This conference, which will be held in London from 26th to 30th April, is being organised by the International Union for Land Value Taxation (theIU). The conference will address some of the fundamental economic issues about tax that need resolution as part of any new and progressive programme to address poverty, inequality and environmental degradation.

Blair has a commercial consultancy, called Tony Blair Associates, plus jobs advising a US bank and a Swiss insurer. He has a multimillion pound book deal. He also has a charity, the Tony Blair Africa Governance Initiative, and another called the Tony Blair Faith Foundation. But much of the income, which includes charitable donations from other sources, has been funnelled through a structure called Windrush Ventures No 3 Limited Partnership. Our contest asks: what is Windrush?

Blair has a complex web of structures involving 12 different legal entities handling the unprecedented millions he is receiving since he stepped down from office in 2007.

So mystifying are the former prime minister’s financial structures – which involve highly specialised limited partnerships and parallel companies – that the Guardian today launches an open invitation to tax specialists and accountants to attempt to explain the motivation behind such structures. We have published the Companies House documents and other legal papers regarding the structure of the partnerships at guardian.co.uk and invite expert comment via our site at guardian.co.uk/politics/series/blair-mystery.

There is no suggestion Blair is doing anything illegal. But he refuses to explain the purpose of the secretive partnerships.

Tax specialists say Blair could use these unusual arrangements at some point in the future to seek to transfer millions tax-free to his four children.

Blair denies, however, that the structures are such an inheritance tax avoidance scheme, known as a “family limited partnership”.

“Family limited partnerships” were being publicized to lawyers and accountants in November 2007 at the time Blair’s lawyers started to set up his structures.

Known in the trade as “Flips”, family limited partnerships are a way of getting round stricter inheritance tax rules in the 2006 budget, imposed by Gordon Brown while Blair was still prime minister.

Jay Krause, a partner at the law firm Withers, is credited with inventing the Flips concept for use in the UK. He told the Guardian it is “entirely possible” to use such Blair-style partnership structures legally to avoid inheritance tax.

Instead of setting up trusts, which are now heavily taxed, children can be granted an ongoing interest in the partnership’s wealth, as a “limited partner”.

There are other more conventional uses of such specialised limited partnerships, accountants say. These include venture capital schemes, private equity investments, or short-term projects such as film finance.

In each of those cases, the so-called limited partner invests cash, but has little control over what is done with it by the general partner.

In return, they are protected from unlimited liability if anything goes wrong.

None of this seems to apply to Tony Blair, however. No outside “angel” investing cash in Blair Enterprises appears in the records. The structure is so artificial that in one part of it, Blair is, in effect, forming partnerships with himself.

The former prime minister refuses to offer any explanation of why he is using the complex structures.

As they stand, they were recently described by the Financial Times as “neither tax efficient nor managerially useful”.

Millions of pounds have been funnelled through one arrangement called Windrush Ventures and a second parallel structure called Firerush Ventures.

They may handle some of the large amounts coming in from Blair’s book deal, his six-figure speaking fees, his banking and insurance consultancies, and his pay from Middle Eastern regimes.

The Windrush structure pays for Blair’s £560,000 a year lease on his Mayfair office, in Grosvenor Square near the US embassy.

Blair’s profit-making commercial schemes involve 12 different Windrush and Firerush legal entities centring on a pair of “limited partnerships”.

His spokesman, former No 10 staff member Matthew Doyle, refuses to say who Blair’s partner is.

Windrush Ventures No 3 LP, for example, consists on paper of a partnership between an entity owned by Blair himself and an anonymous off-the-shelf company.

This off-the-shelf company, which appears to have been set up by Alex Harle, Blair’s lawyer at the Westminster solicitors Bircham, Dyson Bell, is merely called BDBCO No 819 Ltd.

Set up as a nominee company to act as a trustee or an executor of a will, this entity does not reveal its ownership on records at Companies House. Instead, its shares are listed as held by a second off-the-shelf entity, BDBCO No 822.

This company in turn conceals its true ownership. Its shares are listed as held by the lawyers, acting as nominees.

This partner company does not appear to have made any significant investments on its own behalf. The register shows that its sole contribution to the partnership when it was set up in December 2007 was the sum of £19.

The Guardian asked Doyle who owned Blair’s partner company. We also asked for the terms of the partnership agreement which divides up the rights to Blair’s money. We asked the purpose of the schemes, and what funds had been paid into them.

Doyle refused to answer. He even refused to say why the name “Windrush” was chosen.

In a written statement, he said: “Why we set it up … was in order to allow Mr Blair’s office sensibly to administer his different projects, in accordance with relevant regulations and company law in the UK. He has an operation that has over 80 people working for it around the world. This was done on the basis of advice.”

The limited financial information available under company law shows that more than £6m has been passed through the Windrush partnerships, and on to a company owned personally by Blair, called Windrush Ventures Ltd.

The £6m is extracted from the partnership funds by being described as “management fees” going to the general partner – which is a Blair-owned entity.

There is no published record of what other cash or assets remain in the partnership, or how it will be distributed.

The opacity of Blair’s Windrush structures is increased by the fact that they have also been used to handle some charitable donations for projects in Africa.

A Sainsbury family charity, the Gatsby foundation, declares it has paid a total of £992,000 to the Windrush limited partnership. This was for charitable projects in Rwanda, in the two financial years to April 2009.

The Gates foundation, funded by the founder of Microsoft, declares it paid $2.46m (£1.49m) to the Windrush LP in June 2008, for similar capacity-building projects in Sierra Leone.

Blair this year applied to set up a charity, the Tony Blair Africa Governance initiative, in February 2009, according to the Charity Commission.

But its application was not accepted until this month, partly because of its novelty and partly through concerns as to whether it was sufficiently separated from Blair’s personal office arrangements.

The link with Blair and his office was “one of the issues we considered … when looking at public benefit and the independence of the charity,” the Commission said.

Blair’s Wealth

Blair is estimated to be in the process of receiving up to £14m, making him one of Britain’s wealthiest ex-prime ministers. This includes a £4.6m memoirs deal with Random House.

He is also receiving a series of US fees from the Washington Speakers Bureau for making speeches estimated to include a £600,000 signing-on fee; consultancies with the US bank, JP Morgan and with Swiss insurers Zurich Financial Services; and commercial consultancy deals through his private firm, Tony Blair Associates, with regimes in Kuwait and the United Arab Emirates among others.

The growth in Blair’s personal wealth was illustrated in May 2008, when he agreed to pay £5.75m for the late actor John Gielgud’s Buckinghamshire residence, described as “a small stately home”.

This was in addition to the £4.45m paid earlier for a London home in Connaught Square, together with an adjoining mews house.

  With 20 per cent of the population still stuck in poverty, the report calls for sweeping reform of the tax and welfare systems under which higher earners would finance more generous, universal benefits. The £43,888-a-year ceiling on national insurance contributions (NICs) would be abolished, so people earning more would pay NICs at 11 per cent on all their income above that level, instead of the current 1 per cent. 

The study, by the Labour-affiliated Fabian Society and Webb Memorial Trust, argues that Gordon Brown’s “quiet redistribution” of wealth now lacks public support – and declares that one of the reasons is Labour’s tough language about benefit fraud and claimants. 

Its criticism that Labour’s approach has “failed” is coupled with a stark warning to the Conservative leader, David Cameron. The authors say that, in the long run, Tory plans to reduce payments to the middle classes such as tax credits and target resources on the most vulnerable would undermine the attack on poverty. They warn that moving away from universal benefits would create a “them and us” society, leading to less public money being spent on the poor because people on middle incomes would not support it.

The Solidarity Society, due to be published next week, proposes that middle-income groups retain benefits such as tax credits so they keep a stake in the welfare system, allowing governments to spend more on lifting the poor out of poverty. It says this would end the divide between taxpayers and claimants, pointing to the way the tax-funded NHS still enjoys widespread public support. 

But the report says the original goals of Sir William Beveridge, architect of the welfare state, must be rediscovered. Under a new welfare contract, people would have to do “socially useful work” in return for out-of-work benefits, while automatic handouts would be restricted to pensioners. The tax and benefit systems would be merged and simplified. 

The authors, Tim Horton and James Gregory, accept that Labour has made real progress in tackling poverty since 1997. But, while poverty among children and pensioners has been reduced, it has risen among adults without children, especially those on out-of-work benefits. 

With all three main parties committed to cut spending to reduce the huge deficit in the public finances, the authors are worried that the battle against poverty will suffer. They urge the parties to sign up to a new “poverty prevention strategy” – not for the next Budget, but for the next 30 years. 

Mr Horton, the Fabian Society’s research director, told The Independent: “We could be at a tipping point that sends Britain back towards Victorian levels of inequality and social segregation, and makes the solidarity which could challenge that social segregation ever more difficult to recover.” He added: “Inequality in Britain today, on some measures, is at its highest since the early 1960s. And, despite falls in poverty over the last decade, progress is getting harder. 

“Significant cuts in welfare spending would push poverty and inequality even higher. And taking the middle class out of the welfare state would set Britain on a path to a set of ’sink services’ for the poorest, with a deeply segregating effect on society. History teaches us that nothing would be worse for the long-term interests of the poorest than taking the middle classes out of the services that the most vulnerable rely on.” 

Mr Horton said Labour was “hitting the limits of progress” with its current strategy. He argued that redistribution is working – and that more of it is needed. He added: “The Government risks running out of public permission for any deeper attack on poverty. The idea was that using tough language about crackdowns on benefit cheats would make clear that the money was being used well and increase support for tackling child poverty. 

“We can now see how much that approach has failed. Fears that unemployment benefit is too high have sky-rocketed, even as the value of unemployment benefit has been falling relative to average earnings. And fears about benefit fraud have gone up, even as the Government has drastically reduced the amount of fraud. It is unlikely the current strategy will generate public support for the more radical policies needed to reduce poverty significantly below existing levels – where around 20 per cent of the population is in poverty. If this is not to be as good as it gets for a generation or more, a new strategy will be needed.” 

The study found that the countries with more targeting, such as the US and Australia, end up with far less generous welfare states than those with less targeting, such as Sweden, Denmark and Norway. It concluded that the size of welfare spending matters, and that universal benefits redistribute more to the poorest than targeted ones. This is because the amount of redistribution depends not simply on how much of each pound is targeted on the poorest, but also on how many pounds government has to spend in the first place. Targeting makes people less willing to contribute through taxation. 

The authors believe that David Cameron’s strategy is a threat to the fight on poverty because he does not accept these conclusions. The Tories have announced plans to end tax credits for families with an income of more than £50,000 a year and to restrict child trust funds. The study claims the Tories’ dismissal of welfare spending and rejection of universalism stem from an ideological commitment to reducing public spending as a moral end in itself.

 Source: http://www.independent.co.uk/news/uk/politics/britain-faces-return-to-victorian-levels-of-poverty-1831088.html

The leaders were still shadow-boxing at the Confederation of British Industry conference yesterday. In the red corner Gordon Brown thumped out his warning that “choking off recovery too soon would be fatal”. In the blue corner David Cameron hit back, warning again of an austerity budget “within 50 days” of taking power: “Tackling the deficit is not an alternative to growth, it is a big bit of it.”

Labour should be standing on firm ground. Even here in the Tory heartland the CBI clamours for more spending: Crossrail, high-speed rail, super-fast broadband and a mega nuclear build are on their shopping list. Yet they want prudence, too, the deficit slashed and “the public sector” cut: their “public sector” is anything not affecting their particular business. Above all, they want a Conservative win, so David Cameron gets their plaudits although his cuts would harm a sizable number of their companies. But then the irrational CBI always wants Conservative tax cuts while doing nicely on Labour spending.

Conservative HQ worries that Cameron’s austerity pledge was an error, but the Tories are saddled with the foolish promise to cut the deficit deeper and faster than Labour. Had they super-glued themselves to Labour spending plans, they would look a lot less threatening now. But Labour, too, is hamstrung by its unnecessary fiscal rectitude bill, binding itself to cut the deficit in half in just four years, copying the Tories again. That makes the dividing line shaky, with both Labour and Conservatives “choking off” the stimulus dangerously early with growth-stunting cuts. All three parties promise Nick Clegg’s “savage cuts” – a lousy choice for voters. But there are other options.

Today a detailed study by economists and tax experts spells out how tax reform could take the brunt of raising the funds to cut the deficit. Compass, the centre-left pressure group, has again come up with the new thinking that Labour’s high command seems to lack. In Place of Cuts – whose authors include Howard Reed, the former chief economist of the Institute for Public Policy Research, and Richard Murphy, of Tax Research UK – offers a plan to rebalance the tax system so that the rich pay a fairer share, and enough cash is raised to avoid frontline cuts.

The tax system has become more regressive in the last 30 years, so that the poorest tenth pay 46% of their earnings in tax while the richest tenth only pay 34%. That tax shift coincided with a widening gap in earnings: the richest fifth of households take 51% of national income while the poorest fifth receive 3%. By raising the top tax rate to 50% for earnings over £100,000 and uncapping the top rate of national insurance, the balance can be reset.

Other necessary reforms would set capital gains tax back where it was under Nigel Lawson, at the same rate as income tax – to stop the rich rebranding much of their income as capital gains, only taxed at 18%. That is a key reason why on average they pay only 34% tax, and not the 40% they should. To help the lowest paid, the 10p tax band would be restored and the basic rate put back to 22%. Non-doms could no longer pretend to live in Monaco while living in the UK for four working days a week. A Tobin tax on financial transactions, tougher tax-avoidance measures, and the axing of Trident, ID cards, aircraft carriers and fighter planes, brings total savings to £47bn a year. Apologies for this crude summary: don’t post objections until you read the technical details for yourself to see how this can be done.

The net result is this: these reforms would raise enough over the next four years to pay down as much of the deficit as necessary. At the same time, 90% of taxpayers would be better off, while the top 10% would contribute a fairer share of their incomes. It does hit top-rate taxpayers hard – the cumulative effect of these changes will add 12.6% to their tax bills, most of that paid by the top few per cent.

Is that politically feasible? Yes, if the Labour cabinet has the nerve to break with everything it has done so far. New exigencies require new policies, and it’s time to break with the past. There are no votes to be lost by this. Few of the top 10% of earners vote Labour – and their complaints would be drowned out by the other 90%. A curious paralysis has gripped the country where the mostly idle threats of a few high-fliers to flap off to Zug or St Helier send a frisson of panic down the spines of the nervous. Research by the Work Foundation shows how few would go: most are born and bred here, with families, children in school and elderly parents. Tightening the non-dom rules would mean they’d have to stay well away or pay tax like everyone else.

Politically, boldness such as this would leave Cameron and George Osborne again defending the wealth of the very few against the interests of the many. Would most people prefer cuts in schools, hospitals, Sure Starts, police and just about everything else? Believe not a word the parties say about protecting frontline services: the cuts they plan are deeper than anything before and can’t be confined to “bureaucrats” and “quangos”. They will hurt everyone, they risk the recovery, and will cause another wave of unemployment.

Among the startling figures in this report is the true cost of public sector cuts. Assuming a 10% cut in the 5 million public employees, 500,000 would lose their jobs. The sums here show that the gains are small compared with the cost to the state of added unemployment – and that’s without the upfront cost of redundancy pay.

With the pre-budget report two weeks away, Alistair Darling and his team should send out today for a hundred copies of this report. Without adopting all these reforms, here are better ways to raise the money than 10% cuts across the board. Look at today’s YouGov poll for Compass: 92% agree that the “government should change the tax system to ensure that the richest households pay at least the same percentage of tax as the poorest households”; and 72% want the 10p tax band restored for low earners. Presented with the whole parcel of Compass reforms, 62% support it, while 25% fear that “many high-paid people and international companies would move to other countries and Britain’s economy would suffer”. If Labour asked the right political questions it would get political replies that touch that fundamental sense of fairness and economic good sense.

Source: http://www.guardian.co.uk/commentisfree/2009/nov/23/cuts-tax-deficit-brown-cameron ]]> http://renegadeeconomist.com/news/guardian-cool-cutting-fisticuffs-long-hard-tax.html/feed 4 http://renegadeeconomist.com/news/times-bank-gave-rbs-hbos-secret-62bn-loan.html http://renegadeeconomist.com/news/times-bank-gave-rbs-hbos-secret-62bn-loan.html#comments Tue, 24 Nov 2009 12:44:03 +0000 admin http://renegadeeconomist.com/?p=863 Royal Bank of Scotland (RBS) and HBOS were secretly kept afloat with £62 billion of emergency Government support at the height of the credit crisis last year, it was revealed today.

The Bank of England kept the massive liquidity injections secret until today, when it judged calm had been restored and there was no longer any need for secrecy.

The undisclosed support began for HBOS on October 1, two weeks after the collapse of America’s Lehman Brothers and when financial markets were at their most panicky, and peaked at £25.4 billion on November 13. The money was eventually repaid on January 16.

RBS began tapping the Bank for liquidity on October 7 and at its peak borrowed £36.6 billion. It paid back all the money by December 16.

The so-called Emergency Liquidity Assistance was on top of billions of pounds of other support through loans and guarantees and the £37 billion of equity investment pledged to both banks and Lloyds TSB, which later took over HBOS.

The Bank, in evidence to MPs today, said in exceptional circumstances it acted as “lender of last resort” to financial institutions in difficulty. It said it had decided to use its powers to prevent disclosure of the support in its 2009 Annual Report.

“In most cases, confidence can best be sustained if the Bank’s support is disclosed only when the conditions that gave rise to potentially systemic disturbance have improved to a point where the disclosure itself should not be a cause of such disturbance.”

With RBS signed up for the Asset Protection Scheme, an insurance policy protecting it against losses on its toxic assets, and Lloyds embarked on its own £22.5 billion capital-raising scheme, “the Bank considers the need for secrecy has ceased,” it said.

The disclosure is likely to intensify complaints from HBOS and Lloyds shareholders that they were not given the full picture when they were offered shares in earlier rights issues by the two banks in January. The Financial Services Authority is already investigating HBOS for alleged lapses in disclosure.

Lloyds revealed today the pricing for its record £13.5 billion rights issue which will see every British household sink a further £228 each into the lender.

As part of the fundraising, the Government will today plough another £5.7 billion of taxpayers’ money into the bank that has already received £17 billion in state money, giving Britons a 43 per cent stake in the bank.

Today, Lloyds is demanding another £13.5 billion from its nearly three million shareholders to avoid the need for costly state insurance of its bad debt. It is doing this by selling 1.34 new shares to investors for every one share they already own priced at 37p.

Source: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6929451.ece

Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

“Most advanced economies will not accept any more [bailouts]…The political reaction will be very strong, putting some democracies at risk,” he told delegates.

“I do believe that the financial sector needs to contribute both to the costs of the financial crisis and to reduce recourse to public funds in the future,” he said.

He pointed to the debate in the US over the Troubled Asset Relief Programme and said that in many countries, including France and Germany, he doubted that politicians would secure the mandate needed to secure any further bail-outs if banks got in to trouble again, in several years’ time.

Europe is in dispute over the spiralling cost of the global economic bailout, with Germany and France calling for a reduction in state support as their economies have shown signs of an upturn.

In September, George Osborne, the Shadow Chancellor, sided with Germany and France, accusing Gordon Brown of being in “complete denial” over the mounting bill of the financial rescue packages and agreed with Britain’s neighbours that it was time to look for an exit strategy. Countries are recovering from recession at different rates, with Britain lagging behind.

Mr Strauss-Kahn said that while the global economy had made “remarkable” progress in exiting recession, and was on the cusp of recovery, it remained “highly vulnerable” to shocks.

He said state support for the world’s battered economies must remain in place if a smooth recovery is to be achieved.

“We recommend erring on the side of caution as exiting too early is costlier than exiting too late.”

Mr Strauss-Kahn is one of a series of high-profile speakers at the CBI conference, in Central London. Gordon Brown, David Cameron and Nick Clegg will all speak at the event as they seek to sway influential business leaders before a general election next year.

In his speech, Mr Strauss-Kahn also warned that the huge amounts of capital being pumped into China could fuel a pan-Asian bubble.

His comments come after warnings from economists that the economic conditions in China and the rest of Asia are such that asset prices could rip free of their fundamental values unless the bubble threat is addressed.

The Chinese banking sector is currently the scene of an unprecedented frenzy of new lending, which could reach up to 11,000 billion yuan (£97.7 billion) by the end of this year.

Mr Strauss-Khan said that the old paradigm of growth generation based on households in the US was dead. The future sources of growth and the recovery will “depend on a new balance between the US and deficit countries on one hand and emerging markets and surplus countries on the other”.

Emerging markets will provide some of the growth that the US can no longer offer, however he warned that while China and other emerging Asian economies were shifting from exports to domestic demand, they still had some way to go.

Source: http://business.timesonline.co.uk/tol/business/economics/article6928147.ece

There’s nothing like a long-running equity rally, a return to something resembling normalcy in the credit world and fresh signs of economic recovery to lift the gloom of a dreary late November day.

Sure, there are still occasional rough waters. Take last week, when weaker than expected U.S. housing stats, a downbeat profit report, downgrades in tech land and yet another warning from an inflation-fearing central banker reminded jittery investors it’s not only free-spending governments that need a sound exit strategy. Tomorrow, we’ll undoubtedly hear that U.S. consumers are still suffering from a shortage of confidence, which tends to happen when jobless rates keep rising.

But for all of that, the optimists are looking for firming economic numbers, healthier corporate earnings and continuing evidence that risk will be properly rewarded in the months ahead.

“A strong tape, corporate [bond] yields still falling, sentiment not showing extreme optimism and low inflation are a pretty bullish signal,” veteran U.S. strategist Ned Davis told a bunch of investment advisers in Florida recently. “At this point in time we don’t have any evidence that the cyclical bull market is over.”

Far be it from me to rain on that parade. I’ll leave that task to one of the world’s best known and least cuddly of doom-and-gloom bears – Harvard University financial historian Niall Ferguson.

“ The stock market rally has been largely due to near-zero interest rates and a weaker dollar. In foreign currency terms there’s been no rally.”

“I don’t think it’s possible to infer from the stock market rally anything resembling a sustained recovery,” the peripatetic professor says in an e-mail exchange. He rightly notes that at least half (and probably much more) of the third-quarter U.S. economic growth of 3.5 per cent stemmed from one-off government measures and that the consumer remains tapped out.

“The stock market rally has been largely due to near-zero interest rates and a weaker dollar. In foreign currency terms there’s been no rally.”

It was last February, just two weeks before global stock markets began their remarkable eight-month ascent from the depths, when Prof. Ferguson famously told The Globe and Mail: “There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilize some countries. It will cause civil wars to break out that have been dormant. It will topple governments that were moderate and bring in governments that are extreme.”

Has the long market rally and the apparent success of unprecedented government interventions around the world caused him to change his grim prophecy?

“I wasn’t saying there would be blood in the streets of Toronto, remember. My first point was that the crisis would likely destabilize about a dozen relatively weak states and that this ‘axis of upheaval’ would become more violent.

“The other point I had in mind was that, after previous big financial crises, insecure governments have been tempted to rattle sabres for the sake of promoting their own domestic legitimacy. My prime suspect here is Russia, which, of all the big powers, stands to gain the most from geopolitical instability, since (for example) a major attack on Iranian nuclear installations would double the price of oil and greatly enrich the denizens of the Kremlin. The probability of such a war is currently being underestimated by many people.”

“ Over a five-year time frame, the [U.S.] dollar is likely to weaken some more, inflation is likely to pick up after another year or two of pretty low prices and long-term interest rates could move up sooner than that, in anticipation of a revival of inflation. Add, say, 50 to 150 basis points to the … 10-year treasury yield and the effect could be quite painful for the economy as a whole.”

Prof. Ferguson, whose most recent timely best-seller, The Ascent of Money, is now out in paperback, does some hedge-fund advising on these big global themes.

He claims no expertise as a market forecaster. But when coaxed, the historian in him comes out.

“The most we can say, drawing on what we know about past financial crises, is that over a five-year time frame, the [U.S.] dollar is likely to weaken some more, inflation is likely to pick up after another year or two of pretty low prices and long-term interest rates could move up sooner than that, in anticipation of a revival of inflation. Add, say, 50 to 150 basis points to the … 10-year treasury yield and the effect could be quite painful for the economy as a whole.”

He puts his money where his sentiments lie.

“I am out of U.S. stocks and currently have a modest cash pile,” he says. “The commodity and stock market rally since March looks to me to be coming to an end. I am genuinely not sure what happens next.

“Having narrowly avoided a Great Depression by using massive fiscal and monetary stimulus, we are now in uncharted waters.”

Source: http://www.theglobeandmail.com/globe-investor/investment-ideas/features/taking-stock/what-niall-ferguson-thinks-now/article1373545/

Nov. 20 (Bloomberg) — U.K. house prices will probably fall next year, and it may take until 2014 to return to the levels at the 2007 peak of the country’s biggest housing boom, according to a Bloomberg survey.

Nine of 14 economists and real estate brokers surveyed said they foresee a decline in 2010 after a surprise rebound this year. They predict an average drop of about 1.6 percent, with estimates ranging from a loss of 10 percent to a rise of the same magnitude.

“The market is still overvalued, whichever measure you use,” said Seema Shah, a housing economist at Capital Economics Ltd., a research group in London, who was the most bearish in the survey. “Prices need to fall a further 20 percent to 25 percent to get back their long-term trend.”

A 7 percent gain in average prices since April was driven by a shortage of properties for sale and won’t be sustained, according to Shah. Most survey respondents said they don’t think the rally can last while Britain’s longest recession on record fuels unemployment and makes banks reluctant to lend.

Prices plunged 23 percent from September 2007 to April this year, according to Lloyds Banking Group Plc’s Halifax unit, after losses on U.S. subprime mortgages led global credit markets to seize up. They remain at 2005 levels.

For all of 2009, the average home will probably increase about 5 percent in value, to almost 161,000 pounds ($270,000), said Martin Gahbauer, Nationwide’s chief economist. Martin Ellis, chief economist of Halifax, Britain’s biggest provider of home loans, expects prices to be little changed.

120-Foot Garden

That’s no solace to sellers like Nicola Brookbanks, 37. She and her partner put their one-bedroom apartment in the Ealing district of London on the market almost three months ago so they could buy a house in nearby Acton with more space for their 14- month-old son. They bought the apartment, which has a 120-foot- long (37-meter) garden, for 315,000 pounds in March 2007.

After more than 60 viewings, and cutting the price by 25,000 pounds to 325,000 pounds, Brookbanks and her partner accepted their first offer of 318,000 pounds on Nov. 16. The transaction has yet to close.

“I am pretty surprised it has taken this long to get an offer,” she said.

U.K. residential real estate had almost tripled in value during the decade before the credit crunch. The gains encouraged more Britons to pour borrowed money into homes and more “buy- to-let” investors to acquire property for rental income.

6.2 Times Earnings

At the market’s height, banks were financing loans as large as five times a borrower’s salary. That lifted the average price to a record 6.2 times earnings, compared with the long-term average of 3.7 times, according to Capital Economics. The ratio has since fallen to 5.2.

U.S. house prices, by contrast, are at their most affordable for at least 28 years, according to Lawrence Yun, chief economist of the Chicago-based National Association of Realtors. The average price of an American home is 2.4 times income, down from the high of almost 3.4 times in 2006.

Even at the peak of the U.K.’s previous housing boom, which ended in 1989, the ratio was only 4.7. Values then took four years to fall 13 percent and didn’t return to pre-crash levels until January 1998, almost nine years later.

“There is a problem with very high house prices, and getting over it is probably a good thing,” said Martin Weale, director of the London-based National Institute of Economic and Social Research. “I am optimistic that we will move back to a more normal level.”

Out of Work

Claimants for jobless benefits in the U.K. have more than doubled since March 2008, to 1.64 million. They may climb 17 percent more by the end of 2010 to 1.92 million, according to the average of 37 forecasts compiled by the U.K. Treasury.

“We are cautious on the outlook for the housing market and believe anticipated growth in unemployment throughout next year will apply downward pressure on house prices,” Graham Beale, chief executive officer of Nationwide Building Society, said on a conference call with reporters today.

There are already signs that the rally may be petering out. Prices in October rose by the smallest amount in six months, or 0.4 percent, according to Nationwide Building Society.

Sellers reduced asking prices for the first time in three months in the four weeks to Nov. 7 as demand dwindled before the Christmas holidays, said Rightmove Plc, the owner of the U.K.’s largest residential property Web site.

Prime London

This year’s recovery has been fueled by competition for the limited supply of London homes costing more than 1 million pounds, according to London-based broker Knight Frank LLP. Wealthy cash buyers have been lured by lower prices and the decline of the pound against currencies including the euro, dollar and Chinese yuan in the past two years.

In parts of central London, such as Chelsea and South Kensington, prices for the best properties are already back to 2007 levels, according to Robert Green, a partner at John D Wood & Co. Further behind are regions such as the West Midlands — which includes Birmingham, the U.K.’s second-largest city — where prices will take until 2015 to return to their peak, Knight Frank predicts.

“The recent rise we have seen is all about the imbalance between supply and demand, with very few properties coming on the market,” said Capital Economics’ Shah.

Rightmove has listed 934,000 homes for sale so far this year, a 45 percent decrease from the same period of 2007, said Tom McGuigan, the company’s spokesman.

Few Transactions

House sales in England and Wales fell to 26,662 in January, the lowest in at least 14 years, according to the Land Registry. In the first seven months of the year, they averaged 40,448 a month, or 61 percent less than in the same period of 2007.

The number of U.K. mortgage approvals is still half of what it was at the market’s peak, Bank of England data show.

Michael Saunders, chief economist for western Europe at Citigroup Inc., was the most optimistic in Bloomberg’s survey. He said recent nationwide price gains show that the British housing market could surprise again and rise in 2010.

Saunders, who predicted a 10 percent drop in 2009 at the start of the year, expects prices to appreciate 5 percent to 10 percent next year.

“You have had a test case, which tells you that low interest rates can outweigh the labor market,” Saunders said. “I changed my mind because of the data. Housing has been surprisingly strong.”

From October 2008 to March, the Bank of England cut its main borrowing rate to a record low of 0.5 percent from 5 percent, as part of a global effort to rescue the world financial system.

25% Deposits

For some potential house buyers, low interest rates don’t matter if the down payment is unaffordable. Lenders burned by the financial crisis are typically demanding deposits of 25 percent. During the housing bubble, the typical down payment was 5 percent, and buyers sometimes didn’t have to make any deposit at all.

With first-time buyers in London paying an average of about 180,000 pounds for a property, that means they have to put down 45,000 pounds in cash to get a mortgage.

Two years ago, Graeme Oliver, 45, and his partner had a mortgage lined up to buy a home in London that only required a 5 percent down payment. They scrapped their plans after she became pregnant because the property wasn’t suitable for a child.

Now the two physiotherapists, who together earn 80,000 pounds a year, will have to make a deposit at least three times that size to get on the property ladder, he said. To manage that, they’d have to borrow from his family.

They have put plans for a move on hold because they can’t afford anything suitable for a family. Oliver said he anticipates that more job cuts in London, particularly in public services, will lead to more house repossessions and lower prices.

“If the market doesn’t dip significantly in this part of the world, we will continue renting, probably for the rest of our lives,” he said. “I can’t see how it is possible house prices won’t be lower in a year’s time.”

The following table lists estimates for 2010 house prices and projections for when the market will return to 2007 levels.

Firm                     2010 (%)       Estimated Return
                         Forecast       to Peak Prices

Capital Economics        -10            2019
Fitch                    -6 to -8       2016/2017
Savills                  -6.6           2014
RICS                     -5             2012
Knight Frank             -3             2014
NIESR                    -3             2015
Deutsche Bank            -2             2016
Cluttons                 -1.5           2014
RBS                      -1             2013
Investec                  0             2012/2013
Halifax                   0             No estimate
BNP Paribas               3.5           2013
CEBR                      4             2013
Citigroup                 5 to 10       2012

Source: http://www.bloomberg.com/apps/news?pid=20601085&sid=aiokHY_TLuZM

As we explained: 

“In 1976, the UK government went begging to the International Monetary Fund (IMF) for £2.3 billion. In today’s money that’s the equivalent of around £12.4 billion. At the time it was labeled as an embarrassment for the UK, with claims it made the UK technically insolvent. Well, in practical terms apart from the much bigger number, there is little difference between the £2.3 billion bailout in 1976 and yesterday’s announcement that the Bank of England will increase its money printing programme to £200 billion.” 

You’d think that would be enough to get the financial markets concerned with what’s happening in the UK and global markets. 

Wouldn’t you think that if a nation is unable to pay its bills with free cash flow that the alarm bells would start ringing? 

I mean, stop and think about it. 

When you strip away the fancy terminology the banks like to use – quantitative easing – what you’re left with is money printing. Or to be precise, clicking a mouse and suddenly £200 billion appears. 

In other words, the UK government has spent all of its tax receipts, and it has spent all of the money it has from selling government bonds… 

The cupboards are bare. 

It does not have one single dollar of spare cash left. 

And so to remedy that, what does it do? It does exactly what every ‘good’ government should do, it opts for Plan B. 

It knows increasing taxes is never a good look, especially when the next election is just round the corner.

And of course it’s worried about increasing the amount of debt on the market. Plus the government wants to ‘inject’ cash into the economy so that it’s spent rather than invested. 

So the only option is to do what only a government and central bank can do. It prints money. 

If anyone else came up with the same idea it would be called counterfeiting and you’d get hauled off to jail. 

But that’s not the case with governments and central bankers. They can get away with almost anything. 

And they’re helped by the hopeless analysis of the mainstream press. As evidenced by these comments from BBC economics editor, Stephanie Flanders: 

“By voting to inject a further £25bn into the economy, the Bank’s policy makers have signalled that they do not think the economy is out of the woods yet. But they have halved the rate at which that money is being spent. In the first five months of QE, the bank was spending £25bn a month. Since August, the monthly purchases have fallen to about £17bn. Now the MPC plans to spend three months purchasing assets of £25bn – a monthly average of about £8bn. If the economy behaves more or less as the MPC expects, you could say they have put themselves on a path to put an end to QE at their February meeting, or at least put the policy on hold.” 

Got that? At least it now only plans to spend £8 billion per month. Which is down from £25 billion per month. 

But can we really believe the Bank of England will stop printing money next February? 

We wouldn’t have thought so. 

The interesting point about all this is that we could be witnessing firsthand the death of an economy. 

Seriously. It’s something the UK has come close to experiencing several times in the last hundred years. Each time it’s either been bailed out by another economy or by a group of economies. 

The United States helped it out of trouble after the first world war and second world war. The IMF bailed it out during the 1970s. 

And then during the 1980s and 1990s, the growth in the global economy and the increase in financial market sophistication helped bail out the UK economy. 

But who will bail it out this time? 

Well, the US doesn’t have any money left. It can barely take care of itself let alone throw a few bones to the partner in its ’special relationship.’ 

The European Union (EU) is hardly likely to bail out an economy that’s scoffed at it from the sidelines for the last twenty years. And besides, the EU is nothing more than an imperialist oligarchy anyway. 

There would certainly be nothing to gain by Britain falling further into the clutches of the Europe. The phrase, “out of the frying pan, into the fire” springs to mind. 

But then again, things could get so bad for the UK that it has no other choice. 

Is there a chance the new superpowers of Asia and the Middle East will come to the rescue? Again, we don’t see this as being very likely either. 

The main reason is, why would they want or need to? 

You know, we’re struggling on that one. We’re struggling to figure out just what China, Japan, South Korea, Dubai or Bahrain would get out of propping up the UK economy. 

Besides, they seem more interested in just buying up the Premier League football teams than anything else.

Quite frankly, it’s very hard to see how Britain can get itself out of the current pickle without causing itself and its citizens a massive amount of pain. 

With the billions of pounds of debt and the billions of pounds spent each year on unaffordable and bankruptcy-inducing social programmes (such as the National Health Service) there is absolutely no way it can get itself out of the mire without doing something drastic. 

It can’t merely hoped for an economic recovery. After all, where is the economic growth going to come from? 

It’s rested on the laurels of growth in the financial sector since the 1980s. Even if global financial markets do recover and even if they do start flogging more fancy products, the odds are London won’t be the centre of the action anymore. 

Its natural resources from the North Sea are coming to an end, and thanks to the heavy hand of regulation and social engineering, its manufacturing industry is virtually dead. 

That’s why I believe we are potentially seeing the death of an economy. 

The only possible solution for Britain is to default on its obligations directly or indirectly. It can do this openly by defaulting on its debt, or it can do it by continuing the programme of quantitative easing. 

The second option is of course the coward’s way. 

By continuing with this programme, the government and central bank are in the process of unleashing the cruel fate of rampant inflation and the destruction of any wealth its citizens have left. 

Until that happens, the hapless economic analysis from mainstream economists and the mainstream press will continue to idolize the efforts of the Bank of England to drag the UK economy out of trouble. 

The reality is the Bank of England is dragging it further into trouble.

Source:  http://www.moneymorning.com.au/20091109/britain-and-its-near-death-economy.html#more-2454

The sale to India was nearly half the amount that the Fund has targeted for sale over the coming years. 

The IMF said the transaction, which was in the process of being settled, involved daily sales that were phased over a two-week period during October 19-30. 

Each daily sale was conducted at a price set on the basis of market prices prevailing that day, it said, in accordance with the institution’s founding document. 

“I strongly welcome this transaction with the Reserve Bank of India,” Dominique Strauss-Kahn, the IMF managing director, said in a statement. 

“This transaction is an important step toward achieving the objectives of the IMF?s limited gold sales program, which are to help put the fund?s finances on a sound long-term footing and enable us to step up much-needed concessional lending to the poorest countries.” 

The Washington-based IMF, which currently holds 3,217 tonnes of gold, is the third-largest official holder of the precious metal after the United States and Germany. 

On September 18, its executive board approved the sale of 403.3 tonnes of gold, about one-eight of its current holdings, but assured it would do so in a way that would prevent disruption of the gold market. 

Under the plan, the IMF offers to sell gold directly to central banks “or other official sector holders if there were to be interest from such holders.” 

If official demand were insufficient, the IMF said it could conduct the gold sales “on-market in a phased manner over time,” in line with an approach already followed by central banks. 

The IMF would be constrained by the overall ceilings agreed by the central banks, which started on September 27, of 400 tonnes annually for the next five years. 

The IMF reiterated Monday its commitment to inform markets before any on-market sales begin. 

The IMF has made gold sales a key element of its new income model aimed at lowering its dependence on lending revenue to cover expenses. 

The Group of 20 key developed and developing countries, at their April summit in London, agreed the gold sales should allow the IMF to offer favorable conditions on loans to the poorest countries.

Source: http://au.biz.yahoo.com/091102/33/29jpo.html