got to within a million light years of the khazi we are in. You could also never dream of writing some of the guff we are told about how well off Britain is in this scenario by the idiots who run this country.

As taxpayers were are being royally shafted at all ends - and the shafting has only started as the cuts in public services and the higher levels of tax to pay for our own largess has not yet kicked in.

You couldn't dream it up - we bailed out our banks so that they could absolutely shaft us to make massive profits on their lending while they continue to take mega-high risks to pay themselves huge bonuses. And it's our own money they are using.

I've said it before and I'll say it again - we must be stark raving bonkers.

Where Will You Go To, My Lovelies?

Over the weekend some 100 public figures lobbied the Chancellor, Alistair Darling, to curb the 'excessive pay packages' of the few, elite high earners in the banking and financial system, describing them as 'Masters of the Universe'.

The Chancellor himself, in fairness, had already fired a few warning shots about curbing some of the bonuses and particularly guarantees, which is a perennial sore point, claiming he would give more teeth to the FSA to impose tighter rules. He has a problem here as the FSA is crammed full of ex-finance types who bear allegiance to their former colleagues - or worse still, they are the failed bankers who were not competent enough to dip their snouts into the trough effectively and so are not quick-witted enough to catch the banks out while harbouring petty grudges.

It boils down to what the rules are and how the FSA and Government allow banks to operate within them. We have already seen a spate of neat tax avoidance tricks announced by clever accountants on the web who will help anybody who earns above £150,000 next year to minimise their tax bills with some shabby tricks on paying into new companies, some of which are not imaginative enough to scare the HMRC. But it will be the banks who become the most devious as they are absolutely obsessed by the idea that if they limit the bonuses of their 'Top Talent' then they will have a mass exodus of the high-flying high earners to places where the pay is better.

And so where will these little darlings go?

Well first of all, do not underestimate the ability for banks to invent clever schemes to get round the issue or for us to forget the fact that the Government is currently paying around £11m a year in fees to investment banks for advice on the whole issue, let alone around £29m in legal fees. Certainly we may see more of their top traders become non-domiciled so at least more of their 'hard-earned' bonus is spirited away from the thieving hands of the Chancellor. More likely, we will get dummy companies set up and these will be paid lavish 'Consultancy Fees' - and these companies, like strange quantum particles, will exist but briefly to liquidate cash on a capital dispersal idea and avoid things like National Insurance. The fact is that there is nothing in the FSA or Government thinking about 'Consultancy Fees' and I dare say we shall see more of this flying around. In the short term there are stock options which are handy as the market gets back some of its old ground but that is likely to not appeal in the long term as traders like ready cash and they certainly don't want to be held accountable for any collapse in the bank's profits or share price - they have proved that conclusively already.

There will be plenty of 'Guns to Heads' at the moment as the profits clock up on the banks' bounces and traders will be dismissive of their employers' excuses. They will be playing the 'If you don't pay, I'll go to somewhere that will pay me what I'm worth' cards. Theoretically, they have a point as the problem will be that if Britain acts in isolation then they will lose these little mites to other banks who are out of reach of our 'punitive' bonus scheme allowances. This will mean that British banks will become uncompetitive in the 'New World Order' that Gordon Brown talked of.

As the Government wants to show the public it is curbing the excess and high risk strategies by banks, but they do not want Britain to lose out as so much of our economy depends on earnings from the City - there is a dilemma. One way would be to impose windfall taxes on every financial institution for the next 10 years in order to pay back what is generally owed. Of course, most banks would then put their HQs outside of the UK and thumb their noses at us which would be counter-productive but it may be a start that each of them pays exactly what tax they should do from now on and any scheme to avoid tax is fined double the tax owed. It still doesn't solve the problem.

Traders will depart for sunnier climates - to the US or Asia, wherever the banking system allows excessive bonuses to be still earned. This is where I see an advantage. Let them go.

Skimming Off The Highest Risks

You see, the whole system was brought to its knees by the actions of a comparatively small group of people employed in high finance. They say in Iceland you could identify just 6 people who actually nearly bankrupted the whole country and in the City you could draw up a similar but more extensive list. I would do so and I would say to those who think that they can get jobs in other countries, in banks who are willing to pay excessive sums - go. It may well produce a 'Premier League' of banks but frankly it will put all the risk into one area. UK banks can then recruit a new wave of traders who can be weaned on sensible, lower risk banking that never exposes Britain to the kinds of problems we have seen in the last two years.

By skimming off those with the highest risk-taking index and letting them go elsewhere, we make Britain a safer place. And we need it. Should we just lurch into another credit crunch and recession in the near future then we risk simply not having enough resources to bail ourselves out with. Already there are predictions from established sources that by 2014 that British Sovereign Debt could be almost 100% of GDP and we will be paying for every penny of that borrowing, roughly double what we pay were paying for last year.

So my solution would be to let the little blighters go to wherever they think will pay the money for them. Go exercise that egotistic point of view they have that they are 'Masters of the Universe' and far more more intelligent than the rest of us. At some point, I dare say that someone will realise that in order to keep the scam of their elaborate schemes going you need every bank in the world to be as bad at mathematics equally and hopefully one or two will find out how to use calculators and realise that all does not add. Perhaps it will be those banks who first realise that it may be better to trade things you know the value of who will break away from the schemes and focus on logic rather than hot air. Perhaps that is what will help heal the banking system and make it stronger for the future, and perhaps by having a few banks break away more will follow leaving only the very high risk banks in one place. And if they want to be the super-rich ones and pay incredible bonuses, then fine.

Let's just make sure it is the British banks that lead us out of the high risk zone and the first step will be to unequivocally stop high bonuses being paid on high risk business; the second will be to curb high risk business - full stop.

QE(D)

There's a lot of debate as to whether Quantitative Easing (QE) is actually working. The Bank of England recently agreed to increase its use of QE and will spend as much £175bn on the program.

The problem is that down at the street level, the amount of lending is falling short as banks have missed their lending targets, repeatedly. In fact, the desired effects of QE which should be a good deal more credit being offered into the market in terms of new loans, mortgages and the like have been sadly lacking. In fact, there are plenty of accusations that financial institutions are ripping off consumers and business as the cost of business loans and mortgages are several percentage points above the base interest rate of 0.5% which has remained the same for 5 months. In theory, we should have had a bonanza in new credit in the market - the effect has been pretty much the opposite.

However, banks tell us that the reason why loans appear very expensive compared to the base rate is that they have to borrow money to lend on the wholesale money markets where interest rate is a good deal higher, so their profit margins on the apparently high interest rate loans to consumers and business are not as high as we think. This does indicate that QE has not had a great deal of effect. I go back to what QE was supposed to do.

In the past, I have likened QE to champagne glasses stacked three tiers high so that there is one on the top, two on the second tier and three at the bottom. If you pour champagne into the top glass it fills and overflows and starts to fill the two glasses in tier two which subsequently fill and then overflow into the bottom tier. If you imagine that the Bank of England holds the champagne bottle and the champagne is the money they are pouring into the financial system then we see it cascade down from the institutions to banks to the public. That's the basic principle.

But what is happening, or at least there is good evidence of it in the accounts of banks, is that banks have a target to get their loans-to-deposit ratios back in order as this was a huge problem for banks like RBS. QE is the process of buying Government gilts and if we assume that most of that new money flows to banks then it is effectively 'new deposits' of the safest kind in the banks. This means that if the banks hold onto the cash then their ratios look a damn site better. If they want to make more loans, then they could get money in off the wholesale markets and theoretically this will not dilute their loans to deposit ratios too much.

It is in fact as if instead of champagne glasses in tier two of our champagne glass pyramid but two buckets which take a long, long time to fill when they are being filled by the overflow of a single glass before they overflow and cascade into the glasses below. Until the banks feel their ratios are in order, then they are not likely to offer a great deal of this new money out in terms of credit - or that's one explanation. It is probable that they would even lend this money out to other banks anyway as that is far safer lending than to the public or business anyway with all these guarantees flying around.

In a daft twist, some of the money raised by institutions in gilt sales may have also been lent to banks in the form of short-term debt securities which means that banks are getting a nice level of subsidised lending from the Government in two forms as all such debt is underwritten. Again, there is little incentive to lend this money out to less safe hands.

Finally, it seems that as the FSA has instructed banks to buy more safe debt like gilts, much of the cash flowing into the banks from QE is actually going to buy gilts again. This helps the banks' liquidity ratio by stacking up on more 'quality' liquid reserves. It provides a great killing if you sell gilts but doesn't do the economy a great deal of good - in fact, as I blogged recently, it seems that new paper money is buying a great deal of our own new debt. I am no genius, but that has to be unhealthy in the long term as you cannot keep buying high value goods with new paper money. I would like to be disproved on that as it feels like a time-bomb to me.

On the face of it, QE seems to have just pumped money into banks who have sat on the cash. It is the reason why Chancellor Alistair Darling gets so cobby with banks when they consistently miss their lending targets which was the PM's and his (along with those clever investment banks advisers) grand plan to rescue the economy. I dare say we are actually better off because of it but there is a real danger that we either put too much in and trigger rampant inflation or we put too little and we get the opposite effect. It is why QE has never been a generally sensible way of controlling an economy as Japan and Argentina found out. It's why the Bank of England has adopted this measure only for the first time in its history.

Because unlike a QED (Quad Erat Demonstratum) proof of a theory, QE is not an exact science at all. It is pure guesswork.

Market Indicators

It's a weird situation when on the one hand we are all starting to get very uppity about banks awarding their slim numbers of superstars obscene levels of bonus again after clocking up such massive losses and toxic debt and, on the other, we are talking of a second wave of the economic slump.

But that's how the financial system works. There is no doubt that banks took the brunt of the Credit Crunch effects and at least 6 high street names had to be rescued from bankruptcy while many have had to ring-fence toxic debt so that the taxpayers can take the liability off their hands to get on with the important business of paying a small percentage of their staff enormous money after culling many people from their customer-facing ranks who did not lose a penny in profit or bad debt. That's modern banking for you. It is also true, that as the financial system recovers, plenty of vast profits will be made out of thin air as the banks and institutions start playing their silly, high risk games again.

Meanwhile, back in the 'real' world, the slump continues. Quantitative Easing (QE) has been surprisingly extended by the Bank of England and its Governor, Mervyn King, has warned that Britain could suffer a 'debt deflation trap' which sounds about as appetising as trapped wind. There are also fears from other clever economists that Britain may suffer a 'lost decade' much as Japan did as we continue to try to revive our staggering economy. It is perhaps worth noting that Japan was one of the few developed nations to have used QE in recent years along with an extended period of 0% interest rates and their economy stagnated for a decade.

The members of our Monetary Policy Committee which meets to consider such matters and sets the Bank of England's interest rates amongst other things, are the pillars of the financial world. Hedge Fund managers, economists, bank board members we get them all. However, there seems a growing body of concern that the apparent green shoots of recovery are a mirage and that they are a false dawn of a wider recovery. There is opinion that we may well get three successive quarters of economic upturn indicating the technical end to the recession. But in the 1990s, Japan also experienced the same.

Such a recovery could be caused by short term effects only, such as more cars being bought due to the scrappage scheme or perhaps we get a restocking effect after destocking so temporarily boosting output. But there are concerns that the second half of 2010 could be more difficult than the period we are now in and so it brings into sharp focus the gravy train in the banking industry - as always the banks pay on short term gains and do not consider the long term, and there is a real danger that they will pay for merely an economic bounce that was inevitable rather than a long term revival of the system. It's like a salesman getting paid for sales which come in on their own every month and so not having to make a single call to get new ones.

Some of the reasoning behind the gloomy outlook revolves around things like VAT. The temporary farce of lower VAT will have ended next year and indeed the Conservatives, who are looking increasingly likely to be in power after next May, are planning a hike to potentially 20% which is equally stupid, if not more so, as it a form of tax which disproportionately hits poorer people.

But, in my opinion, it will be the tax burden in general, the increase in the jobless, and so the drain on the Welfare State, and the cuts in spending on Public Services - none of which have really bitten us hard yet - that will slow the economy more emphatically. As the state magnet is set to 'high' to remove more tax money from our pockets, the unemployment figures should have peaked at over 3m in the UK by the end of 2010 and so the burden on the State will be huge in terms of benefits, plus the number of people able to pay tax will have been reduced. All in all, it could be a 'Perfect Storm' to depress spending generally and while the banks whoop it up right now, they too will feel some of that pressure so paying bonuses right now for anything is seriously misguided if inappropriate anyway.

Sants in His Pants

If you want a giggle on bank bonuses, listen to the BBC interview with Hector Sants, CEO of the FSA, who tries to make out that he knows what he is talking about when it comes to regulation of bank bonuses. He says the question of bonuses is, in fact 3 questions. 1) Are banks disproportionately skewing rewards for more high risk transactions, 2) are banks paying too much of their profits to too few people and 3) are the size of the individual bonuses too much? He is right on one thing - that is 3 questions. The answers have always been 'YES' to all 3 - so it is a case of 'No sh*t, Sherlock' as that is exactly what happened before and is happening again.

He looked very excited as he thought the FSA could intervene in answer to the first two questions but question 3 was one for the banks themselves and the public to resolve. I am sorry, I don't get that.

You see, the FSA is on the one hand destroying the whole Independent Financial Services industry by imposing incredible regulation on the army of small businesses that give independent investment advice to small businesses and consumers, reducing commissions and restricting what they can and cannot say without immense bureaucracy. In the last year, it is estimated that 30% of small mortgage brokers and IFAs have either left the industry or gone broke. Meanwhile, accountants and lawyers who get involved in the giving of such advice for fees and are not regulated by the FSA so do not have to tell people, for example, that taxation has changed after a Will has been written, are protected from the consequences of their lack of or bad advice, yet are paid for it - and the fee size is unregulated. It is also pushing more of the financial advice back towards those institutions who have a vested interest in selling only their own products, like banks, building societies or insurance companies. Pretty soon, only large mortgage brokers and firms who focus on the corporate market will be left.

The army of local, independent financial advisers who are more ethical than ever, will soon be destroyed because the FSA has ruled exactly how little they should earn. Then we get Hector Sants saying the exact opposite for the bunch of former colleagues he worked with in the City.

That is why we should not pay him the £1m per year salary and bonus that he earned even though he sat by and watched the biggest financial disaster since the Great Depression. He does nothing to curb it as he is one of them. It is one rule for one industry that is public facing and one rule for the other that lives in its own dreamworld of high finance and it is the crux of the reason why banks and their bonus culture will not change.

It is because there is an in-built belief that small people are not important and there should be no curb on the fabulously wealthy, as 'wealth creation' is seen as good while servicing the public is second rate - it is a sentiment shared at the highest level in Government by former PM, Tony Blair, and current Business Secretary, Peter Mandelson. That is why, when banks fail they chop staff at the public end of their businesses while keeping the high-flying traders in place to get more bonuses.

Until we change that culture fundamentally, we will never rid ourselves of the problem in the world of finance. That will mean changing all the past bankers on Monetary Committees, Boards and Regulators as they are all part of the problem - they are not of the 'real' world.

Why We Are Not Economists

The Bank of England did two things this week. First it decided to keep interest rates at 0.5% - good news for mortgages, bad for savings. Second, it extended its practice of Quantitative Easing beyond its agreed limit of £150bn to £175bn, raising the question of will it go further?

The £175bn has been used to buy Gilts, or Government Bonds on future debt which we need to pay to off all our recent extra spending. In fact, in certain sectors of the Gilts market, the bank now owns above 70% of the available issues. On the face of it, this is econo-masterminding on a grand scale to save our economy and we feeble-minded numb skulls watching via the news articles should shut up and let the experts run the show.

You do not have to be a genius to work out this a high risk strategy. Quantitative Easing is in fact creating money out of nothing to purchase valuable things. It would be the same as you and I getting a classy money printing machine, printing off some fresh fivers, tenners, twenties and Fifties and then walking into a jewellers and buying a stack of gold. If anyone stopped us, we could say that are good for the money as we have a some savings in the bank and it is hardly likely that several jewellers would ask us to pay with real money all at the same time. Why, couldn't they just take those notes we have given them and use them to buy whatever they wanted - no one should worry as we are good for the money - and again not all vendors will come to us at the same time asking for the real money or its equivalent.

Quantitative Easing (QE) is really like that. Except of course, that we are no allowed to print our own money. But we have a way of doing so. Many of us have indeed printed new money over the years by taking some of the equity in our houses and creating new money in its place - sadly we have cannot behave like the Bank as we have to repay the loan, the Bank apparently doesn't. Another sad fact is that many of us are in a serious situation where the value of our assets have dipped below the original debt taken to buy them or we have negative equity - some 39% of all Northern Rock customers are in that mire while around 20% of Lloyds customers are.

QE is the process of conjuring cash from fresh air and buying really valuable items with it - with complete impunity. It works on the principle used by most banks which says if I have £1m in reserves in the bank then I can lend out many multiples of that as not everyone is going to ask for their money back at the same time or create a run on the bank. Meanwhile, the more 'unreal' money you put into circulation, the less the real money is worth. That means that each time you create more unreal money, prices have a tendency to rise as vendors think if there is proportionally more unreal money in circulation, then if they raise their prices they will keep the amount of real money they want for their goods.

It's a hard concept to grasp but if for every £1 in circulation, if 10p is unreal money created by QE, then each shop should raise their prices by 10p to get £1 of real money.

Very quickly, inflation can set in as it is so attractive to print more money to to apparently 'buy' your way out of economic trouble. Countries like Argentina did this and very nearly bankrupted themselves as so much unreal money bought apparently valuable things that the country nearly collapsed as inflation went into hyper-mode to try and compensate. QE, in economic terms, is the last resort of third world countries to save themselves.

Unless of course you are the experts at the Bank of England who think Britain is rich enough to do so. With our wonderful balance of trade heavily pitted against us, our manufacturing base pretty low and our rising debt after the bank bail outs set to almost double Sovereign Debt, QE makes perfect sense. Britain can afford it.

Our Sovereign Debt is based on cashflow, largely our tax receipts to pay the interest and repay the loan at some time. As with our own households, if we leverage our equity, then we have to pay for it, whether our assets rise or fall. In reality, by creating more money to buy our own Sovereign Debt, all we have done is created the need to raise more debt in the future to pay for it, as you have bought the debt with unreal money. It is the start of a very vicious cycle.

I am no genius, and better people than I will put me right, but one thing I know for sure is that you cannot buy anything for nothing. There is always a price to pay. QE is merely a postponement to pay in the future - we buy our own debt with more debt.

Pure genius.

You Lose, We Win

Well it didn't take long, did it? As you mull over your breakfast and worry about your finances and future, be comforted by the fact that life is getting back to normal.

A report by the New York State Attorney General has published the list of bonuses paid to bank executives last year. That's right, I said last year - the year when the taxpayers around the world paid the rather large bill for the bunch of voracious gamblers in the sophisticated world of Hi-Tech Finance which we seem to think we need to help our world be the way it is. So much so that we are willing to continue paying off the debt until 2032.

Put down your cereal spoon for fear of choking on the next mouthful as it gets better.

First up - Citigroup, who were until a year ago the most 'profitable' bank in the world but was the US version of RBS in the scale of their stupidity and greed requiring hundreds of $billions to bail them out by the US Treasury in terms of loans and guarantees. Well, their darling top earners pocketed a meagre $609m last year - and that was shared out amongst just 124 people. Three of the gamblers earned over $10m, 13 of them grabbed $8m or more while 44 people made off with $5m or more.

Merrill Lynch was at it too - the company that performed so badly that it had to be bought by Bank of America and even then had been less than honest about its liabilities and even as it finalised the deal, still paid out bonuses to its gambling executives. They clocked up a near $28bn loss last year but still managed to pay a total of around $860m in bonuses and that was only to the top 149 earners, of which the top 4 were paid a combined $121m, the next 4 around $62m.

There is plenty more - every state aided bank paid out huge bonuses again last year just as if nothing had really happened. The estimated global cost in terms of bail outs is far in excess of $5 trillion and the banking world goes on as if nothing has happened.

In the UK, savers have been compensated to the tune of £21bn after the collapse of the banking system and then there is the enormous bill we have been landed with by the world of finance far beyond that in rescuing the banks who failed so massively.

It's a real world that lacks any kind of similarity to real life.

A career in banking was once seen as the realm of the fuddy-duddy, striped-suited Oxbridge chaps who stalked the City effectively lunching to get inside tracks. Today, modern banking is just a sophisticated and complex system of gambling. The supply of endless money into the system means that comparatively unintelligent people can drive screens that just does the banking version of whirling weighted fruit machines - they cannot seem to lose and the rewards are fabulous. What we have done, in all the far-fetched sums we have collectively stumped all over the world, is to keep the whole thing going in exactly the same way.

There is not a hint of contrition. There has been no real cull of the people who caused this. There has been little or no action by Governments and scant real understanding of the extent of our dependence on the system to sustain our way of life other than the fact they 'had no choice' in bailing the system out to make sure it did not collapse and the world becomes some kind of wilderness of fighting tribesmen haggling for food with beads and goats.

The fact remains that the finance world had created a make-believe game that generated profits from thin air just as part of the solution is to create more money from thin air in 'Quantitative Easing'. The threatened implosion of that system did not trigger a clamour to change it but to merely save it and we came so very close, they would have us know, to a world foreseen by 'visionaries' like David Icke. It now seems that lunatics like Icke were actually the clever ones.

The problem revolves around us. We are now so 'well off' that we must have 42"+ tellies, more pods that you can listen to, phones that send video, the latest gadget, new furniture, holidays, kitchens - the list is endless - and we are all very prepared to spend far beyond our means in order to get it and forfeit anything to do with provision for our retirement. Our jobs are now in far greater jeopardy than they were two years ago, more of us have lost our jobs since 1997 and our average take home income has actually dropped in real terms over the same period.

The fact was that we afforded this 'Utopia' by drawing down on our asset values - we created our own banks to conjure up money out of nothing.

Many will tell you that there is a concept of 'zero sum finance' which means that all the money in the world flows in credits and debits and always adds up to zero. So in that farcical view of the world, some may get richer at the cost of others but the amount of money has not changed and so the world is no worse off. But it is worse off. Just as the Bank of England literally conjured up £175bn out of nothing in order to increase the money supply, each of us created our own cash out of the supposed value in our assets. And then we gave it all away by spending it. We did not buy any really tradable assets as what we bought were effectively disposables or services - we did not invest in fine art, stamps or precious metals. We effectively increased the amount of money in the world and gave it away.

The bill for all that came right back to us because it was not real. As the value of our assets dropped the whole system shredded itself and we had to dip into our pockets for the actual cashflow to pay for our own mortgages again - this time in incremental tax over the long term.

What the whole collapse has taught us is that you can get nothing for nothing. You can create as much money as you like but there is a price to pay for it. And boy has the real person found out.

Up the there in 'Bank World' that hasn't happened. Reality was a close call for them but thankfully a bunch of mugs known as taxpayers and real people worldwide saved their pathetic necks. And now they are playing the whole game again. In the zenith, or nadir, of the crisis, I saw excerpts of the African Nations Congress or similar. Speaker after speaker expressed how incredulous they were at the enormity of something they simply could not understand. They also were at pains to point out that they had not caused this Credit Crunch and so the developed world should not forget them - but we did. There are always losers in the world of 'zero sum finance' and it is those who are unable to play the game. As in any lottery, you have to be able to afford ticket to play - the Third World just watched wide-eyed as the sophisticates of the developed world simply gave away money they did not have to a small number of incredibly wealthy people and then paid for it again. Meanwhile people were dying in front of our eyes and the planet is getting a less healthy place to live.

We must be mad.

My Point Exactly

It really gives me no comfort to be right for just once in my life but it seems MPs in the Treasury Select Committee have confirmed my thoughts.

Namely, that the FSA and Government's new proposals on 'Macroprudential Regulation' are in fact just a rehash of the same regulatory policies in place prior to the Credit Crunch. It also confirms that that the FSA 'failed spectacularly' in monitoring banks in the lead up to the financial meltdown. It must come as a sick joke then that a) the same body and executives at the FSA remain in force, b) that they are responsible for re-writing the policy for the future and c) that a total of £17m was paid to the staff of the FSA in bonuses.

Oh yes, it wasn't just banks at the old bonus game - £17m amounts to nearly £8,000 for every one of the 2,500 FSA staff, of which Hector Sants, CEO of the FSA, alone gets over £100,000 bonus on top of an annual salary of over £900,000 while Lord Adair Turner gets over £200,000 for his part time work as Chairman.

It's a complete joke and a sham.

Central to the new policy, if it can be called new, is that the tripartite system involving the Bank of England, the FSA and the Treasury should remain intact. This may surprise most and even the MPs reckon it should stay but they have criticised the proposed reforms as merely being 'cosmetic'.

In fact, more alarming was the notion that in his evidence to the committee, the Governor of the Bank of England, Mervyn King, had 'no idea' what the Government's plans on reform were. This really smacks of another disaster in the making and having all just spent vast sums of money on bailing out the financial system to allow greedy banks to just do it all again, everyone seems to forget that there is a limit to the seemingly bottomless pit of money which is the taxpayers' pockets.

At no point does the system recognise that it is taxpayers who are at risk here. It seems that the safety net will always be the same and that we should just grin and bear it. Why there is not wholesale reform of the entire banking industry so that there are clear lines of differentiation between what forms of banks do that ring-fences risk so that the public does not have to pay for stupid mistakes is beyond me. Yes, it will slow the pace of growth and it will reduce the risks that are taken meaning economies will have to slow down but that IS THE CENTRAL ISSUE.

You cannot grow economies when the growth is not real.

The whole point of the last 10 years is that banks were making profits out just pushing debt around, all links to the values underpinning the debts were lost because no one cared. The profit was in trading the debt not in the debt being serviced. Traditional banking values have been lost after deregulation which has spawned a high risk gambling system which relies on no one asking questions just taking a profit on every, more convoluted trade.

The system requires fundamental overhaul and it will be painful because it is the responsibility of every official to make sure that the same weasels don't come kicking us for money again. What happened in the banking industry was our problem this time around because we were given so much credit based on poor asset assessments that we spent it all and craved more spawning a massive boom. Well, it is better we are told that credit will be tighter, more stringently managed and that the boom is over - and lump it.

Instead, the whole system is rigged to do exactly the same again and that is what the MPs have spotted. As Joseph Stiglitz has pointed out, by saving the system as it is we have just started the countdown to the next crunch, the next in a long term cycle of booms and spectacular busts and at each cycle the economies will get ever weaker so survival will be less likely.

I'm no economist but even I can see that.

What Price Silence?

It's okay, only 5 of the UK's top financial institutions failed so badly that they are in varying degrees of public ownership and depending on whose number you use, we are only liable to loans, capital and guarantees of £1.3 trillion. Not a bad year all in all.

That must be what the executives of the FSA decided when thinking on handing out bonuses last year. Not just any bonus, mind you, £19.7m in total to be precise. Lord Adair Turner, the Chairman of the FSA, who not only presided over the biggest financial meltdown since the Great Depression but has been given the remit to write a new role under 'Macroprudential Regulation', will be facing angry questions from the public about how he can possibly justify such bonuses which average £7,880 per member of the 2,500 staff.



Oh, but do not think that everyone will be receiving such a princely sum. After all, the CEO Hector Sants, deserves most credit for costing the taxpayer such an enormous, almost incalculable amount of money. He gets a further £130,000 bonus on top of a salary of almost £1m per year - so the lowly administrators at the FSA will get a bag of peanuts.

In a year when we have been whirled around by prodigious bonus scandals at banks and outrageous misappropriation of money by MPs, this is perhaps the icing on the cake. Or, indeed, the final insult.

The Conservatives wish to disband the FSA and give the Bank of England the power to regulate markets. Meanwhile, Gordon Brown says disbanding the FSA would be a huge mistake and, if anything, the FSA should have even wider powers. And more bonus, perhaps.



I am sure many people around Britain will be as aghast as I that the FSA is awarding anyone a single penny of bonus after doing nothing while the whole financial system crashed around it. The pathetic excuse that Lord Turner gave that the Government effectively told it to turn the other way simply does not cut it and shows how stupid Brown is. If Brown asked the FSA to turn the other way, then he could do it again, so it does not matter where the regulation sits, in the Bank of England or on Mars, if the PM intervenes to tell it what to do then it will fail again.



The city is working itself up into a lather as profits are up and the bonus good times are back. Meanwhile the FSA is piddling around trying to justify its future - not reforming the system to stop the excesses again.

Once more, lots of talk and no action will mean the gravy train has left the platform and the regulator is long way behind. But at least they will be able to count the bonuses they so richly deserve.

Putting Your Money Where Your Mouth Is

In the month of the year, March, when the car industry usually sells 17.9% of the total annual car sales in the UK, sales dropped by over 30% from the same month last year. There is no point making cars if you can't sell them and so this was about the worst possible news for the car industry - even these figures were around 5% worse than expected.

The Government will troop out the excuse that this is symptomatic of a global slump caused by the recession. That is not entirely true.

In Germany, there was a corresponding 40% increase in sales while in France it was nearly 10% up. So what is the difference between these countries and the UK?

Bail Out, Schmail Out

Business Secretary, Lord Mandelson, announced a £2.3bn bail out for the car industry back in January. By March, companies were already moth-balling production lines, putting workers on less hours and there were talks of widescale redundancies. For some peculiar reason, the bail out was stalled, according to Mandelson, in negotiations with the Bank of England and The Treasury, presumably after he had washed his hands of it.

It is very vogue to talk of big numbers as they impress everyone and by mentioning them it seems the problems, or at least the public scrutiny of them, will go away. However, as I have blogged of late, it is all very well conjuring up these ideas with vast sums of money but it is all about how each penny is spent - that will determine how effective these plans are.

In this instance, a cursory glance would suggest that both Germany and France have gone to the very heart of the problem. Instead of trying to preserve production or help tiding car makers over, Germany and France have gone directly to the consumer and given a direct incentive - a scrappage deal. This, coupled with aggressive offers from the dealer network and vendor in unison, good credit deals and plenty of direct advertising appeal, has effectively dispelled the consumer gloom and not only kept sales going but, of course, kept production going.

Instead of pointing fingers at others, these countries sought to directly solve the problems with deals that they can account for every penny for to the taxpayer. The British Government response to such a deal was that they a were not sure it was the best value for money.

Cutting Through The Bull

The UK response to the car industry plight has been to not just dither but grind to a halt - blaming other factors and saying it's a global slump issue. Germany and France saw no such obstacles and issues - they addressed the problem with a carefully calculated plan that was instantly executed and the result was spectacular.

In contrast, we look at the bank bail outs which seem to grow daily by small or large billion amounts and we have no idea how the money is being spent or whether it is working or not. Interestingly, it was both France and Germany who balked at the US and UK lavish bail out plans and managed to curb the senseless, ever increasing bail out funds being lobbed down a financial drain.

I have no idea whether these two countries are right but there does seem to be a stark contrast between the British approach and theirs. Time will tell but each day the clock is ticking for the British car industry - I have a suspicion that if it does take a beating in the next year as the recession really grips due to lack of constructive action, then it will never recover to the same levels again in this country. There is simply too much competition elsewhere for the work and we own none of it to influence it.

That will be right at the doorstep of the Business Secretary, in my opinion.

Some Good News, At Last?

The average price of homes rose 0.9% last month according to Nationwide. Mortgage approvals rose from 32,000 in January to 38,000 in February. It could be signs that the economy has some 'green shoots' at last - or are they?

The measure of Quantitative Easing (QE) as started by the Bank of England last month has yet to take great effect and so the positive movement cannot be put down to that measure. Besides, in a volte face by Mervyn King in the face of unexpected and bad news of a rise in inflation, it seemed this was no longer the vogue idea.

In response, for the first time 14 years, an auction of National Debt failed as the markets got spooked.

As the G20 country leaders get into full swing today, there will be another crucial time in the City as the next debt auction takes place and the markets will be wary of the outcome. To keep the housing market moving, the theory is that some of that cash has to cascade down to house buyers in the form of more liberal lending terms.

The Dangers

While this is generally received as a good thing, we have yet to agree upon a new structure and strategy for the regulator, the FSA. One of the huge problems that we have faced was the crazy and far too easy terms of lending on houses that got us all delving into our mortgage equity to spend. Northern Rock was not the only bank to lend at over the asset value in its 125% Together mortgages and most banks who lent anything over 80% loan to value (LVT) in the last year or so have seen their buyers actually go into negative equity.

Perhaps it is time to set out the rules properly about sensible lending policy at banks like a cap at 80% LVT so that we do not make some of the same mistakes again. It really is time that household disposable income came to the fore as the fuel for lending rather than the hope of equity growth and release.

Or am I asking too much?

Does Anybody Actually Know What They Are Doing?

The PM is in the US to talk to the President to compare the size of their economic phallus' (phalli?) and see who has spent the most money in the bail outs on things that they shouldn't have - like bonuses, fat pensions, consultants, investment banking advice and daft conferences to whitter on as if they know what they are talking about.

In a single day, even an hour, it seems fiscal policy was turned on its head and there are worrying signs that not only does no one know what they are doing, but worse still, they are all promoting doing the opposite thing.

Knee Jerk Reactions

In the series of bank bail out knee jerk reactions like large nervous twitches, we have seen several hundred billion spent by the government and the Bank of England to try and remedy the financial mess we are in. I am deliberately vague on the figures as there seems to be no popular consensus on how much actually has been pledged, spent, put up as guarantees and loans or slung down a large drainpipe leading to nowhere. In the remarkable series of events that allowed Fred Goodwin to walk away with a fabulous pension at our expense, no minister seemed to be able to know his address or phone number to contact and tell him he was not going to be rewarded for failure. How surprising that a bunch of vandals found Goodwin's house with remarkable ease and made the same feelings known with a series of well directed bricks.

Barack Obama seems to have lost his coolness and has developed a nasty habit of tittering when answering questions on the crisis which he refers to as essential 'gallows humour', and his usual unflappable speech style has been replaced by a Gordon Brown stutter.

The two should get on famously this week as the one thing they are both getting good at is spending large amounts of money their countries haven't got.

The latest in the series of knee jerk reactions came yesterday as inflation shot upwards and not one single economist had predicted it, which does not inspire much confidence. Having already embarked on his course of Quantitative Easing in earnest, Mervyn King, wobbled visibly and there now seems to be a volte face likely on that particular bright idea. In response gilt yields shot up record amounts as investors started to speculate that the era of low interest rates may be short lived.

The rise from 3% to 3.2% in the Consumer Price Index was very unexpected - in fact falling high street prices had been seen as potentially pushing us toward deflation if anything. But it is clear that economists don't spend much time in the real world as from my tired eyes shop prices have stabilised and gone back up with few exceptions. The fire sales seemed to be over a while back. In response, Mervyn King penned a fifth letter of explanation to the Chancellor.

I hope he put pictures in it as I think Alistair Darling is having real trouble reading things at the moment.

Further, King then told the Treasury that he may hold back on spending his £75bn of Quantitative Easing that he agreed to do not a month ago. The fear that inflation takes off is one of the side effects in the theory book on this one and Merv is playing very much by the book it seems.

The combined effect of these two things then sent gilts down in price and yields up as investors speculated that the Bank would buy far fewer Government bonds than first thought which had sent prices up previously. Another unexpected result of all this tumult was that sterling rallied against a whole basket case of currencies and gained 2.25 cents against the dollar.

Opposite Views

As Gordon Brown starts his visit to Washington to basically agree with the US that buckets more spending is the only solution to this economic crisis, Mervyn King was warning the Treasury Committee that the Government should not embark on a policy of further spending to stimulate the economy and was specific that the country should not run up more debt. Instead there could be targeted measures to get us out of the mess.

The Government was quick to point out that there was no rift with King on the stimulus package. We can only assume that either no one knows what the other is saying or Brown will simply tell King what to do - no discussion.

Rumours are that Alistair Darling is sitting muttering in a corner not knowing which way to turn. It will be an interesting match when Darling meets his US counterpart, Tim Geithner, who far from retreating into his shell with a face like a slapped backside as Darling has, he has boldly stepped forward and said that he wants wider powers to deal with financial firms. He claimed that the £173bn spent on bailing out AIG could have been avoided if his predecessor had the powers to have put AIG into receivership. Darling will be shocked at such a notion with the Government having to step in to save 5 major banks falling in the UK, the first of which, Northern Rock, had a strong case for just withering.

Bungling, Incompetence and Negligence

It may come as cruel twist to the saga of Goodwin-gate that in fact the US taxpayers and not the UK's may end up paying the cost of Fred's pension. The RBS Board insured themselves against their own incompetence (what foresight they had) and the main underwriter is none other than AIG. So if the UK Government do sue Fred and by some miracle they win, AIG amongst others will have to cough up. Pigs will be flying snow to Eskimos before the Government will get a penny back from Fred.

But it has been a depressing week for our super hero leader. As he flies like a speeding bullet to several countries to bore them with his monotonous message on spending and non-protectionism, the revelations by the National Audit that after the Northern Rock bail out was done, the highly paid consultants, under the watchful eye of ministers, allowed a further £800m in 125% stupid mortgages to be handed out up to 6 months after. Even a an imbecile would ahve thought to have told Rock management the very first thing they should do was to stop such nonsense - but no the object was to 'save' the bank not to rectify its brilliant lending policies. We then had Lord Myners whinging that he was not to blame for the Goodwin pension fiasco when it was his responsibility to get it right, we had Northern Rock paying its staff bonuses and changing the terms of its loan repayments to us, a sharp rise in unemployment was announced, tax revenues dropped by 10%, deficits rose sharper than anticipated and now we have the Czech Republic becoming the third and most significant country to oust its Government in the wake of the crisis.

As each country reports dramatic bad news after bad news, it is now absolutely clear that the financial crisis and recession has gone far deeper than expected and into the general commercial markets. It is becoming fast apparent that the drop in consumption in the wider sense will not be replaced by the vast spending by central governments. The spiral is beginning to lose control.

What is most worrying is the divided opinion amongst the people charged with getting us out of the mess having allowed us to get into. It is no good turning to the Conservatives as they are struggling to keep up with the niggling soundbites and witty one liners of criticism to have enough time to have ideas on how they would go about it.

Niall Ferguson had a long and technical article in the Telegraph yesterday with his ideas on how to stimulate the economy which I did not understand but what he does agree upon, as many are realising for themselves, is that the anticipated results of pouring a vast pile of money down a drain have been over estimated while the long term borrowing requirement has been vastly underestimated.

The Tories picked up on one of my analogies from some months ago, saying that Gordon Brown was like an obsessed, broke gambler believing it just requires one big bet to wipe out all his losses. The trouble is, he is gambling with borrowed stake money, and the IOUs are underwritten by us. I think we should take a lead after Latvia, Hungary and the Czech Republic and turf Brown and all his incompetent ministers and advisers out.

The sad fact is that we don't have anyone competent to replace them, except for the guy by the fruit machine in the Robin Hood pub last night who advocated bringing back Nigel Lawson, Ken Clarke and John Major led by Margaret Thatcher - his A Team. Er, no thanks.

Go on then, Gordon, have another throw of the dice on all of us. Here's hoping.