The UK authorities combine blood curdling statements with inappropriate action to handle the financial and economic downturn. Mr Bean, deputy Bank Governor, has gone further than the Chancellor and the Governor with lurid language. Do these people not understand that markets are listening to their every word, and moving prices on the back of their statements? Can’t they learn to use language carefully? They should tell us the truth in a measured way, always pointing us to a better tomorrow by taking action likely to stabilise rather than destabilise.
The question this morning is how much more bad news is it going to take to get them to do something sensible? How far does the pound have to fall to get their attention? How far does the Stock market have to fall to persuade them that current policies are not working? How far do the prices of bank shares have to fall before even this government says the potential losses to taxpayers of the bank share deal are unacceptable? When will they stop concentrating on trying to avoid the next credit bubble by the kind of tough regulatory action they should have taken 2004-6, and see that their immediate problem is not a credit bubble but a credit collapse?
I am constantly being asked what could they do? Here is my present list, containing some familiar items to regular readers.
1. Cut interest rates. Convene an emergency meeting of the MPC if they want to persist with the fiction that they are in charge, and don’t let them out until they see sense and back Mr Blanchflower.
2. Revisit the banking share package. Tell Lloyds to raise its own money anyway it sees fit. The taxpayer should not finance the merger. Sort out with HBOS and RBS a package which is fairer and lighter on the taxpayer, making them raise more of their own capital and cash by cutting costs and expenses and conserving more of their own cashflow.
3. Start to get more control over public spending, and give us revised forecasts of public borrowing which are credible and show a wish to get on top of the government’s own growing debt mountain.
4. Sort out the statements of the UK authorities. They should be sober rather than apocalyptic, and should concentrate on what is being done to tackle the problems of banking liquidity and capital, overborrowing and government indebtedness.
5. Produce new forecasts of the economy so we have a better idea of what the authorities really think about the length and depth of the recession they are now calling.
6. Work with the banks to get maximum benefit from the £400 billion plus package of loans, guarantees and money market assistance. The money needs to be supplied however it does most good to get banking markets working again, with proper security for taxpayers.
7. Deliver on the promise to pay all government bills within 10 days.
The magnitude of the UK debt problem is large but it could be manageable. UK consumers and mortgage holders have borrowed around 100% of National Income. UK companies have been more restrained, borrowing maybe half National Income. The government owes somewhere between half and more than 100% of National Income depending on whether you include pension debts in the government total as they make the private sector do. If we take as a very rough figure total borrowings and liabilities of say £3.7 trillion, the interest burden is still manageable. At 5% interest it works out at around one eighth of income, and at 10% at a quarter. Lower interest rates enforced in the market would clearly ease the pressures.
The danger for the government is that the interest burden on state borrowing will rise too quickly, both because the increase in the amount of debt is now so rapid, and because if they seek to borrow too much they will have to pay a higher rate. As this downturn began because the authorities decided they needed to reduce the total amount of private sector borrowing, and as it intensified when the authorities decided to tighten the squeeze by demanding banks hold more capital for a given level of lending, it would be odd to end up simply transferring the excessive borrowings from private to public sectors.
There was too much credit by 2007. The authorities have not shown a sure touch in deciding by how much they want to cut it and over what time period. In the meantime, instead of the public sector showing us how to restrain spending and borrowing, they are doing the opposite. That makes absolutely no sense unless your aim is to take more and more into state control.