By John J. Kelly

In a move unprecedented in Europe since Martin Luther said the Pope wasn’t a Catholic, German Finance Minister Peter Steinbrueck called Gordon Brown’s “crass Keynesianism” breathtaking – but not in a good way. Following the rude absence of Mrs Merkel, the German Chancellor who couldn’t be bothered to turn up to Gordon’s Coalition of the Borrowers last Monday (Thus passim) another Hun, this time Steffen Kampeter, wee-weed on the recovery plans by stating that Brown’s audacious Micawber Plan (Thus Passim) showed a “failure of Labour Policy.” Sarkozy, meanwhile, dapper Neo-Liberal French footie friend of Gordon, is erring on the side of financial incaution. The issues are well summarised here in a Bloomberg Special Report.

I hold in my hand a message from the German Chancellor

Conservative Shadow Chancellor George Osborne – who nobody cares about anyway after his boating misadventures – piped up that “there is a growing international consensus that Brown’s borrowing binge will make the recession worse, the recovery more difficult and burden future generations with a mountain of debt.” Labour Foreign Secretary David Miliband – who nobody cared about after he failed to unseat Brown and was pictured with a banana last October but is now rehabilitated as Mandelson’s hopfrog – said on the BBC Today Programme that it was all a German internal spat (unrelated to Eton footwear). Mrs Merkel was behind Brown’s Micawber Plan to urge Europe to splurge a quarter trillion Euros on tax cuts and public spending, funded, presumably, from the Planet Zanussi. He didn’t say just how far behind it she was, though.

Exactly what part of Schadenfreude don't you understand, Herr Bleistift Schwanz?

Mrs Merkel announced earlier that no big decisions would be taken about the level of state intervention in the German banking crisis until January, estimated subvention at around Eur 32 billion over two years and ruled out tax cuts. The world money markets, clearly in awe of Brown even if the Valkyrie was resisting his charm, signalled their ringing endorsement. Sterling plunged to a record low against the Euro, which was hailed as a triumph by the madly spinning Miliband who declared that a weak pound would help exports. True, if the UK had anything left to export apart from bankrupt Woolworths Pick ‘n Mix boiled sweets and old MFI furniture (THUS passim). It will be very bad for UK imports of just about everything else, but crucially of energy, denominated in dollars, which the UK, like everyone else, sort of needs in order to keep the lights on and the printing presses rolling at the Royal Mint.

It's Mr Micawber again, vying for EU Finance Minister's post

European insiders recall that during his time as UK Chancellor, Brown’s modus operandi was to turn up at EU Finance Meetings, read a prepared speech then take off his headphones and ignore the debate as he got on with his homework. He’d put on the phones for the closing speech and exit, assuming consensus around the UK position. This endearing trait has not been forgotten. Brown, meanwhile, reiterated this week that he had no intention of considering Britain’s entry into the European currency, a peculiar message from the self-appointed leader of Europe’s latter day Marshall Plan. As a worrying postscript, BBC Economics Editor Robert Peston reported that HBOS, which the UK government bailed out in September, has incurred an extra £3 billion in losses against unsecured loans in the past three months. Santander, Spanish owner of Bradford and Bingley and Abbey, two more UK financial sector strugglers, also announced huge job cuts in the UK as of January.

Meanwhile the UK credit card companies, who are gleefully charging an average of 14.9% interest on purchases and 23.9% on cash advances, and who are mainly owned by the banks, ruled out passing on Bank of England interest rate cuts to their customers, though they did say they would give distressed borrowers 100 yards head start before sending the attack dogs after them. Stick to your guns, Missus Merkel. Alles is far from Klaar. We really don’t want another Weimar. Look what happened last time.

You can read all 237 pages of the UK Government pre-budget report if you really want to, but to save time, cut to the chase o page 198. This tells us what the Government earns, spend and the difference between the two, and explains the headlines we have been reading. The biggest one shows UK Government (or is that ‘our’?) debt growing to £1,084,000,000,000 in 5 years time. That’s £17,777 owed by each person and child in the UK, at 2007 population levels. This time it’s serious. See Thus passim for more on the UK’s parlous credit status. (Thanks to Buckle, Green for pointing to p. 198. I personally have no intention of reading this meritricious jibber-jabber).

Innovative retail finance will replace failed banks with Scottish names

Beggars can be munificent, however. It’s cheering to note that the deposits of 10,000 savers with London Scottish Bank, a former secondary banker (credit trader) have been guaranteed by the government Financial Services Compensation Scheme. though the bank has gone into Administration (Chapter 11). London Scottish was a sub primer lender by any definition. Its business was old-fashioned money lending to people with a poor credit history, debt collection and fixed interest deposit accounts. It was a better example than most of this somewhat rancid but arguably necessary business, but its elevation to the status of a bank serves as an example of the failings of regulation in the UK financial services sector. While pleased for the depositors (but puzzled as to why folks would deposit money with the tallyman), I wonder if Gordon and Alastair were swayed by the faux-ethnicity of this Manchester ‘bank’. ‘London Scottish’ which joins Bank of Scotland and Royal Bank of Scotland in putting out the begging bowl. Next, pawnbrokers may be eligible to apply to the government to guarantee pledges, secured against dodgy watches, bling and musical instruments. UK plc might become a leading secondary market for such items, replacing our financial services industry, until a few weeks ago the envy of the world and other planets.

I made a rare visit to my bank last week, and was reminded why. I needed to send £62.00 to Switzerland. After a lot of wasteful form filling, I was charged £20.00 for this ‘service’, which will take 4 working days to process. The exchange rate is likely to operate on a 1.5 – 2.5% spread. The total transaction will be close to £100.00. Adding injury to insult, the bank called me and asked for ‘further proof of identity,’ despite giving them my card  and pin number, both of which they had issued. Some of this idiocy relates to the belated money-laundering regulations imposed at the behest of America and the EU (to which Britain, but not its financial system, sometimes belongs) after some British banks had scooped up most of the Russian mafia’s savings accounts. Part of it is endemic ignorance, inefficiency and extreme parochialism, but mostly it’s just routine gouging.

From Williams and Glyn's to RBS to HMG to Carey Street

I have been a customer of this bank since 1973 when it traded under the reassuringly Victorian name of William’s and Glyn’s, originally a Manchester bank I believe. I was attracted by the promise of an ‘alternative’ to big banking (no surprise there) but saw it morph from the smallest to the largest, most leveraged, most greedy and now most government-owned. I didn’t move because I thought the rest were probably just as bad, knew that some were worse, but not because it ever tried to reward my loyalty. The abiding reason why Royal Bank of Scotland’s shareholders failed to snap up its second rights offer this year, forcing the government to underwrite £14 billion of our money, is related. Apart from paying far too much for both NatWest and ABN Amro with little evidence of real synergies, the RBS policy of gouging and bullying its customers once it became a giant, proved unsurprisngly counter-productive. Natwest owns Coutts, bankers to the Queen, who enjoys a more personal service than most, with an ATM machine in the basement of Buckingham Palace. Presumably the recession will mean that she will also receive a personal professional beggar in blankets to moon about outside said cash machine, asking for spare change. I digress, but I have always found this puzzling. The smallest denomination of currency these machines dispense, if you can find one that works, are £10.00 notes, not change. Given the shaky state of RBS finances, HM might be well advised to switch to GiroBank or the Post Office Savings Bank. They will probably give her a free plastic piggy bank or install a box in the basement with a bloke in it pretending to be a cash machine, handing out readies.  

RBS was good when its core business was personal banking. As things stand, the government has bought another turkey, which moreover operates back office banking for Tesco, Sainsbury and several of the other quasi-banks that have sprung out of our ‘vibrant retail sector,’ not to mention retail insurance (Direct Line) and mortgages. This will not be its last cash call. Break this monster up, give the Dutch their own busted bank back and repay the taxpayer as quickly as possible.  And encourage our banks try and at least pretend to be interested in Europe.

PS. Consider buying RBS shares if and when they get below 40 pence, if you’re into that sort of thing. Their asset value is greater than that and in the hands of decent managers the bank, if broken up, could thrive anew. The Tories are bound to sell them back to the markets, if only to ease the debt burden, which means 2010 at the latest. Bradford and Bingley and Northern Rock were should have never demutualised and both were mismanaged by oddfellows. HBOS is a puzzled entity, a mixed marriage between Bank of Scotland, a commercial bank which had few retail branches in England, and Halifax, once the UK’s largest building society.  Halifax were very inexperienced and bad at banking, while BOS were not adept at small scale mortgage lending. Result: misery. Their shares are probably a bargain at around 55 pence on the promise of a divorce. You’ll need to wait a couple of years to see a return, though. The FT SE100 index is likely to fall below 2600 in my opinion, as people are forced to liquidate whatever equity they have. On second thoughts, don’t pay any attention whatsoever to me, or to financial journalists, who are mostly feckless layabouts or blowhards. Play ‘share picking’ monopoly in your head and mentally kick yourself when it all comes true, banks are valuable again, the sun still rises in the morning and the sky didn’t fall in.

Wilkins Micawber, new Labour economics guru

Before spreadsheets enabled geeks to assume they could manipulate the economic weather, we knew that if we spent too much, we’d run out of money. If we ran out of things to sell or do in return for more money, we’d be in trouble. If we borrowed money at unrealistic interest rates, we’d be in even more trouble. If we borrowed money with no intention of paying it back, we’d be beggars and pariahs.

If we intend to borrow money for a ‘fiscal stimulus package’ when most of the developed economies are scrabbling to do the same, we will need to demonstrate that we’re a better bet than the other guys, offer a higher yield to the lenders or form an international syndicate – effectively what Brown is trying to do. Going it alone is risky. According to the IMF, British external debt is hovering around £UK 6 trillion. Net assets are around £350 billion. Gross domestic product (GDP) is around £357 billion and falling.

Gordon Brown is hassling the part-nationalised banks, tied to a 12% interest rate, to repay their government bailout loans, to start lending to businesses without further ado before it is clear where the backstop cash is coming from. They are ignoring him: losers don’t lend to other losers. Meanwhile, who does he strong arm to lend to UK Plc? The Americans have £13 trillion debt and troubles of their own. They might need to turn a tad protectionist. We’ve been routinely horrid to Europe over the past eight years, even though we’ve been net EU contributors. Unsurprisingly, the majority of our trade is with the Eurozone.

Back to the syndicate idea. The European Central Bank is sort of a pompous mutual savings and loan organisation. The once-stern criteria for entry into the Euro – sound fiscal policy and limits on public spending as a proportion of GDP – have probably been breached by the majority of its members of late. Regardless, as a result of Eurozone membership, Greek bonds are likely to be more attractive than those offered by the UK and even the US. (Thank you, Stilpon Nestor, late of OECD, for this insight. We had lunch today. Thank goodness we didn’t drink or this would be even more mazy).

This might be a good time to start thinking about how to get back into the Euro club. It may require a degree of grovelling and scraping. Labour still has an outstanding election pledge to give the electorate a referendum vote on the Constitution (‘Treaty’) but the Irish have given us all a breather. Europe should be a big ticket item on the forthcoming election agenda. The Tories have a recent history of Europhobia, which is ironic, since Ted Heath took us into Europe and the Iron Lady signed the 1992 Maastricht Treaty. The UK took part in European Monetary Union from 1990 until recession and George Soros forced an undignified exit in 1992. Incidentally, Britain was the fifth, not the first currency to be forced out. It is a mistake to compare EMU, an exchange rate mechanism, with a merged currency such as the Euro and it was an accident waiting to happen to peg our exchange rate, at an all-time high, to a falling Deutschemark. But no such problems now. Sterling is so low we could enter with ease. They might even welcome us back, prodigal style. We are a big, if obese, economy with Europe’s best financial markets.

The alternative is to carry on pretending we have a special relationship with the US. The problem with this approach is that it implies continued reliance on a busted economy and a falling dollar. Or we can go cap in hand to the IMF. Remember 1979?

We will need to have some sort of ‘fiscal stimulus’ unless we want to do a Hoover (the president, not the failed vacuum cleaner company, although there are similarities) but to do that we need allies, since we’re basically skint. There is an obvious mutuality with our European neighbours, and the Euro makes for a better spread bet than a single national currency. Labour and Tory will need to be explicit about their respective positions. Both have been suspiciously tight-lipped. Make sure you ask them what they think about Europe when and if you are called upon to vote, which I think will be next November, by crisis more than design.

Feel free to tell me if some or all of this is wrong. I’m not proud. I’m not an economist, but I’m Irish and was educated by Jesuits. It’s what I’d do.