Right as rain

The MPC kept interest rates high because of the threat of inflation. It is naïve to suggest that somehow, miraculously, the credit crunch could have been avoided or even ameliorated had interested rates been reduced drastically earlier.

The crisis came because of reckless lending by banks to people who had no hope of repaying. It came about because consumers borrowed beyond their means and they might well have borrowed even more had interest rates been lower.

When the MPC did slash interest rates, the money markets were still frozen because banks stopped lending to each other. It has taken many months for money markets to return to normal and has more to do with banks learning to trust each other than about interest rates.

Meanwhile, savers are getting little or no interest and borrowers – consumers, homeowners and businesses – ended up paying as much or more than they did before base rate came down.

Inflation figures released this week demonstrate that inflation, not deflation, is still the threat. The consumer prices index edged down from 1.8% in June to 1.6% in July. Forget the fact that this is its lowest level for four years or that the rate is now firmly below the 2% central target rate.

Once again the reduction has been less than economists predicted, despite the fall in prices for gas, electricity and food. The depreciation of the pound has pushed up the cost of imported goods and made oil more expensive. As the government services its soaring level of debt, interest rates will be forced up by the need to attract more buyers of gilts.

At least I can be confident that if I keep forecasting a rise in inflation, and in interest rates, I am bound to be right some day. It could happen sooner than you think. The VAT cut is due to end in just over three months time and the most recent rise in petrol prices has yet to feed through into the wider economy.

Oh my, EMI
Private equity investor Guy Hands has, according to reports from the US, finally admitted that his Terra Firma fund was on shaky ground when it bought music publisher EMI for £2.4 billion in May 2007.

His expressions of regret, however, suggest that he still has not learnt the lesson, for he says that he would not have bid for EMI group had it been put up for auction two weeks later, after the buyout bubble burst.

The problem was not the buyout bubble. The problem was EMI itself. The group had struggled for years, had wasted money and energy in a senseless feud with Warner and had been hurt along with the rest of the industry by rampant piracy.

Quite why EMI was so attractive to Hands, or why he was so sure that he could succeed where others had failed, is a mystery. This is not being wise after the event. The warning signs were there for all to see long before EMI decided to put itself out of its misery.

As a blindingly obvious bad deal, this ranks alongside the Lloyds-TSB takeover of HBoS, and serves as a warning to amateur investors that the professionals can and do sometimes get it spectacularly wrong. And that they have difficulty in admitting to bad judgement.

Bust flush
When you run out of cash you are at everyone’s mercy. Northern Rock discovered that, followed by Bradford & Bingley and Lehman Brothers.

I have commented ad nauseam in the past about the futility of complaining later if some or all of your assets are snapped up at bargain prices by a more prudent and financially solvent rival or, indeed, by the government.

However, we once again have carping by investors who have no leg to stand on, this time about Barclays snapping up bits of Lehman Brothers. For heavens sake, Lehman was bust and if Barclays got the parts it wanted at a favourable price without taking on the rest of the baggage then well done Barclays.

After all, the predators do not always come out smelling of roses. It has become increasingly clear over the past 12 months that Bank of America jumped out of the frying pan and into the fire by abandoning its planned takeover of Lehman and merging with Merrill Lynch instead.

Holding court
Much as I oppose UK membership of the European Union, I am alarmed at the ignorance of the British press and its determination to blacken the EU’s name on any pretext. Such specious misinformation undermines the genuine arguments in favour of getting out before it is too late.

This week we have seen reports that staff taken ill during their holidays will be able to claim time off work in lieu of the lost holiday. This is supposedly a ruling by the European Court of Justice.

The court has made no such ruling for one very simple reason: it was not asked to rule on this issue, so it didn’t. The European Court rules only on the specific issue before it, not on other matters, however closely related.

In this instance the court was asked to decide whether an employee who had booked a holiday but was injured beforehand could postpone that holiday. The court said he could. In other words, if a worker is already on sick leave he or she can refuse to count that sick leave as part of holiday entitlement.

This is a potentially onerous ruling for employers anyway so there is no need to exaggerate. A person already on holiday when taken ill is on holiday leave, not sick leave. It is quite possible that the court would rule, if asked, that illness incurred on holiday should be transformed into sick leave. Until it is asked for such a ruling, one can only speculate.