My theme for many weeks has been simple – the authorities should fight deflation, not inflation. recession is the new enemy, just as inflaiton and excess credit was the enemy two years ago. Every word and aciton of government and regulators should be examined with this in view. So how are they doing?
In order to fight recession you need to have low interest rates, provide plenty of liquidity to the banking system, ensure all statements are positive and confidence building, and use what public spending you can afford to maximise the beneficial impact on people’s employment and incomes.
The UK authorities are giving a very mixed performance judged by these simple standards.
They have kept interest rates far too high for too long. They should cut them to 2% today, which would still leave scope for further cuts if the economy does not respond well. Market rates are well above the indicated rate and will remain so. That’s all the more reason to cut the indicated rate, to relieve some of the pressure. If interest rates remain too high more people and companies will default on their payments, leaving banks in a weaker position and savers worried about the security of their funds.
They are now supplying large amounts of liquidity, which is good. Previous attempts to withdraw liquidity from markets have been disruptive. They need to supply as much as it takes for as long as it takes, ensuring the taxpayer is protected by taking proper security for the loans.
The authorities have made too many statements and allowed too many stories to escape that undermine confidence. If they think any bank needs more capital, they should sort that out in private with the bank concerned. We should know nothing about it until the bank announces to the market how it is raising the money, when the problem is largely solved.