Two Parliaments of Pain

I discovered a really interesting angle (by accident obviously) on the current predicament we find ourselves in with the UK’s Political and Economic mess.

 

I stated in the ‘5 Becomes 10’ blog (http://stevesmithlive.blogspot.co.uk/2013/01/5-becomes-10.html) that the master 5 year plan to restore our economic prosperity is unlikely to be met and we’re looking at probably 10 years of pain not 5 (another 7 years from now) of austerity measures……or are we?

 

Thought #1

We are only 3 years away from a General Election……right slap bang in the middle of the remaining 7 years of the plan.

 

If we stick with the current Government……they will see through the austerity measures. If we go with Miliband’s Labour……they will borrow and invest to ignite the economy and completely undo the austerity measures that we are suffering now.

 

Two vastly different approaches and if Labour do get in, it begs the question what was the point of the austerity measures in the first place and the subsequent pain that it caused?

 

 

Thought #2

Ed Miliband’s Labour are placed 10 points higher in current opinion polls.

 

Thought #3

My tolerance and patience of contradicting political policies is wearing incredibly thin.

Moody Blues

The Story……
The UK has lost its AAA credit rating for the first time since the 1970’s with Moody's downgrading its assessment of the outlook for the UK economy.

The Background……

There are three significant credit rating agencies in the world, with Moody’s being considered the biggest and most important. These agencies grade various countries / investment funds to provide investors with an independent opinion using various criteria. In the case of countries, the agencies are assessing their creditworthiness and their ability to pay back money lent to them. The more likely a country is to be able to pay back its debts, the higher the rating. The AAA rating is the highest honour, which countries strive to achieve / maintain as it allows them to borrow as cheaply as possible.

Current Problem……

On Friday, Moody’s downgraded the UK’s rating from AAA to AA1 due to its more negative view of how long it will take the UK to recover from the downturn. This is pretty consistent with my blog of ‘5 Becomes 10’ (http://stevesmithlive.blogspot.co.uk/2013/01/5-becomes-10.html).

The Consequences……

Losing our AAA rating is a major issue and is likely to have the following negative impact:

1.     The borrowing required by the Government (to bridge the gap between insufficient income and too much expenditure) will now cost us more as the interest rate the Government borrows at will be higher to reflect the UK being a greater risk now. This increases our expenditure at a time when we are trying to reduce it……and remember ‘we’ need to borrow £100 billion a year!

2.     The value of Sterling will fall. UK companies will suffer from greater importing costs or having lower profit margins on exporting goods / services. This will lead to lower company profits and lower tax revenues for the Government (compounding the income / expenditure gap).

3.     As a consequence of (1) and (2), it will take longer for the government to reduce the budget deficit (the whole point of the austerity measures in the first place).

Clearly some big issues……perhaps the biggest is whether George Osborne continues as Chancellor as the grand master economic plan for the UK just isn’t working……the Moody’s downgrade confirms that to all. Interesting times ahead of the budget on 20 March 2013.

Never dull is it!

Unstable Cable

As an honest, reasonable and understanding person who believes that the vast majority of people in the UK are honest, reasonable and understanding, I have no idea where to start with this……let’s try the beginning.

I Told You So……

As I predicted in my blog back in June 2012, (‘Another Day……Another Banking Scandal’ http://stevesmithlive.blogspot.co.uk/2012/06/another-dayanother-banking-scandal.html RBS have also got themselves involved in the mass cheating for financial gain (who would have thought it!) with the manipulation of Libor. In short, they got their dirty fingers in the honey pot and must now pay the consequence. The consequence? A fine of £390 million.

Enter Vince Cable MP……

Our current Secretary of State For Business. This guy is no idiot surely……he has a significant economic education, has been economic adviser to a number of Commonwealth countries and has been involved in UK politics for 30 years (now holding one of the big 5 seats at Number 10).

 

 

However……

Give a politician an opportunity to jump on a popular bandwagon, jump they will. And with bank bashing being so vogue, Vince Cable couldn’t resist.  

The day that headlines were awash with details of the £390 million fine for RBS, Vince Cable declared to the world “RBS must pay the fine themselves and not the Government or taxpayers”. Oh dear. It’s as if he had knocked at my door and told me he had a blog for me to write.  

I’m Never One To Miss An Opportunity……

Which leads me on to a couple of important points that I feel should be brought up Mr Cable.

1.     RBS is 82% owned by taxpayers. That is because the Government decided that it would be good value to bail them out to the tune of £45 billion. (£45 billion seems far too easy to type so here’s the harder version……£45,000,000,000). As 82% owners, ‘we’ by very definition must pay for this indirectly……taxpayers ARE paying this. 

2.     I appreciate that you and your political party were not in power at the time that the £45,000,000,000 was agreed. However, you held a seat in Parliament at that time and history shows that you offered little resistance to this. At best this was poor politicking for the constituants you serve. At worst, this was unforgivable as a man of such economic standing.

 

3.     Having realized you have ‘dropped one’ with this, you have now stated that the fine should be paid from past and future staff bonuses. Seems reasonable. However, the current Chief Executive (Stephen Hestor) will still receive part of his £2.4 million annual bonus in March as the Government have failed to put sufficient clauses in his contract to stop this from being paid. After 4 years, two parliaments and many investigations, why is this? Who has failed? What action will you take?

We are run by people who think we are idiots when it seems very apparent they are the idiots.

 

Mr Cable, take a bow.

Banking On A Fresh Start?

Like it or not, banks are back in the news this week.

 

In short, the Chancellor has introduced the Banking Reform Bill which is designed to provide new rules to ring-fence risky banking investment operations separately from traditional high street banking functions. Ultimately there is the threat that the (so far incompetent) regulator can break up a bank that fails to follow the new rules (which are at the bottom of my ramblings).

 

Or to put this another way……reducing the risk of continued casino banking and avoiding another £65 billion bailout from the public purse.

 

I have a number of key questions:

 

Q: Why Has It Taken Over 4 years To Introduce Such A Bill?

A: Pass. Shocking / Frustrating / Frightening / Ludicrous (add your own)

Q: What Will The Impact Be To The Economy?

A: In essence, this is really good politics but really bad economics. The Government can only gain political points with the public and they will attract good headlines. But the reality will be banks lending even less money at a time when the economy needs significant capital to be introduced.

 

I wrote about this recently……http://stevesmithlive.blogspot.co.uk/2013/01/the-magic-of-9.html

 

Q: Will It Work?

A: Time will tell – I am rarely surprised by anything that happens in the banking sector now. Anything less than ‘shocking’ has to be a step forward.  

Ultimately this is a classic ‘catch 22’. Tying a banks right arm behind its back and expecting it to give cheap money with its left is essentially where this leaves us. It is certainly creating a challenge for the UK economy’s only source of money currently.

We can’t have it all ways I guess!

 

 Banking Reform Bill

An overview of the changes…...

The Ring-Fence:

The High Street activities of each UK bank are to be put into a separate subsidiary from its riskier investment banking.

 

Electrification:

Regulators will be given the power to split up an individual bank altogether, subject to certain conditions, if the regulator deems the bank to be undermining the purpose of the ring-fence. Regulators will also review the entire UK banking industry each year to determine whether the ring-fence is proving effective.

Deposit Guarantees:

The Financial Services Compensation Scheme currently guarantees up to £85,000 of every deposit in a UK bank. Under the bill, if a bank goes bust, the FSCS will be paid out ahead of other people owed money by the bank. It means that the FSCS will be better able to recover the money it has guaranteed, which should reduce the potential bill for taxpayers if there is a shortfall.

 

Loss Absorbency:

The bill gives the Treasury the power to impose tougher requirements on banks to increase their ability to absorb losses, in particular by requiring a bank to borrow money from markets in a form that allows the bank to impose losses on the lenders if it gets into trouble.