We need a better recovery plan

It is usually dangerous when the Establishment unites behind a single policy and says there is no alternative. The last time that happened in the UK we were lumbered with the Exchange Rate Mechanism which gave us a rapid inflation followed by a recession.

Recently in the USA the Republican and Democrat leadership united with both Presidential candidiates behind the Paulson plan. That plan turned out to be bad politics, failing its first vote in Congress, and bad economics, leading to subsequent modification by its own author.

It ws therefore a relief that this week David Cameron and George Osborne signalled that they do intend to be critical where criticism is warranted, and to offer an alternative. That is called democracy. Criticism of George Osborne is fashionable and unfair. It was George who thought up “Tax con not tax cut” to characterise the unsuccessful 10p tax band budget. It was George who rightly pointed out that the government did not mend the roof when the sun was shining, and George who is now using colourful language about a house burning down to draw attention to the problems.

The Opposition now needs to flesh out its alternative strategy to see us out of the current severe dfficulties. They can draw on the Economic Policy Report they commissioned. We called for a stronger Bank of England, making better decisions over banking capital, liquidity and interest rates.We warned against lurching from too easy an approach to credit and money to too tough an approach. We sought better control over public spending, an effciency drive throughout government, less useless regulation, and concentration by government on a limited number of things that government did have to regulate well – especially money and credit levels. We recommended a big increase in infrastructure spending, mainly privately financed.

Today I suggest a threefold aproach to the crisis.
The first is to amend the government’s way of handling its approach to the banking crisis.
I fully support the privison of liquidity and longer term loans to the banks. They must take full security for these advances to protect the taxpayer. The withdrawal of too much liquidity at times over the last fifteen months has intensified the crisis.
The government should not spend £37 billion it cannot afford on buying bank shares. It should refuse to finance the HBOS/LLoyds merger, leading to LLoyds going it alone in the private market for its capital needs. The Regulators should give HBOS and RBS time to increase their capital ratios, whilst the government makes it clear it stands behind both banks with loans and cash if needed. They could both improve their capital ratios by stopping dvidend payments, cutting very high pay and bonuses, reducing staff through natural wastage and other cost reducing measures, and reducing their loan books. It should be their choice which combination of these measures they adopt.
The government and Bank are right to experiment with other ways of lending and using guarantees to get the banking markets moving again.

The second is to get control of the public finances. Cancelling the £37 bllion will help. There are many other ways of starting to control public spending, whilst keeping every nurse, teacher, doctor and teacher and other important public service workers.

The third is to take action to stimulate the private sector, which is crashing downwards rapidly. That means cutting interest rates by 200 basis points or 2% immediatey, with the prospect of more to come if needed. It means working with the energy, water and transport industries to see which larger investment projects can be brought forward to provide some work for the construction industry. It means redoubling efforts to help people back into work who lose their jobs as the redundancies build up this winter.


  1. Mark Wadsworth
    October 19, 2008

    Broadly agreed, but there is no evidence to suggest that cutting bank base rates results in lower interest rates paid by businesses.

    Interest is nowhere the biggest expense that businesses have, and interest rates are not particularly high by historical standards, i.e. inflation plus 2% to 3%. What is worrying is when banks reduce the credit limits for businesses.

  2. Kit
    October 19, 2008

    If you want an easy and risk-free way of stimulating the economy: cut regulation. Scrap the minimum wage and employment laws. But you know this already. 😉

  3. Johnny Norfolk
    October 19, 2008

    I see Darling and Brown are going to spend us out of recession.
    That’s all very well if you have money on one side or have things to sell like gold.
    But we don’t.
    Labour have spent it all. So it will make matters worse in the long term.
    Labour live for today and could not care less about the future.
    They will try anything to cling to power.
    They have always put their party above country. For so called educated men they come over as just having no common sense to me.
    They just do not understand the basics.

  4. rugfish
    October 19, 2008

    It seems no one is showing much of a clue when it comes to having a workable strategy to save the housing market. Homeowners, the building trade, home values, or getting the market started again must be made a prime strategy of government if this downward spiral is to be broken.

    The housing market needs buyers.
    Buyers need incomes and jobs.
    Builders need a growing market and house buyers in order to stay in business.
    Homeowners need to know their assets are not withering away due to lack of demand.
    Lenders need their money back or they need regular payments from their customers otherwise they’ll go down the tubes too.
    Without these things it will cost taxpayers even more money and many jobs in building trades, retail, and manufacturing will simply be lost, adding more cost to the public purse and more need for urgent and extreme measure later to rescue our economy.

    Homeowners in default with their lender should have their mortgage interest payments backed up by the state quickly. If this is not done then mass selling of underpriced housing will deteriorate the market further. People planning to retire and downsize will lose substantially as a result of a drop in equity, lenders repossessing homes will lose out on the difference between the mortgage amount and what they receive in a deflated market, and this could be a significant amount if prices through auctions were to drop to 60% or less when the mortgage on that property could have represented 95% of its former value. A wipe out of 35% of the lenders asset value would cause severe pain to the lender which it would have no choice but to recoup from others. Equally, a retiring couple planning equity release or downsize would see the value of their asset wiped out too and be forced to delay their retirement.

    Many of those planning to retire on equity release may still have a small mortgage, yet because the value of their home has dropped they could be unable to release equity.

    Some have said lower values would be good for First Time Buyers, but if FTB’s can’t get a loan due to having no job, or because the lender has placed a higher loan critera on buyers so they’re unable presently to attain a mortgage for reason the lender requires a larger deposit, large arrangement fee and higher interest out of its need to recoup its losses due to a deflated market, then clearly this won’t help to generate more sales and will inevitably lead to less jobs, lower values and less people being able to buy houses.

    Government should remove stamp duty and place this cost on the seller.
    It should also bring back Mortgage Interest Relief at Source for first time buyers.
    These two changes would make purchases more affordable for home buyers and help to kick start the market.

    I welcome the government having shortened the gap for assistance from 39 weeks but this doesn’t inject any motivation into the market it simply increases the size of the state safety net which will incur more cost upon a diminishing number of taxpayers.

    They need to get the market ‘moving’ in order to stabalise home values otherwise the loss in home equity will be a loss to the real economy.

    The retired couple for instance who would have downsized but now can’t, will not be buying a smaller home, won’t be decorating, won’t be spending money on DIY, won’t be having that once in a lifetime holiday, won’t be gifting money to relatives, won’t be buying the last car of their dreams, won’t be buying a holiday chalet or a caravan or visiting garden centres, and our economy will suffer massively for this lack of consumer spending which will knock on job losses all over the UK.

    The first time buyer won’t be spending money on DIY, furniture, bathrooms and kitchens, extensions, garden furniture, patio’s and drives and garden walling and fencing because they won’t be moving anywhere unless houses and the means to buy them are made available and become affordable.

    The government HAS to intervene in housing quickly in order to help stabalise our economy as banks won’t do it alone !

    1. StevenL
      October 19, 2008

      So let’s get this straight. You think that if we all go back to taking out huge loans and making big leveraged bets on house prices all our problems will vanish?

      Surely once house prices fall to levels where people can afford to buy without overstretching themselves to a level that represents too much risk to the lenders things will sort themselves out?

      Government should stay out of the housing market if you ask me. When government buys up housing they effectively take housing off the market for the majority of the working population.

      Unless you are an unemployed single parent or a ‘key worker’ government aren’t in the slightest bit interested in your housing needs. If government did rent out housing on commercial terms it would actually be a good way of generating income, but they aren’t interested in doing that.

      1. rugfish
        October 20, 2008

        Huge loans ?
        The average mortgage is under £150k, that not "huge" by todays standards it's just "unaffordable" for many who are on low pay and part-time work.

        Leverage has bothing to do with a buyer and everything to do with some unproperly regulated wheeler dealer lenders.

        Faling house prices will remove the legitimate asset growth of housing stocks which will hit all homeowners and investors who invest in the housing market such as pensions. They will lose out too and the level of you future pension will be affected regardless of whether you were a home buyer yourself. You will also pay high taxes because less people will be working.

        I agree the government isn't the slightest bit interested but that's because they can't drag themseleves away from Milton Friedman's free economics which has not only suffered abject failure, it has taken our whole economy with it unless we take positive action to stabilise it and then attempt to revive the parts which are still able to work.

        Incidentally, without consumers in this country there is no chance of revival because consumerism is the lifeblood of our economy and consumers need jobs and money along with the confidence that what they buy will actually hold a certain amount of value otherwise they won't buy.

        In such a senario you'll have a lack of confidence in house buyers: [ Why bother to buy syndrome ], and boarded up shops and other outlets with no workers inside, a smashed buildings trade, no manufacturing base to meet demand which isn't there, and a spiral of government debt and depleting population with closures of schools and hospitals along with rubbish piling the streets as being the worst outcome.

        That's the future unless the government 'intervenes'.

        1. StevenL
          October 21, 2008

          'Faling house prices will remove the legitimate asset growth of housing stocks' (rugfish)

          Asset prices can go up and well as down. It's even written in the small print of all these shared equity schemes the government are touting.

          I understand this fact, why can't homeowners. I've made a few bad bets this year, mainly trying to short commodity stocks on too much leverage before the bubble had actually burst.

          Now oil and mining stocks have come crashing back down without me I'm pretty gutted, but I'm not asking the government – aka the taxpayer – to give me back the money I've lost.

          I guess the difference is that I didn't actually gamble any money I couldn't afford to lose. If people have gambled their solvency on houses that's not my problem, and I don't want to spend my taxes bailing them out, they'ev have to get repoessed, someone with capital can pick their house up cheap and they can go back to renting.

          Renting is not the end of the world, I've been doing it for years.

  5. James
    October 19, 2008

    I can’t believe the plaudits that Brown is receiving for the bail out plan.

    It’s like a man who has spent the last ten years smashing up your house, turning up one morning with a vacuum cleaner (that he’s just bought with your money) and offering to help clear up the mess!!

  6. oldtimer
    October 19, 2008

    The more you find out about it the more the “bank rescue” looks like a “bank swindle”. It is thoroughly bad for both tax payers and bank shareholders.

  7. Matthew Reynolds
    October 19, 2008

    I would slash spending on public sector payrolls and allow small & medium sized companies to cease complying with most regulations that fail a basic common sense test . I would let the PSBR rise and thanks to smaller government & higher borrowing all taxpayers could get a £600 one off rebate while various taxes could be suspended ( such as tax on income from savings & shares , stamp duties on shares & property deals ) , frozen ( such as VED & road fuel duties to get the benefits of lower fuel costs to consumers ) or cut ( such as NI on the self employed & employers to make it cheaper to employ people ). The tax suspensions I suggest would get more money into the banks , they would make it more profitable to own shares and would remove a disincentive from the housing market . Freezing transportation taxes would lower business costs & help depress inflation thus making big interest cuts more likely . A big tax refund would help people make ends meet and/or service debt and could be a shot in the arm for the faltering high street . Cutting employment costs would help stop the dole queues rising – it stands to reason as EU countries with a high taxes on jobs have had poor growth rates and high unemployment levels .

    Making welfare less generous would slash economic inactivity and thus stop sacked public sector jobsworths adding overall to the dole queues . JSA & IB need replacing with one payment to get the workshy back into the very jobs that lower NI for employers might help protect and as the economy recovers job creation will be helped by lower employment costs in the form of lower levels of red tape on small & medium sized businesses and the NI cut .

    Smaller government , lower taxes , a temporary rise in the PSBR and deregulation of the small & medium sized firms whose recovery is vital to get down the jobless rate . Boosting the Square Mile , the high street , savings ratio and the housing market would be no bad thing !

  8. R.Rowan
    October 19, 2008

    why don’t the local councils get involved in staying repossessions by a shared ownership scheme which would allow people to stay in their homes,this could steady the housing market and free up some of the capital for banks and building societies.Raising the VAT limit for small businesses to £100,000 would help them,surely this would be a start.

  9. Tony Makara
    October 19, 2008

    There is great danger that as Sterling weakens when we cut rates the cost of food inflation will rocket as 40% of our food is imported. For this reason any rate cuts have to be co-ordinated with leading trading partners so that currency differentials are not thrown into chaos or become subject to aggressive speculation.

    Here government could fight recession and faciliate liquidity by the issue of newly created money in the shape of loans to business, these loans would be short-term and destroyed on repayment so that the money supply is liquid but not inflationary.

    Government spending has to undergo a complete audit and expensive showpiece programmes like the New Deal should be closed down, this should be replaced with simple job-matching. The New Deal has been used principally to make the long-term unemployed disappear from the official count as Chris Grayling pointed out recently in Parliament, surely even the government must now recognize that the money tied up in the New Deal would be far better spent in helping homeowners and business survive the recession.

  10. Obnoxio The Clown
    October 19, 2008

    John, what does it matter what Dave and George say? We are ruled by the EU and cannot do anything of which they do not approve.

    1. APL
      October 19, 2008

      Obnoxio: “We are ruled by the EU and cannot do anything of which they do not approve.”

      We could tell the EU to stuff their union, they wouldn’t approve of that!

      Sadly, Dave and George know* that they are little more than glove puppets, any proposals they might suggest are nothing less than a monumental stinking confidence trick, unless they are prepared to tell the EU to stuff their union.

      Which they are too spineless to do.

  11. Adrian Peirson
    October 19, 2008

    We spend £100 Billion on Quangos and non jobs. 5 Billion NET to the EU, 80% of its budget is unnacounted for, it has not had its accounts audited for 12 years. We are involved with 2 Wars, For Oil.
    Would it not have been better all round to trade for this Oil, better yet we could have revitalised British shipping and built a few Oil tankers and brought the stuff here, maybe won a few contracts to ship the stuff to other countries too.
    Might have been cheaper than War.
    But what do I know, I’m only a Prole.

    1. APL
      October 19, 2008

      Adrian Peirson: "5 Billion NET to the EU, .."

      Even if we get back £5b of the £10b we pay, we don't get to spend it according to our needs and priorities. The EU grants that money in ways important to it, it also attaches conditions to those grants so that local authorities have less to spend than they would otherwise have, because the conditions draw funding from other areas.

      The EU will also spend our money in ways which it thinks will promote the image of the EU rather in ways that would be useful to the UK.

  12. Adrian Peirson
    October 19, 2008

    A return to the Gold standard is to be preferred, failing that, Govt alone should coin money, Free of charge.
    The worst Possible option is to borrow this money into existance by issuing Gilts to the Global Banking system, this is how and why we are enslaved.
    The Crown could issue this 'money' free of charge or interest payments, which currernly costs us around £80Billion per year, add to this the £100 Billion spent on Quangos etc.
    This is why TWO parennts must now work to pay for the Flat screen TV's and Camper van they are never home to enjoy.
    The nations wealth is being syphoned upwards into the vaults of the Global Banking Cartels.
    Issue our money free of charge in the economy, don't borrow it.

  13. mikestallard
    October 19, 2008

    From the Telegraph headlines this morning it is obvious that none of the above suggestions are to be implemented.
    Instead we are to have a Keynesian solution – like spending more on the insulation of houses, and the Olympic games. Even some cross London rail routes are to be looked at (again).
    This will mean that the national debt will be massive. And, of course, we will have to cripple ourselves with the interest. How will we pay for it? The city will be in the same state as british Rail in the 1970s. The manufacturing section is dwindling. Our agriculture is crippled. Many, many people are on the government payroll one way and another. Taxes, meanwhile, are bound to crash.
    George Osborne went out of his way to be on the same side as the government. According to Matthew d’Ancona in the Telegraph, his offer of cooperation has simply been pushed to one side.
    On top of all this, Ed Miliband seems determined to implement the ridiculous climate change objectives which will cause even more disruption to our earning capacity and finally will put the lights out.
    It was really good to see Mr Cameron attacking the government. About time too!

  14. […] Krugman has been very impressed by Gordon Brown’s response to the banking crisis. Redwood has not. The banking crisis is complicated. When faced with a complicated policy issue, there is a […]

  15. Adrian Peirson
    October 21, 2008

    Climate change, and CO2 Emmisions, Congestion charging, like we can solve those with mass immigration.
    We are being packed in like sardines and fleeced like sheep.
    If we need so many, why has Westminster presided over the Abortion of 6 Million British babies, what exactly is the purpose of having 'advice' clinics in every town and what is the ultimate purpose of this advice..
    and why is Dawn Primorolo suggesting we should sterilise British Schoolgirls, Just exactly what are the Communists in our Establishment up to, ( he asked, as if it wasn't self explanatory )

    Primorolo, Sterilise British Schhoolgirls http://www.dailymail.co.uk/pages/live/articles/ne

    This man thinks he Knows what they are up to, and he should do. http://www.brusselsjournal.com/node/865

  16. Tuinmeubels
    March 29, 2009

    I have a simple thing to say about this that why don’t the local councils get involved in staying repossessions by a shared ownership scheme which would allow people to stay in their homes,this could steady the housing market and free up some of the capital for banks and building societies.Raising the VAT limit for small businesses to £100,000 would help them,surely this would be a start.

  17. How to Get Six Pack
    April 15, 2009

    The style of writing is very familiar . Did you write guest posts for other bloggers?

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