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Saturday, 14 February 2009

£30bn Gap of Gloom?

Shouldn't this be weeds in the picture, thistles and cowslips especially?
The lack of attention given to the Bank of England’s forecast for the economy is bizarre, according to the FT and other organs.
Mervyn 'Midas' King basically said the recession, from peak to trough, will be two times worse than the Treasury expects. Given that the BoE is showing a narrow V form to the recession and recovery, not a U or L shape, this is not at all so? The BoE chart is extremely optimistic, surely? I hate these fan-tail monte-carlo style forecast charts. They just tell me there is too much loose analysis in the modelling. Look at the range of possible GDP growth in 2010. That is shameful economic forecasting, especially if the central projection is merely the median of such a wide range of possible outcomes. I cannot believe this vouches for credibility in the BoE's or the Treasury's macro-economic models!
Anyway, the forecast knocks about £30bn to £40bn off official GDP forecasts, hits the Government tax take we are told by up to £20bn and raises the deficit from 8 to closer to 10 per cent of national income. You have to wonder why David Cameron decided to raise the 2% VAT cut in the Commons on Wednesday PM Questions and ignored the big “gloom gap” between Gordon Brown and the Bank of England. he got short shrift on VAT by being told that the IFS said it was effective - to the tune of about £12bn.
But, when it comes to Government Revenues where is the income from £185bn in treasury bills at 1% offset by $245bn in ABS received paying LIBOR plus say 25bp. That alone means £6.7bn. Add to this £57bn paying 9% worth another £5bn. On February 12 (Bllomberg), “Prime Minister Gordon Brown said bank shares bought by the British government as part of his rescue packages will ultimately make money for the taxpayer. ’I believe over time that the value of these shares will rise,’ Brown told a panel of lawmakers today.” let's assume the banks share rise 20% this year, which from their low base is feasible, that's another £10bn. A further £250bn in BoE swaps are likely, worth another £7bn. Total £28bn, repeatable in 2010 and 2011.
For those who are interested, the BoE calculations are based on this Bank fan chart and not a straight comparison with the Treasury forecasts, so the figures were put into a spreadsheet by Chris Giles, FT economics editor, who did the sums to find that, "The Bank’s forecast, after taking account of “downside” risks, suggested the economy would shrink by more than 3.5% in 2009 with only anaemic growth in 2010, ... far worse than the Treasury’s expectation of a 0.75% to 1.25% contraction in 2009 and 1.75% growth in 2010. From peak to trough, the risk-adjusted estimate from the Bank predicts a 4.6% economic contraction, about twice the latest Treasury forecast. The Bank’s prediction is that we are living through a period that is worse than the 1990s recession and on a par with the 1974 recession, but not quite as bad as the early 1980s. What is really terrifying is the Bank putting more than a 10% probability on Britain seeing no growth until 2013."
I suppose that to be a more than 10% probability that banks will not maintain their 2007 UK lending levels? What does this mean politically? According to the FT, "Brown and Darling’s PBR estimates were far too rosy". But, are they. This depends a lot on the effect of an 8% fiscal impulse. And that surely is the basis for the very sharp recovery.
Compared to all 20th C recessions, recovery averages 5-6 years to get back to pre-crash peak. The BoE fant tail media shows it could happen far quicker!
The FT says "the budget will be grim". No it won't, not for tax-payers, this is a borrow now, pay later maybe or maybe not? Also an 8% fiscal impulse is exactly becoming the international norm. If everyone does it then everyone benefits - no beggar-thy-neighbour strategies.
The FT says, "The chances of a noticeable upturn before the election are tiny." Not according to the BoE chart they're not!
See comment for more on 2nd Treasury Select Committee questionming of the banks.

1 comment:


From the FT
The second session of MPs versus bankers has kicked off. This time it’s current chief executives facing the Treasury select committee.
Opening question from John McFall, chairman: Why do the general public hate you? Cue long-winded non-answers from several bank chiefs.
We’ve now moved on to Stephen Hester of RBS and the question of who decides the bank’s bonuses. (RBS has controversially considered paying up to £1bn of bonuses, some of which are under contractual obligation). Hester says: “I believe that falls to the RBS board but I could not imagine the RBS board doing something over the violent opposition of the majority of its shareholders and we have one shareholder which is majority so we are looking very carefully with UKFI (a wing of the Treasury) to get the right solution.”
Michael Fallon, deputy chair, asks: “I thought the relationship was arms-length?” Hester: “I think all companies try hard not to do things that shareholders would oppose and so….we are trying to make sure UKFI are on board with what we do.”
The RBS ceo has just claimed that he shares public unhappiness about undeserved rewards for bankers: “I one hundred per cent agree with the public sentiment and agree it myself in terms of unjustified rewards.” But - alas - he cannot stop the RBS bonuses which must be paid. “From my position what we have to do is obey the law, we’re in a position of having to obey the law rather than make it.”
John Varley of Barclays admits that not all is well in the banking world’s compensation structure. “It is absolutely right that we should listen, that we should understand the views of the world about this subject and should be prepared to respond.”
Then again, he says, that shouldn’t apply to branch staff and other more lowly-paid. Nor is it clear that he definitely wants restrictions on more senior staff. “For senior executives, as their compensation grows, the ratio of shares rises very significantly”. (To me this sounds like a defence of the status quo).
Hester really is a pro: Now he’s reassuring MPs that he takes no joy from handing out bonuses. He really does want to clean up the industry’s excessive largesse: “I do think banking pay in parts of the industry is way too high and needs to come down - and I intend us to lead that process.”
Now we’re on risk management systems. Hester believes that RBS’s systems need “a lot of change”. He says that can’t take place in a couple of weeks. Eric Daniels, ceo of Lloyds Banking Group (which now includes HBOS) admits that: “We think the HBOS acquisition will test our systems…we’re going to have to put the Lloyds systems into HBOs and that will be a challenge for some time to come.” He also admits that Lloyds would not have needed state equity without the HBOS takeover.
Fallon wants to know when taxpayers will get their money back. For RBS, the timeframe is 3 to 5 years, says Hester - who believes that over that time the public could make a profit. Lloyds Banking Group has no timeframe, Daniels admits….although he “would certainly hope” that it would not take longer than 5 years.
Now an MP is asking Hester about the international scope of the RBS business (there has been criticism in some quarters that the bank should receive state help when most of its lending is abroad). “The only part of our business which we are extending lending is the UK. That process will continue and accelerate,” he says. But - he cautions - we should be careful about a retreat into isolationism. (The US legislators will not be happy to hear that lending is not going to be 'extended' by Citizens Bank!)
“We all have to work together, it is a cliche but it is true.”
It’s now coming up to 4pm (end zone) and Hester is insisting that nationalisation of RBS would be a mistake. It would not be in the public interest, he says. “We hope we can stay strong enough for it not to happen.”
We aren’t hearing much from the men from Abbey or HSBC. Perhaps unsurprisingly.
John Varley of Barclays has just been asked who was to blame for what went wrong. The answer is so slick that Varley could - if things go wrong - become an excellent politician. Many groups were to blame, he suggests, including central banks. If one had to look at various sectors and institutions then yes, the single biggest contribution to the crunch would be banks, he concedes. But that doesn’t mean banks should take the “majority” of the flak.