91Èȱ¬

The cost of mortgages for many of us is probably still on a rising trend.

Here's why.

Net lending for mortgages - that's mortgage lending over and above the refinancing of existing mortgages - was £110bn last year (it was a similar amount in 2006 and a touch less in 2005).

According to a leading bank, net lending this year will be £60bn.

Now you may be surprised that net lending - which represents an increase in the stock of UK mortgages - isn't nil at the moment, given that there's been a sharp drop in the number of housing transactions and house prices are moving downwards.

However, a zero increase in net lending would be associated with a housing market in total freefall - because most people only move house every few years, so the sharp rise in house prices over five years or so guarantees a rise in the value of net mortgage lending, even as the number of transactions falls.

But although the market isn't in freefall, a drop from £110bn to £60bn - a 45% decline - is pretty substantial and significant.

Let's look at why it's happened and then what it means.

It reflects two factors:

1) the nervousness of potential buyers about whether they should postpone purchases till house prices have fallen a bit more;

2) a massive shrinkage in the lending capacity of banks and building societies.

The second cause is the more important.

As I've written and broadcast recently, mortgage lending is currently dominated by just a handful of our biggest banks led by .

Specialist mortgage lenders have vanished with the closure of the mortgage-backed securities market. Small building societies are barely lending a thing. And medium size banks have cut back their mortgage-lending very significantly.

Even the biggest building society, - which announced impressive financial results recently - is reducing net lending.

So competitive pressures on mortgage rates have all-but vanished.

The reason - natch - is the notorious crunch of credit, banks' inability to raise substantial sums of long-term finance at a reasonable price on wholesale markets.

And although the is providing valuable funds to the banks by allowing them to swap mortgage-backed securities for highly liquid government paper (cash, to all intents and purposes), this is only enough - by explicit design of the scheme - to allow the banks to finance their existing commitments, not to make incremental loans.

Also, the £100bn odd of succour being provided by the Bank of England is not cheap money - but that's a story for another day (as is the longevity of this government-backed financial support - with the Bank of England, as I understand it, likely to hold these mortgage assets for at least four years, far longer than was widely thought).

But let's get back to that £60bn of net mortgage lending that'll be provided this year.

It may sound like a lot of money, but it compares with an estimated £80bn to £85bn that house buyers are expected to want to borrow.

That £85bn-ish is derived from estimates of those who have to move house for various reasons or are desperate to buy their first home.

So to put it another way, the supply of net additional mortgage money is currently around 30% less than demand.

Which means that a staggering number of wannabe borrowers - such as those that can't afford the deposit - are being turned down by banks and building societies.

By the way, those unable to buy a house or move home - and the £25bn funding gap suggest there could be well over 100,000 who can't raise the wonga - are unlikely to be rallying to the cause of Gordon Brown, at this, his moment of some need.

There is a further painful consequence of this mortgage shortage for existing and potential homeowners. It's that mortgage interest rates will be under significant upward pressure, almost whatever happens to money-market interest rates or the Bank of England's base lending rate (which isn't likely to be cut for some considerable time, if at all, in any case).

In fact the few banks still participating in the mortgage market in any size tell me they are planning - in as quiet a way as they can - to nudge up their rates in the coming few months.

The reason is a law as old as commerce itself, the law of supply and demand. For the first time in years, there is massively more demand for mortgages than supply.

Is it remotely realistic in those circumstances to expect that the big banks would not raise prices to take advantage of all that pent-up demand?

Are they charities?

Apart from anything else, the risk of providing mortgages has risen.

The economy is slowing down, increasing the incidence of default. And house prices are falling, eroding the value of collateral.

Banks are - understandably - keen to be compensated for the increased risk of financing house purchases in an economic climate that is a lot less benign than it was.

The mortgage market will therefore remain tight and expensive for some time.

Which will exert downward pressure on house prices - not colossal downward pressure but unremitting.

And a second source of negative momentum on house prices is the demand by all banks for bigger deposits from borrowers, which - as I have explained before - acts as powerful gravity bringing house prices down to earth.

How long could the downward trend in house prices endure? Well one leading bank is bracing itself for a "correction" lasting two years.

That's how long there is to run before the next election. So Gordon Brown and the Labour Party can't assume the feel-good factor will be back in the nick of time for them.

I also can't help but wonder how on earth can run down its mortgage book to repay that £25bn odd of taxpayer-funded loans on the .

It needs to persuade its borrowers to refinance their loans with other banks - but, as I've pointed out, there's a chronic shortage of lending capacity elsewhere.

Northern Rock may be stuck with more borrowers paying expensive variable rates of interest, as they come off the cheap fixed-rate deals, than it would want - though they're profitable customers, for as long as they can afford to keep up the steep payments.

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• - What's this?

So private equity has made a successful takeover bid for the whole of London.

Well, with the price of many public companies relatively high and debt-finance still too tight to mention, we shouldn't be surprised that one of the star operational managers of the buyout sector has opted to run our capital as Boris Johnson's de facto chief executive.

It's the best mega deal around - and the only mega deal.

's appointment as London's deputy mayor shows the confidence of a resurgent Conservative Party.

He's worth a few tens of million pounds and is what George Soros would call "filthy rich".

And he was one of the lightning rods for that onslaught of criticism of private equity a year ago.

As the then chief executive of the , he and his backers - the private-equity firms and - were lambasted week after week for their alleged ruthless treatment of AA employees.

In fact, to some extent he was the victim of propaganda generated in a territorial dispute by a couple of unions, struggling for negotiating rights at the AA.

But at a time of growing unease about the widening gap between the super-rich and the rest, some of the mud stuck (fairly or not).

That the Tories plainly don't care about his historic image problem is a sign that what they want is the best man for the job (in their view) and aren't as obsessed with image and public relations as their critics would allege.

So what would Parker actually do for London?

Well he is good at cutting costs - and at delivering services in a more efficient way.

If the priority is for Londoners to receive more for all that council tax, he may turn out to be a smart choice.

More significantly, he is probably the radical model for what the Conservatives would do on a much bigger scale with public services if they take control of national Government - and is therefore worth keeping close tabs on.

As for the battered private-equity industry, its leaders will be cheering.

One of them told me on Wednesday that they are terrified they will again become national figures of loathing and contempt in a serious economic downturn - having made a fortune in the good times but having loaded up a number of substantial companies with huge debts that could sink those companies.

But they can rest easy that any future Conservative government is very unlikely to put the boot into them.

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• - What's this?

Britain's largest estate agent, , has toggled.

Or to translate, it has stopped paying interest in cash on £100m of debt and is instead rolling it up.

It's a sign of the tsunami that's hit Britain's estate agents that Countrywide - which has about 8% of the British residential market - has decided to conserve as much cash as it can.

However, under the extraordinarily favourable borrowing terms negotiated by Countrywide's private-equity owner, of the US, when buying this business for more than £1bn a year ago, Countrywide is quite within its rights to stop paying this interest in cash - and there's nothing its lenders can do but wince.

In fact clever old Countrywide has also just drawn down a further £100m odd from a bunch of banks under a revolving credit facility it negotiated at the time of the buyout.

It's done this not because it is strapped for cash right now but as insurance against the risk that its cash-flow from operations will be insufficient to pay its residual interest over the coming few years.

Yes, you read that correctly. A bunch of banks have lent to Countrywide to allow it to make interest payments to another bunch of lenders.

This would be financial commonsense only in Wonderland.

And I have to ask what was on the mind of banks and other financial institutions when they financed Countrywide's buyout.

It was a deal done at the very peak of irrational exuberance about private equity last summer. The buyer, Apollo, obtained the most astonishingly favourable terms from lenders - including the absence of the normal covenants that allow lenders to take control of a business when the going gets tough.

In the case of Countrywide, it seems there would literally have to be Armageddon for the lenders to have any real power. Apparently a fall in the volume of house sales this year of over a third, which is what the Council of Mortgage lenders expects for this year and is in line with Countrywide's own estimates, does not represent Armageddon.

The boss of Countrywide, , tells me that - having drawn on the revolving facility and toggled the £100m floating rate note - Countrywide has enough readies to pay interest on its residual £640m of cash-interest-paying debt for three years, even if the housing market remains flat for as long as that (which he says he doesn't expect).

But don't be fooled into thinking all that debt is worth what it was when the deal was done. Some £370m of senior secured untoggled notes is being priced by traders at 61p in the pound, implying a fall in value of almost £150m.

The toggled debt is priced at 54p in the pound, so there's another £46m of mark-to-market loss. And a further £170m of unsecured debt has lost around £90m of value, on the same measure.

So there's nudging £300m in aggregate of mark-to-market losses for Countywide's lenders - which is fairly disturbing for a deal that's less than a year old.

It would be interesting to know whether the investment banks that advised on the deal, , and , kept any of the lovely debt for themselves, when they trousered the transaction fees. If so, they'll be part of the sorehead brigade that's woken up after the end of the buyout party.

As for the thousands of agents employed in Countrywide's 1,100 residential offices, they have reason to take comfort from bankers' pain.

If it weren't for the way that Apollo screwed this mind-boggling deal out of the lenders - if Countrywide hadn't been able to suspend cash-interest payments and borrow to pay interest - the prospects for this business and their jobs would be a good deal worse (though in view of the mess in their market, that's probably not a reason to be too cheerful).

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• - What's this?

For months now, bankers have been taking some small comfort from the nature of their .

They have suffered markdowns, but these are not real cash losses. They are reductions in the market value of securities backed by subprime, to reflect a fall in the market price.

And that fall in the market price has been exaggerated, or so the argument runs, by the total evaporation of liquidity in these markets.

So in theory, the final losses suffered by banks could turn out to be much less than the losses they've announced, if the banks were to hold their subprime securities till all the borrowers of subprime money have either repaid or till those borrowers have defaulted and had their respective properties seized and sold.

That was, for example, the implication of a recent analysis by the Bank of England, which said that it thought subprime was being priced at a level that was surely lower than the underlying economic reality would justify.

So that's the context for assessing the significance of this morning's by , the giant Swiss bank, that it has sold $22bn of subprime, Alt-A (a grade of US mortgage debt just a bit better than subprime) and prime mortgage-backed securities for $15bn.

It represents a loss for UBS of $7bn or 32% - not a notional accounting loss, but a real loss of hard cash.

And to add insult to very genuine self-inflicted harm, UBS is providing an $11.25bn loan to the buyer of all this stinky US mortgage debt, which is the fund management group BlackRock.

So UBS has suffered a genuine, eye-wateringly large loss on the sale of assets it should never have accumulated, but is remaining exposed to those assets to the tune of $11.25bn.

As I write, my brain can't quite come to terms with the extraordinary financial implications of all this, even though the terms of the deal have been known for some time.

Does it mean that the credit crunch must be nearing an end, when there is such an extraordinary example of what investors call "" by UBS?

Or does it mean that we're still at the end of the beginning, in that it's impossible to do an arms length deal even at a knockdown price?

The same question is posed by yesterday's deal that reopens the British mortgage-backed securities market, ' piddling sale of £500m of securities backed by prime UK mortgages.

It's the first sale of mortgage-backed bonds by a British bank since last August.

But the amount is a fraction of what HBOS would typically have sold before the market shut down. And HBOS is paying an extraordinary amount for the money - 0.85 percentage points above LIBOR, even though the £500m is backed by mortgages worth about £800m.

It shows you how much international investors fear the prospects for the British housing market if they are only prepared to lend money to HBOS at more than 6.5%, even when the collateral is worth between 30 and 40 per cent more than the loan.

That is scary.

Which brings me to the question of how we shut the stable door now that the horse has bolted and taken up tax residence in Monaco.

, the chief executive of the Financial Services Authority, told a fund managers' dinner last night that the City watchdog would consider the implications of how banks pay their star bankers when assessing the financial risks being taken on by those respective banks.

The implication is that if the FSA believes bankers are being incentivised to do reckless or imprudent deals, their respective employers would have to hold additional capital to compensate for those incremental risks.

That would make it much more expensive for any bank to promise its top bankers that they can personally trouser squillions from making big bets with that bank's balance sheet, but that the bankers won't suffer the losses if the bets go wrong.

As my recent 91Èȱ¬2 documentary, Super Rich: the Greed Game, showed, this asymmetry between bankers' personal rewards and risks was an important contributor to the bubble in financial and asset markets that led directly to the credit crunch.

UBS has today put on display the full horror of its losses on its exposure to US subprime - but quite how big were the rewards paid to the bankers that created this disaster?

Last night's remarks by Sants indicate the FSA would be prepared to be more interventionist in re-introducing common sense into bankers' remuneration structures than he originally indicated he wanted to do.

Only a few months ago, he told me that he hoped banks' shareholders would put pressure on banks' executives to bring an end to the madness of bankers being paid huge bonuses on the basis of the notional profits they generate, rather than after years have elapsed to genuinely assess whether their respective deals make sense.

It appears he's having doubts that the banks' owners will sort this out without a little nudge.

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• - What's this?

's dad had no interest in making money. His priority was the enjoyment of life, after having been a prisoner of war in Siberia during World War I - or so Soros fils says in his romp of a new book about the credit crunch (which has the unprepossessing title ).

When I interviewed the hedge fund pioneer last night, I asked him how and why he acquired his voracious appetite for making money.

"Money counts" he said. It gets you what you want. And if he hadn't made his many billions, he doubted he would have been sitting there being interrogated by me.

Well there's no accounting for taste.

More substantively, Soros has been one of the great philanthropists and political activists of our time - whose voice, thanks to his financial clout, has resonated from the New Europe to not-so-new Washington.

There's also a shambolism about his success and aspirations which is highly engaging.

He doesn't for example deny that his most successful investments have been spawned as much by his backaches - brought on by worry about whether his funds were being astutely invested - as by the application of reason.

The book is a totally compelling, well-ordered stream of consciousness, which - by turns - attempts to demolish neo-classical economics, gives a diary of his recent trading performance, and expounds his own philosophy of social science.

His main argument is that the neoclassical postulate that markets tend to equilibrium is nonsense. He founds this view on what he calls the theory of reflexivity, which broadly says that use of scientific methodology in economics is wholly inappropriate, because economic agents cannot avoid influencing the outcomes they forecast.

Academic economists may sneer. But he has become considerably richer than all of them put together by investing according to his own conviction that markets tend to disequilibrium.

I've written before about how he sees the credit crunch as the end of a 25-year superboom poisonously coupled with the collapse of the US housing bubble.

So I will concentrate here on his current prognostications.

There is of course a problem of his own making in giving weight to these predictions, because he can't dignify them as scientifically accurate forecasts for all the reasons given above.

That said his track record as a money maker means they shouldn't be dismissed out of hand (though some will be uneasy that he talks his own trading positions). In 2007, when he took active control of his funds for the first time in years and put his money where his mouth is, he made a return of more 30% (which is no slouch for someone who says that at the age of 77 he doesn't really know how to use the full gamut of modern financial products and techniques).

Here are a smattering of his views:

1) The US is in for a longer and deeper recession than most professional forecasters expect - and that will ultimately lead to a further weakening in the dollar.

2) Prospects for the UK are poor, because of the fragility of our housing market, our personal indebtedness and our dependence on a financial services sector that is heading for bad times. He fears we could be in a worse mess than the US.

3) The longer-term outlook for China is very uncertain. And he would not be surprised if the developing bubble in Chinese markets ended in a financial crisis, though he thinks such a crisis won't happen for a few years yet (if at all).

So the years of onwards and upwards may be behind us. Which may be a shame for those of us yet to make our first billion (unless we're planning to short more-or-less everything outside of Asia and the Middle East).

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• - What's this?

What if the Bank of England were not to bear down on inflation in the face of the upward pressure from rising global energy and food prices?

What if it were to respond to popular, corporate and political calls for cuts in interest rates, to give some oomph to an economy slowed down by the credit crunch?

In a worldwide trawl of bankers and economists - which I made in preparing a documentary to be broadcast at 8pm tonight on Radio 4 ("Power Failure at the Central Bank") - a compelling case for not cutting interest rates came from across the Channel, from the veteran public official who is arguably the most respected central banker in the world right now, .

What he said, with passion and conviction, is that the price of failing to set interest rates at a level that keeps inflation in check would be the rise of mass unemployment that would hurt us for at least a generation.

Or to be more precise, he argued that the current rise in energy and food prices is comparable to the oil-price shock of the early 1970s. And he insisted that the failure of most European economies back then to suffer the short term pain of tighter monetary policy, higher interest rates, led to inflationary wage settlements that undermined economic competitiveness.

"Before 1973 and 1974, there was everywhere in Europe full employment," he told me. "It is after the absence of sufficient lucidity in analysing what was happening after the first oil shock, trying to protect ourselves from the first oil shock and not understanding that we had a real transfer of resources associated with the first oil shock, all that created mass unemployment.

"And we are still fighting against unemployment which is at a level that is not satisfactory in the euro area and which is the legacy of these mistakes in the first oil shock."

Or to put it another way: cut rates and risk long-term, serious damage to all our prosperity.

The commodity-price surge has pushed the rate of in the eurozone well above the formal target of less-than-but-close-to 2%. But high inflation "will not last forever", he said, adding ominously that "we are there to care for it going down."

He argues that even if the sharp rises in energy and food prices represent a one-off realignment, they can't be seen as somehow irrelevant to an assessment of the core rate of inflation, or as immaterial to where interest rates should be set.

What Trichet fears is what he calls "second-round effects", such as wages being set at levels that assume inflation will not fall - which could precipitate endemic inflation, a debilitating virus that would be hard to shake off.

Chatting to Trichet was in some ways strikingly similar to listening to Mervyn King, the Governor of the Bank of England, as he warned last week (yet again) that his fabled NICE era of non-inflationary consistent expansion is well and truly over. As it happens, Trichet has a strong empathetic relationship with the Bank. He said:

"I feel very close myself to the Bank of England. I feel that the Monetary Policy Committee of the Bank of England and the Governing Council of the ECB have very much equivalent analysis on this major point... that we had to have a monetary policy stance which would be designed to deliver price stability."

Or to put it another way: there's not the faintest chance of interest rates falling in the eurozone or the UK for some time (if at all).

The other very striking point made by Trichet is that he rejects any suggestion that the ECB should have an explicit goal of (in his words) "ensuring stability in the price of assets". He said: "it doesn't seem to me possible."

He added: "We will do all we can to delivery price stability and ensure financial stability through the delivery of price stability. But we cannot directly target asset prices. That would probably be something which is impossible, I would say, and not advisable at all."

This matters, because one of the causes of the credit crunch was the rapid and unsustainable rise in asset prices, especially property prices, in the preceding two or three years.

During those bubble years, Trichet was at the forefront of central bankers warning about the dangers of all those trillions of dollars being lent and invested without due regard to the proper risks. He spotted that asset prices were inflating too fast.

But his sounding of the alarm did nothing to stop the bubble expanding to near lethal proportions - such that when it popped, the cost for the financial system and the global economy was very substantial.

Perhaps sensibly - chairman of the - is reviewing (against his own revealed instincts) whether his central bank should intervene more conspicuously when asset prices surge.

M.Trichet implies Mr Bernanke is wasting his time.

Probably better, as many central bankers and regulators now believe, would be to look at whether new rules can be introduced that would raise and lower the capital requirements of relevant financial institutions in a counter-cyclical way - such that their capacity to lend too much too cheaply was constrained in boom years (with the corset being loosened in downturns).

So are we, at the least, over the worst of the credit crunch? The Bank of England recently said there were signs that financial markets are past their nadir.

What is the prognostication of the wily M Trichet, who has had a ringside seat at every international financial crisis since the mid-1980s? Well I pressed him and pressed him, and he pointedly refused to say that the point of maximum danger is behind us.

All he would say is that we are experiencing an "ongoing, very significant market correction."

Which, given his record of calling the credit crunch rather more astutely than the Fed or the Bank of England, isn't conspicuously reassuring.

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• - What's this?

The Postal Regulator is calling for to be .

is making the highly contentious proposal - which could lead to Royal Mail being owned in part by a private-equity firm - to an independent review on the future of postal services that has been set up by the government.

It says that Royal Mail's financial difficulties are likely to worsen considerably, without the injection of private-sector capital and management expertise into the state-owned business.

Nigel Stapleton, the chairman of Postcomm, has warned in an interivew with me that in the absence of part-privatisation the government may be required to inject a big new subsidy into Royal Mail, which it won't wish to do.

The risk of not bringing in the private sector or a subsidy would be a significant deterioration in the quality of Royal Mail's service under its obligation to deliver letters to and from anywhere in the UK at a uniform tariff, he said.

Only last week Royal Mail announced that it had made a loss on providing this so-called universal service for the first time. Royal Mail estimated that the loss for the last financial year on this its core activity was £100m.

The government will find it hard to dismiss the suggestion out of hand, especially since analysts believe the independent review led by Richard Hooper is expected to come to the same conclusion.

However the Prime Minister is likely to be irked that such a divisive issue is being forced back on to his agenda.

Privatisation in any form, whole or part, is strongly opposed by the , the main postal workers' union - which is also a leading funder of the Labour Party.

The CWU's opposition is shared by many Labour MPs.

Their consistent opposition has always deterred the government in the past from embracing whole or partial privatisation - even though Gordon Brown has told colleagues that he is sympathetic to the idea that Royal Mail could be sharpened up by private-sector capital and expertise.

However the government only has itself to blame that part-privatisation is back in its in-tray - because when ministers set up the Hooper review of postal services, they were well aware that PostComm was bound to make the recommendation

There are uncanny echoes of the early 1990s in Postcomm's call for part-privatisation.

The then Prime Minister, John Major, was widely seen to be on the ropes, as Gordon Brown is perceived to be today.

And an attempt by his ministerial colleague, Michael Heseltine, to privatise the postal service was ditched after opposition from backbench Tory MPs.

Postcomm is proposing that Post Offices Ltd, which controls the huge network of post offices, should be separated from Royal Mail and kept wholly in public ownership, because it already receives a substantial subsidy and is viewed as a de facto social service.

Its model for what should happen to Royal Mail is the part-privatisation of the Danish postal service, .

In July 2005, the leading UK private-equity firm, CVC, bought a 22% stake in Post Danmark from the Danish state. CVC and Post Danmark then bought a big stake in the Belgian post office in 2006. And this year Post Danmark announced a merger with Posten, the Swedish post office.

Mr Stapleton told me that CVC has played an important role in modernising these postal services. He believes the likes of CVC could play a similar role for the Royal Mail,

However, private-equity firms are mistrusted by many trade unionists and Labour MPs. They see private-equity firms as over-rewarded investors who are excessively ruthless in the way they reduce costs and overheads in the businesses they acquire.

Mr Stapleton tried not to criticise the current management of Royal Mail. He said that it was immensely difficult to run Royal Mail successfully given the pressure on the letters market from emails and digital technology and also the huge financial burden of a multi-billion pound deficit in its pension fund.

But Postcomm's submission does not flatter Royal Mail. It says that in April 2008 Royal Mail provided Postcomm with its projected profits and cash flows for 2006-10. These showed that Royal Mail's cumulative cash flows would be £2.6bn lower than it had expected in late 2005.

Postcomm says that "in part this difference is due to lower than expected mail volumes" but a"greater impact is that of lower efficiency and the payment of significant bonuses to staff".

The regulator says that Royal Mail has failed to make some £1bn of promised efficiency savings, but has still shelled out £600m to staff in productivity bonuses.

A further £300m of savings is failing to materialise because of "compensation for falling short of licenced quality of service standards" and £700m has gone AWOL because of unexpectedly lower volumes of business.

Postcomm believes that part-privatisation would provide the cleanest solution to Royal Mail's pension problems, in that it would allow the government to take over total direct responsibility for the fund without breaching European state-aid rules.

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• - What's this?

I am grateful to a former tax inspector, Adrian Huston, for a witty calculation. On the basis that the Tories may be heading for a 1000 vote victory in the , which means that Gordon Brown would need to turn 501 votes his way, the cost-per-key-vote of yesterday's emergency tax measure was £5.4m.

Hmmm.

Actually more worrying for some was what the Chancellor, Alistair Darling, gave as the rationale for the increase in the personal allowance for 22m basic-rate tax payers. Quite apart from providing a degree of compensation to those damaged by the abolition of the 10p tax-rate, he said it would "help all basic rate taxpaying families at a time when oil and food prices have been rising in every part of the world."

On the Today programme this morning he went further, and said he was giving a boost to a British economy that's slowing down.

Many might applaud the government's new-found sensitivity to the squeezed disposable incomes of those on low earnings.

But, under our conventions, there is a time and a place for providing that succour - viz, the Budget and (that Brownian invention) the pre-Budget report.

To provide help in what looks like an emergency Budget smacks of alarmism, and not just about Labour's by-election prospects.

It may undermine all those soothing things chancellor and prime minister have been saying about the robustness of the British economy.

Their putative "steady-as-she-goes" approach to managing the nation's finances meant that the good ship United Kingdom was in fine fettle to withstand the global storms - or so they insisted, time after time.

But there was nothing "steady-as-she-goes" about yesterday's debt-financed tax cut, which takes the Treasury perilously close to breaching the rule on how much it can borrow as a proportion of the national debt. The manoeuvre smacked of an about-turn in a gale.

Which rather implies an absence of faith in the supposedly hard statistics about the state of the economy.

Those statistics say that the UK is a long way from recession.

Those stats say that the big problem in the UK is surging inflation.

But the Treasury appears to be putting more weight on all those trade-association surveys and opinion polls of consumer and business confidence which say that times are tough and may get tougher.

It's not that confidence indices are useless or that data collected by this or that industry are bogus.

It's just that right now they are only telling us the bloomin' obvious.

After all the publicity about the supposed mess we're in, what consumer or shopkeeper is going to tell a collector of survey data that everything's going swimmingly well?

It is difficult for any of us to be cheery amidst all the evidence of a mortgage drought, the rising cost of credit, the surge in power prices and the rampant inflation in food prices.

The amazing thing is that the housing minister or one of her officials bothered to write down that house prices are set to fall at least 5 to 10% this year. You can hear the same thing on any night of the week in any British pub.

The point is not that these negative trends aren't real. It's rather that we can't yet assess the full and proper significance of these trends. And Gordon Brown has said many times that in these circumstances the imperative for government is to be steady, put it all into perspective and not to panic, to be an anchor.

British industry would agree with him.

What business fears is that the prime minister has pulled up the anchor and is trying to tack with the winds, in a risky way.

There is an associated fear in boardrooms, which is that the Bank of England's will feel obliged to increase the size of its own anchor.

The members of the MPC do look at more than official statistics. But, as I've said, the evidence of the hard data is unambiguous - and it's that the bigger problem in Britain right now isn't low growth, it's rising inflation.

Or to put it another way, if the Bank of England sees the government taking risks with fiscal policy, it will want to be even steadier than it would otherwise have been with monetary policy - which means it will be more reluctant than it would have been to cut interest rates.

That will alarm businesses, especially small businesses, and many of the 22m who've just been bunged a few extra quid.

UPDATE 14:16: The Bank of England's inflation report is something of a dirge.

It anticipates a sharp slowdown in growth to less than 1% per annum in early 2009 on the basis of an unchanged base rate. But it expects inflation to overshoot the target two years from now if the base or policy rate falls to the level discounted by the market.

Which puts the Bank of England in a tricky position, to put it mildly. If it keeps rates where they are, the outlook for growth is dismal and we could be tipped into recession.

If it cuts rates, its credibility as crusader against the wickedness of inflation could be severely damaged, especially as it expects inflation to be well above target later this year, whatever it does.

The chances of further interest rate cuts in the near future seem to me to have narrowed to somewhere between slim and zero.

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Whisper it ever so softly, but it's just possible that a business of strategic value to the UK won't be sold to an overseas buyer.

I'm referring to the auction of British Energy, the power company that is our nuclear past, present and future.

Right now, there is only one serious bidder, of France, largely because the government - which through a complicated arrangement owns 35% of British Energy - was insisting that any buyer should pay cash alone.

Only EDF appears to have the appetite and resources for a pure cash bid of £10bn-ish for the whole of British Energy.

Or to put it another way, as auctions go this one has so far been on the lame side.

As for , it's been widely reported that if the owner of British Gas were to enter the fray, it could only do so as the junior partner in a takeover led by the likes of EDF (or of Germany).

Centica simply doesn't have the borrowing capacity for a pure cash takeover.

But I am hearing that Centrica is exploring whether it could do a deal with British Energy on its own.

How so?

Well the penny seems to have dropped at the Treasury that it will get more for the British Energy stake if there is a proper bidding contest.

Which means that it may well entertain offers consisting of shares and cash. And that would let Centrica into the game as a bidder in its own right.

And since, for now at least, the government's veiled threats of a windfall tax on power companies have abated, Centrica's share price may recover enough to turn its shares into valuable currency.

The advantages for Centrica of buying British Energy are written in almost every line of which it published this morning.

That's largely about how its profit margins on supplying 15.9m customers with power are being squeezed in this era of rising energy prices.

The reason is that it owns gas resources equivalent to only around 28% of its needs and it can never raise retail prices quickly enough to match the increments in wholesale prices.

By the way, the short term significance for most of us of Centrica's statement this morning is that what we as consumers pay for power is set to rise again.

That's inevitable given that the forward price of wholesale gas for the fourth quarter of this year is 80 pence per therm, compared with 44 pence in the same period of last year.

If Centrica owned British Energy, it would have a stable source of power that would help to protect its margins when wholesale prices are volatile.

And there would be a second benefit, which is that when negotiating with the lucky owners of gas, such as the Norwegians and the Russians, Centrica would no longer be such a needy buyer with no ability to strike a hard bargain.

So there is a strong commercial case for Centrica and the Treasury to create the conditions in which it could make a proper offer for British Energy.

But the slight frustration for British Energy's board and its shareholders is that the process for selling the company would take a lot longer than they originally hoped.

I would imagine the Takeover Panel may want British Energy to make clear to the market fairly promptly that uncertainties about its future ownership will continue for some considerable time.

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's great hero is Sir Richard Branson. And just like Branson, Dunstone never seems happy unless he is testing himself with some bold new business venture.

Though its only a couple of years since Dunstone - which has ultimately paid off but wreaked some havoc on his company along the way - he is now reshaping his retailing operation.

He is calls its distribution operation - basically its stores - to of the US for £1.1bn.

Best Buy is a retailer from another planet, where everything is much much bigger.

It is four or five times the size of Carphone, with annual sales greater than £20bn and about a fifth of the US market.

It sells every conceivable electronics and electricals device from vast superstores, comparable in size to a large Tesco and much bigger than anything we have here.

It's the biggest customer for a number of computer manufacturers.

So it's big.

And it wants to be big in Europe.

Best Buy has chosen Carphone Warehouse as its partner in this European invasion because the two already work together in the US - where Carphone has developed an operation selling mobile phones within Best Buy's giant stores.

Dunstone, Carphone Warehouse's founder and chief executive, tells me that the jointly owned company wants to build as great a share of the European market as Best Buy has in the US.

Note that the ownership of Carphone Warehouse as a corporate entity remains unchanged. It is selling a half share in what it calls its distribution business, which operates 2,400 stores in nine European countries.

Best Buy is not buying any of Carphone Warehouse's broadband or telephony operation, which trades under the TalkTalk and AOL brands.

Carphone Warehouse will use the £1.1bn being paid by Best Buy to reduce its debt and invest in developing both the broadband and retailing businesses.

The deal comes at a time when trading is difficult in the UK for many retailers. The market leader in electricals and electronics retailing, DSG - the owner of Currys - has been having a particularly torrid time and has issued a couple of profit warnings since the start of the year.

But if is looking for a crumb of comfort, it could do worse than look at the precedent of WalMart's takeover of Asda in 1999.

That deal hasn't been a flop. But WalMart didn't transform grocery retailing in the UK - and in the years since WalMart arrived, Tesco has increased its lead over Asda.

That said, DSG's managerial reputation is not on a par with Tesco's.

And Dunstone is among the two or three most determined entrepreneurs I have encountered over many years.

Oh, and I almost forgot, this transaction shows that - in spite of the pervasive gloom across the retailing sector, and in spite of the credit crunch - not all retailers have descended into the kind of chronic depression that prevents them doing any kind of deal.

Some Carphone shareholders may grumble that Dunstone is selling this stake at the wrong point of the economic cycle and that he could have received a better price if he had waited till the good times return.

But he owns a third of Carphone and is not taking out a penny. Which is pretty good evidence of his conviction that in the coming years this tie-up will generate significant incremental profits.

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is urging the to into whether the defence giant paid illegal bribes and commissions in its massive Al-Yamamah defence deal with Saudi Arabia.

In an exclusive 91Èȱ¬ interview broadcast on the Today Programme this morning, BAE's chairman, , told me he wanted the SFO to seek senior legal advice - known as counsel's opinion - on the prospects for mounting a successful prosecution against his company.

BAE's chairman believes a legal review of the Saudi case file would show that there would be little chance of bringing a successful prosecution.

It would, in his view, lift the shadow hanging over the defence contractor.

Some 18 months ago, the Serious Fraud Office abandoned its probe of the Al-Yamamah deal with Saudi Arabia, following representations from the British government that failure to do so would increase the risk of a terrorist outrage - because Saudi Arabia was threatening to withdraw security cooperation.

The High Court recently ruled that it was unlawful for the SFO to abandon the case on those grounds - though the SFO has since appealed to the House of Lords.

Mr Olver wants the evidence in the Al-Yamamah case reviewed whatever the outcome of the appeal, because he fears the reputation of his company will otherwise be indelibly stained by the insinuation that it has something to hide.

Funnily enough, he takes comfort from the recent High Court ruling that so embarrassed the SFO. In it, Lord Justice Moses said that the way the SFO stopped the Al-Yamamah probe was wrong, but he also said there was good reason to doubt whether the allegations in respect of the Al-Yamamah contract could be proved to be true.

This is the relevant part of Lord Justice Moses's judgement:

"According to the Attorney General's evidence, BAE has always contended that any payments it made were approved by the Kingdom of Saudi Arabia. In short they were lawful commissions and not secret payments made without the consent or approval of the principal.

The cause of anti-corruption is not served by pursuing investigations which fail to distinguish between a commission and a bribe. It would be unfair to BAE to assume that there was a realistic possibility, let alone a probability, of proving that it was guilty of any criminal offence. It is unfortunate that no time was taken to adopt the suggestion to canvass with leading counsel the Attorney's reservations as to the adequacy of the evidence."

Or to put it another way, Lord Justice Moses's judgement against the SFO wasn't quite as bad for BAE as was widely reported. That said, Dick Olver is taking something of a risk: there is no guarantee that a new review of the evidence by the SFO would lead it to abandon the case once and for all.

The SFO could decide to do precisely the opposite and re-open the probe. You'll probably remember that only last week, Robert Wardle, who has just retired as the Director of the SFO, told me that there were reasons to believe that pursuing the investigation could eventually amass sufficient evidence for a prosecution.

Dick Olver is making a calculated judgement - and he'll probably be prompting a little anxiety in Saudi Arabia, where the ruling family is no more enthusisastic than it ever was about having its business dealings with BAE raked over.

But BAE's chairman is gritting his teeth and hoping that his Saudi customers will ultimately recognise that the stain from Al-Yamamah can only be scrubbed clean by allowing a rigorous analysis of the propriety of the deal under British law.

He wants a new start for BAE. Which is why he also told me that he was committed to implement all the recommendations of the former Lord Chief Justice, Lord Woolf, on cleaning up the way BAE conducts business

Mr Olver added that creating a deepseated ethical culture in a company employing 97,000 would not be quick or easy - though he would have no hesitation in sacking anyone who breaches the new code of conduct.

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didn't in the past pay sufficient attention to ethical standards in the way .

That's the frank admission made by the defence giant's chairman and chief executive - Dick Olver and Mike Turner respectively - to a panel chaired by the former Lord chief justice of England and Wales, .

It's an embarrassing admission. And it's qualitatively different from the company's normal statements that it adheres to the law when negotiating giant defence deals.

- who include the former boss of coca cola, - have made 23 recommendations to ensure BAE does not come up ethically short in future

They include a requirement to draft and publish a code of business conduct. Other proposed measures include the creation of registers for gifts given to clients and much greater scrutiny of the shadowy advisers and fixers who facilitate big defence deals.

In the past, pragmatism has trumped principle in the defence industry. There has been a consensus among industrialists, politicians and Whitehall officials that defence companies can't be cleaner than clean if they want to win the biggest contracts and promote employment.

Lord Woolf has said that business won in a fog of dubious practices is business that's not worth having.

Since BAE has committed to implement Woolf's measures, there'll now be a very real test of whether commercial success and ethical conduct can be bedfellows.

So the implications for BAE are serious indeed. But there are also implications for all big British multinationals.

What Woolf proposes for BAE goes much further than what most companies do to ensure that they don't stray into the moral darkside. Is there any sensible reason why reforms that are right for BAE shouldn't apply to the rest of British industry?

As for the stench that hung over BAE's £40bn Al-Yamamah deal with Saudi Arabia, Woolf's report contains no material views or information. However he has reviewed its successor contract, the "Salam Project" between the UK and Saudi to supply Typhoon combat aircraft, which is worth many billions of pounds.

Lord Woolf says that "security obligations" prevented access to some relevant documentation. But on the basis of the commercial details provided to him, he feels that "the contract should not in itself create any risk of unethical conduct".

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I know it's deeply unfashionable but I feel slightly sorry for the and how it's been pilloried for proposals to reform the .

The ideas underlying its proposals are not intrinsically Neanderthal. It's the possible application of these ideas that is giving British business the heeby-jeebies.

There are two elements to the Treasury's plan. The first is to simplify the taxation of foreign dividends received by large and medium-sized British companies by exempting these dividends from UK taxation.

In itself that would deliver a modest saving for companies, because right now these dividends are taxed on the difference between the British tax rate and how much these dividends were taxed overseas at source.

Note that this, if implemented, would represent a reduction in tax on overseas earnings: quite the opposite of what you would believe on the basis of recent media coverage or the lobbying of big companies.

It's the second element that is terrifying the multinationals - and is why they gave the prime minister an ear-bashing when they trooped into Number 10 last month.

The Treasury wants to levy tax on income earned by multinationals on so-called passive assets that have been sited abroad purely for tax reasons. The government is concerned, for example, that intellectual property such as drug or technology patents is developed in the UK and then registered in low-tax countries to minimise the tax payable on the income generated from the intellectual property.

Understandably any multinational whose profits stem primarily from intellectual property - drug, media and technology companies are the prime examples - worries that they would face a massive tax increase.

So should we feel their pain and hope that the chancellor has a change of heart?

As usual in tax, there is a trade-off between fairness and enforceability.

What the Treasury is suggesting doesn't seem particularly unfair, if the aim is to tax revenues from assets that could only have been developed in the UK but were transferred overseas purely to save tax.

If for example a new drug, turbine or weapons system took advantage of research in a leading UK university - and therefore received a substantial taxpayer subsidy - surely earnings from it should be taxed here.

But in practice, it's rarely as simple as that. Some element of a new product or service may have been developed in the UK, but much of the research and development may have been shared with offshore operations.

There is however a more brutal argument against what the Treasury wants to do: companies that don't like it can simply relocate offshore to more benign tax-centres such as Dublin.

A number of substantial British businesses have already done this or announced they are emigrating. Shire and UBM are only the latest manifestation of this exodus.

In a globalised world of tax competition between countries fairness is a less important consideration for the Treasury than what it can get away with.

Which is why the chancellor, at the slightest whiff of yet another corporate gang-assault on his capitalist credentials, has set up a review of the competitiveness of our tax system.

That review will probably dodge the big political and economic question: should the UK be turned into an Irish-style low-corporate-tax economy or should the government lobby for harmonised global taxation that undermines tax-competition between countries (and, as many would say, also undermines a pillar of national sovereignty)?

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Fill your boots with sub-prime, asset-backed securities.

That's the implication of the Bank of England's latest .

Actually it would not put it as starkly as that, since the is not - as far as I am aware - authorised by the to give investment advice.

But the big message of its latest Financial Stability Report is that the cost and availability of credit, on the one hand, and the price of certain investments - such as securities linked to subprime - now exaggerate the risks in the global economy, where for years they were understating them.

Some will say that the Bank is stating the obvious. But as a public statement, this represents a significant change of emphasis. For years, the Bank argued the reverse, quite correctly - and more's the pity that it was systematically ignored by the City.

Subprime lending was, during the credit market euphoria of the previous few years, the extreme case of banks ignoring the golden rule that they should never lend without checking that the relevant borrowers can repay.

But what a difference nine months make: the pendulum has swung so far that financial institutions are currently assuming that losses on subprime will be on a scale without any precedent.

The Bank of England thinks their fears are exaggerated. It now believes that the market price of subprime investment products overstates likely future losses on subprime lending by about 100 per cent.

How so?

Well, because of the collapse of trading and liquidity in that market, prices imply that losses for providers of subprime loans will eventually be $400bn. But the Bank calculates that actual losses should turn out to be less than $200bn, when all the potential defaulters have handed back their keys and their respective properties have been seized and sold.

That means anyone prepared to buy subprime now and hold it to maturity would make a mint (more than $200bn if you were to buy the lot).

It also means that banks such as Royal Bank of Scotland which have been savagely marking their subprime exposure to the depressed market price may well be writing back those charges as handsome gains, in the coming years.

As you can imagine, I urged the Bank - on behalf of us poor taxpayers - to turn itself into a public-sector prop desk or hedge fund and go massively long of CDOs, ABSs and all the rest.

And if it succeeds in knocking 15 percentage points or so off the national debt from the future subprime gains, surely no one will begrudge me my 20%, hedge-fund style cut of the spoils for suggesting the big play.

No one could accuse the Bank of England of insider trading, since it has perhaps gone beyond the call of duty to create the conditions in which banks and financial traders see sense about the real risks out there - by launching its £50bn-plus scheme to allow banks to swap unfinanceable mortgages securities for the equivalent of cash.

Oddly, the Bank doesn't wish to put its analysis to sharp commercial use. As I said, the point of its subprime calculation is to persuade banks and other financial players that they are now too fearful of the risks of lending and investing, where before they were systematically ignoring those risks.

Or, again to stress the point, if all manner of loans were too cheap and easy to obtain prior to last August - and stoked up that financial bubble for which we're all now paying - credit is now disproportionately expensive and tight.

For the Bank, this is grounds for modest optimism, in the sense that it hopes banks and controllers of huge pools of liquidity (notably the massive US money managers such as and ) will gradually realise they are being neurotic about the outlook and will start to lend to our banks again at longer maturities than overnight and at reasonable prices.

But the Bank acknowledges that there is a substantial residual risk of lenders not seeing sense. In which case, lenders would bring about the very thing they fear most by continuing to restrict the availability of credit - viz the collapse of over-stretched borrowers and further falls in asset prices which would generate incremental, spectacular loan losses.

The kernel of all our problems remains what it was, a chronic shortage of liquidity in the banking system. And normal conditions should at some point return. But the Bank cannot predict when that will happen nor be confident there won't be another banking or markets accident in the meantime.

Which means that if you see the Governor propping up the bar in your local hostelry, it's probably not worth asking him for an investment tip.

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