Ed Balls: a new slump looms

It’s no use my telling them, of course, but the People’s Party is on the verge of making a historic mistake. They are about to elect one of the two Miliband brothers as their leader, when neither of these perfectly amiable north London intellectuals has ever said anything memorable about anything. (What is the definition of a millisecond? The length of time an average human being can watch a debate between the Milibands before switching channels.) And they are therefore going to reject my old friend and sparring partner, the boss-eyed and pugnacious shadow education secretary, Edward Balls.

Whatever you say about Spheroids, he not only has balls. He has ideas. He has conviction. He has a grasp of economic history, and as he showed in his Bloomberg lecture last week, he knows how to mount a compelling argument. Balls is like one of those Florida weather forecasters who has just seen something terrible on the long-range radar. Outside in the streets of Miami the sun may be shining, and the kids may be happily going about their daily business of shooting up and car-jacking each other. But far out over the Atlantic, deep in the armpit of Africa, Balls can see what he claims to be an accelerating whorl of low pressure.

A disaster is impending, he says, and sooner or later a hurricane is going to hit. It’s going to be a perfect storm, he says. Just as the housing market is looking peaky, just as the stock market is stuttering, just as VAT goes up to 20 per cent – whoomf – the Coalition’s spending cuts will come in and kick the stuffing out of the recovery. Confidence will fall away. Orders will dry up, he warns. Unemployment will climb so high that the welfare bill will wipe out other savings, and mutant rats (he all but says) will crawl from the neglected sewers and gnaw the faces of the unburied dead.

It must be admitted that his words are finding an audience, even among those who might normally be counted as state-shrinking free-marketeers. There was Martin Wolf in last week’s Financial Times, warning that “Ed Balls’s critique is right”; and blow me down, there was a leading article in the normally pur et dur Thatcherite pages of the Sunday Times. “An awful thought,” ran the panicky headline, “but what if Ed Balls is right?” If the Right-wing commentariat is getting nervous about the depth of the cuts, what about the Left of the Coalition? What about the Lib Dem rank
and file?

The consensus around drastic and immediate deficit reduction is in danger of breaking down. That is because one of the key arguments no longer looks as strong as it did. You may remember that during the election and in the run-up to the June Budget, we were told that it was necessary to avoid a Greek-style sovereign debt crisis. We were told we would have to slash the deficit or else the markets would punish us with cripplingly high interest rates. Well, the deficit is still more or less what it was, and yet interest rates and bond yields are at historic lows. Of course it is a good thing to bear down on wasteful public spending, and the deficit must certainly be reduced. The question is how far and how fast this can be done without provoking a double dip recession – and the risk is that if there is a serious downturn at the end of the year, it is the Coalition that will cop the blame. Balls will be jubilant. Nouriel Roubini will be claiming his Nobel Prize for Gloom. The unions will be doing their best to fan the flames of public anger, and there will be a further toxic element to be introduced to the mix.

What else do we expect to happen around about Christmas, just as large numbers of public sector workers will presumably realise they have to look for a new job, and just as businesses of all kinds start to feel the chilling effects of cuts in public spending? The bankers will be getting their bonuses – that’s what.

I hope and believe that Balls is wrong about the double dip. I hope and believe that the economy will continue to recover, and that the Government can make the necessary deficit reductions without a new recession. But whatever the pain and anger of the public at the cuts – and some pain is inevitable – that anger will be hugely magnified by the spectacle of the banks doling out hundreds of millions of pounds in Christmas bonuses to the very people who, collectively if not individually, were responsible for the financial crisis.

Whether Balls is right or wrong to prophesy a new slump, the banks have got to understand that this year public feeling may be even more inflamed than last and politicians will be facing colossal pressure to appease public indignation – and the risk is that this year they may take steps of a fiscal or regulatory kind that would do long-term damage to London as a financial centre and as a tax generator for the rest of the economy.

We need two things to happen. We need the Government to be vigilant about the risks of a double-dip recession. And we need the bankers to break the habit of a lifetime and anticipate this problem. We still have time. There are months to go before we see this combustible contrast, between public sector lay-offs and vast bankers’ bonuses. The executive jet and the passenger-laden jumbo have entered the same airspace, at the same height; but there is still time to change course.

The banks have three months to get together and work out a way of showing restraint and a real commitment to the poorest and the neediest in our capital city and the country as a whole. Many financial institutions already have excellent corporate social responsibility programmes. But they could do much, much more. If they fail, there will be many who find an unbearable contrast between the fortunes of the bankers and those of the wider public. As John Prescott might put it, we need to nip this train crash in the bud.

This article is in The Daily Telegraph

13 thoughts on “Ed Balls: a new slump looms”

  1. Bond yields (US, German and UK) have all been falling. Most likely for 2 reasons:

    1) Both in the US and UK bank lending and money creation is falling, people fear deflation.

    2) A carry trade (where people borrow cheap money, invest in risk assets like stocks, then pile for the exit and buy government bonds) might be developing.

    Other than the big headline cuts like the Audit Commission, probably 20-25% of public sector staff are over 60 anyway. So over the next five years they would have been retired anyway. Most of them won’t be replaced, but life will go on.

    Balls is just continuing with the strategy he wanted to fight the election on – labour investment v tory cuts – politically it would have been a good strategy, as long as a double dip occurred. If the US goes back into recession, the UK probably will too. If the US starts printing money, the UK probably will too.

    Don’t watch these clowns, watch the US economy for the answers.

  2. The reason Gilt yields have come down is two fold.

    1) Confidence in George Osborne getting to grips with the massive overspending of the last government.

    2) Due to a flight to perceived safety, as money exited risk trades. This is being reversed in September to some degree.

    Mr Boris, you are quite wrong to fall into the lefty trap of blaming the banks and bankers alone. The total frame-work of baking was compromised by Brown the meddler.

    The crisis happened for a number of reasons all combining to create a massive mess.

    First China and Middle East Petro Dollars. China never neutralised their income from exports thuis creating free or cheap money in the markets. The rise in Oil allowed the Middle East Oil producers to seek more places for their money. London was busy re-cycling these funds.

    Banks did what banks do they took the cheap access to funds and used the money. The likes of Northern Rock built too large a mortgage book funded by short term money from the markets.

    Golden rule in banking never lend long and borrow short unless you have the government allowing you to do so. They are at the moment as they are ensuring the banks re-build their balance sheets.

    Northern Rock went bankrupt due entirely to Gordon Brown failed regulatory system. It was saved due to politics, it should have been sold for a £1 to one of the big boys and then allowed to run off the books and cherry pick the good quality assets. Loans are assets.
    So please while I understand the message of asking the banks to be more socially aware do not follow the left line that they were the sole cause of the disaster.

  3. Golden rule in banking never lend long and borrow short unless you have the government allowing you to do so.

    Isn’t borrowing short and lending long the fundamental point of a bank? I don’t know many people who hive their savings away in 25 year bonds to cover people’s mortgages with.

  4. But Johnson dismissed the [Milliband] brothers as “amiable north London intellectuals” who have never said “anything memorable about anything”.

    One suspects they would do a better job of running London. They would probably have the spine to take on the car-lobby and keep the Western Zone Congestion Charge.

    Still, there are votes for Boris Johnson in [Ed: inappropriate].

  5. stevenL No it is too dangerous, a Bank should never lend long term maturity and cover that loan with short term money.

    For exactly the reason Northern Rock got into trouble.

    The market dried up, but Northern Rock needed funds to cover their long -term loans. Result massive losses if rates go up or worse bankruptcy if the market dries up.

    We know there are times when it can be done, but you have to be very nimble.

  6. If only these bankers and other financial clever-dicks
    were smarter, then we’d all be rich! Or have I got hold of the wrong end of the stick?

  7. Purpleline:

    But things like current account balances, regular savers, 1 year savings bonds etc are still short term compared to the loans and mortgages they were making.

    I think what you’re saving is that banks should not lend more than their deposit base.

    Northern Rock might have found it easier to borrow money to re-finance it’s debt if it hadn’t made so many bad loans. If anything, it was the market for making risky loans that dried up. Even NR’s retail depositors considered the loans they had made NR too risky and queued up to call them in.

    Personally I think they should have just stung the bondholders by forcing NR, B&B, A&L and HBOS to do debt-for-equity swaps. Then the people that actually took the risks would pay the price, first the shareholders are wiped out, then the bondholders get a big haircut. Would probably have meant bigger falls in house prices though, and we can’t have that can we?

  8. Not really, it was the re-financing on the Money markets that dried up. Yes they used and levered their balance sheets, but the lending book was massive compared to the amount of funds they had on deposits.

    Northern Rock created an off-balance sheet vehicle in a tax efficient location as a funding vehicle a SIV named Granite, it could not raise money on the money markets any longer because the US Sub prime tainted all banks who started to hoard deposits as no bank could get funds.

  9. Never mind US subprime, NR had it’s own subprime 125% equity together mortgages.

    Granite was what they were laundering (sorry securitising) all this rubbish through. the market for dodgy mortgages went, but if the stuff on NR’s books was thought sound, and it’s capital base thought sound, then it should have been OK.

    It was highly leveraged too, in other words had hardly any capital base.

  10. I think I’ve got it now. The bankers and financial clever-dicks are smarter, as they’re rich, and we pay them. It reminds me of other nationalised industries, back in the 1970s. The guys running them did pretty well, too. I wonder, does anyone remember what happened to the nationalised industries of the 1970s?

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