The G20 needs to find some horses before they improve the bolts on the stable

The G20 want to discuss how to bolt the stable doors – they should try looking for some horses first.

The putative agenda for the G20 is all about better regulation of the financial world to prevent a repeat bubble. I am all for that. The overblown regulatory industry of the last decade failed spectacularly to do one simple thing – keep lending and borrowing within prudent limits. Next time round we do not need more regulators, just regulators who use the powers they have to keep some overall size control on financial institutions balance sheets.

However, we are not in the luxurious position governments are spinning we are in. They want us to believe the banks have been saved by Gordon, Paulson and others, that money markets are gently returning to normal and all we need to worry about is some future credit binge. If only.

What we should be worrying about is recession. Last month 250,000 more Americans became unemployed. The car industry in Europe and the USA has fallen off a cliff, leading to financial distress amongst major companies, factory closures, and more job losses. Property related businesses in the USA, the UK, Spain and other distressed centres have seen a huge decline in the volume of business as well as a big fall in the value of any property assets they own. Steel makers now have to cut capacity. Retail staff hang around little used tills, worrying how much longer they will have jobs. This recession is finding its way into most nooks and crannies of the advanced economies. It will leave a trail of devastation in its wake – job losses, bankruptcies, broken dreams, damaged families, dislocated businesses.

Beneath the surface of their soundbites and their political games, the governments of the west are worrying about how to dig their economies out of the mire they have driven them into. There are now three main policy options being pursued, and two being considered.

1. Cutting interest rates. This is the best and in some ways the most important. It was high interest rates and tight money which triggered the collapse. Overborrowed countries, however, need to tread carefully.
2. Making more cash and short term borrowing available to banks, with guarantees to assist markets. If anything makes the money markets work again, this will. It is going to take time and unbelievable sums in cash to do so.
3. Buying shares in banks, to recapitalise them quickly. This is a foolish policy, as it puts the taxpayer on too much risk, and delays the cuts in costs and inefficiencies which the banks need to make to do better in the future. It limits the scope for interest rate cuts.
4. Bringing forward public spending on capital projects. This is being considered on both sides of the Atlantic. In practise it is slow to work, as projects take time to bring to contract stage. At the margin it is helpful, and shows “something is being done”, but cannot be done on the scale to power us out of the slump.
5. Tax cuts to give people more spending power, to encourage more demand. This too could be a useful contributor, and worked in the second quarter in the USA. It can only be done by countries with a sufficiently strong financial position to afford it.

What should be done?

I would do four out of the five policies above. Even the UK could afford some borrowing for short term tax cuts, if it stopped buying bank shares on the scale envisaged. I would also want the international meeting to address the wider issue of the big global imbalances.

China and the oil producers have too much in reserves and savings. The west has been overspending and borrowing too much. There needs to be short term transitional arrangements, and a longer term fix.

In the short term a combination of weaker western currencies and less demand at home should force more into export. The UK and the US have to start earning their higher living standards by selling more abroad and producing more at home. During the transition period the IMF needs to strengthen its reserves from the cash and reserve rich countries of the world, to relend to the strugglers. China needs to make more progress in freeing its currency, and in stimulating her internal demand to provide a market for the world to aim at. There need to be further relaxations of barriers to trade to encourage more export to the cash rich countries.

China and the Gulf states will probably carry on lending more money to the West, and buying shares in Western companies. We need their money to sustain our overborrowed lifestyle, and they have few other places to put their cash. We need to free capital and currency markets, and markets for goods and services, as much as possible to speed and facilitate the movements needed to right the imbalances. Now is exactly the wrong moment to impose new controls and to think protectionism is the answer. The answer for the West is not less world trade, but more world trade where we are selling rather than buying.

Western governments, instead of subsidising bankers bonuses, should be making heroes of the exporters. We need them now to right our accounts and help us wipe off the big deficits of the bubble years.

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11 Comments

  1. DiscoveredJoys
    Posted November 8, 2008 at 1:04 pm | Permalink

    I bow to your superior insight John, and agree with the points you make.

    I do think that there are two other longer term transformations required though. They won't directly affect the current situation, but they might ameliorate future booms and busts. They are:

    a) Gradually decrease the lifestyle expectations of the developed countries. Has to be gradual for fear of upsetting world trade, but the principle of economic growth 'forever' just cannot be true. Far better to reduce expectations now, rather than get into depopulation and wars over exhausted resources. The financial systems might be more robust if 'growth' is no longer the be all and end all of 'sucess'.

    b) Remove expectations of 'no risk' living. This is in two parts, reduction of trivial and expensive rules about consumer and worker safety – yes, keep rules about food adulteration and wearing hard hats and safety boots, but remove rules about the shape and appearance of fruit and vegetables and running endless risk assessments about using correction fluid. The second part is reducing government rules about employment – do we really need the number of child protection enquiries, do we need endless paperwork to be a child minder, do we have to erect huge paperwork barriers around starting a new business? I fear there are far too many professional 'busybodies' making life difficult in the pursuit of 'no risk' living.

    Taken together both of these ideas would encourage the mindset of getting the best out of what we have, rather than rewarding unthinking consumerism. We'll know that the world's economy is on a sounder footing when sensless excess is frowned upon and not treated as a mark of success and celebrity.

  2. Bazman
    Posted November 8, 2008 at 1:42 pm | Permalink

    If this and previous governments had been more supportive of engineering, manufacturing, shipbuilding and other less glamorous areas of the economy we would be in a much better position to weather any recessions. As a lot of people, myself included suspected much of this service and financial economy was built on sand and kept this in mind. Do any more bright sparks still think tax cuts for the rich are the way forward?

  3. david
    Posted November 8, 2008 at 1:46 pm | Permalink

    Yesterday, we had Red Dave of Blue Labour telling the government that they should, 'order' the nationalised banks too lower interest rates. Today we have, 'Pinky' Duncan, (author of libertarian tract Saturn's Children) telling the government that the Post Office, must be saved regardless of cost: what next Clause Four?

    Are you in the, 'Right' Party John? Looks like a 'Left' Party from here.

  4. jean baker
    Posted November 8, 2008 at 2:49 pm | Permalink

    Bazman,

    The last Labour government was held to ransom by unions who drove the final nail in the coffin of shipbuilding. The state of Britain inherited by Margaret Thatcher following the winter of discontent is not forgotten. Since her departure, Nulabor has morally and financially bankrupted Britain – blaming others in the process.

    • Bazman
      Posted November 8, 2008 at 5:29 pm | Permalink

      The idea that the unions causes the demise of the shipbuilding industry is your fantasy. Where they responsible for the death of the British motorcycle industry too?
      Subsidies and investment support in Europe, America, Korea and Japan have left UK yards at a competitive disadvantage.
      Who builds these great cruise liners that fly British flags and are talked up to be the best of British? Not us, and the facilities and skills are not now available, not even enough people available for military contracts. That will be the unions fault too I suppose? Anything to say about the banks holding us to ransom jean?

  5. oldtimer
    Posted November 8, 2008 at 3:32 pm | Permalink

    I would add as #6 tax incentives.

    These need to be structured to encourage savings for investment. For savers the credit crunch is, in fact, an asset crunch as penson funds, investments in shares and interest earned on cash deposits have taken an almighty hit over the past year.

    There has been enormous wealth destruction; there needs to be wealth creation now. The dead hand of government intervention will not do it. It needs a willingness for people to take risks again in an extremely hosltile environment.

  6. Roger
    Posted November 8, 2008 at 6:09 pm | Permalink

    I think in all this that the miscreant, Brown, is absent. No good putting forward a !"solution" when the destroyer is being "lauded" as a saviour when he is nothing of the kind.

    The media are wilfully bending the information.

    PLease keep to the interests of the working people of this Country,( those jobsworths within the state = x million, are excluded).

    This Tory Party I once supported without thought, is no longer.

    Sound Principles well explained will always hold the day.

    We have "sheep" as voters. Sad.

    Any politician who moves to secure their own future through greed, and not to serve us, will pay a price.

  7. mikestallard
    Posted November 8, 2008 at 7:04 pm | Permalink

    Can I address point 4? When I was on the dole in the 1990s, I met with a sort of wall. There were certain useless jobs (double glazing salesman, call centre work etc) and nothing much else. It seemed, frankly, that there was nothing worth getting out of bed for. Eventually, I went back into teaching until retirement beckoned.
    It seems to me that England needs a job too. Yes, we can cut back (we aren't), and no, we cannot go backwards as Bazman says.
    What sort of areas can we look at?
    Africa is bursting for some peace and quiet. We are excellent with Africans and we have an excellent track record there too. There is a man's job to be done in the dark continent. Cecil Rhodes anyone?
    We are simply excellent at inventing things. How about a few elitist think-tanks to work on what happens when the oil runs out? (I do not think the Labour government is actually going to be able to work this).
    Encouraging actual leisure is another area which is very fruitful. When I was on the dole, I had less time to enjoy life simply because I was too busy desperately looking for work and there wasn't any.
    For us religious people, too, of course, there is lots to do. Any chance of some support from the government there? Erm. Perhaps not.
    Instead, I suspect that we will borrow for a lot of very high prestige projects which will achieve nothing much. A huge Olympic Stadium, a lot of money wasted on high speed railways, perhaps. Lots and lots of "facilitators"…….

  8. adam
    Posted November 8, 2008 at 8:00 pm | Permalink

    I was watching a bbc4 programme on FDRs New Deal last night.
    It said cotton prices had fallen 70% and cotton workers were being made unemployed. FDRs solution was to employ those workers to go out and destroy the cotton crop in the hope it would drive up prices.
    It is difficult to think of a worse thing to do. I can imagine the howls of laughter if Sarah Palin had suggested it.

    FDR is still a hero of the left.

    In times of crisis it is all the more important to have a government that actually understands basic economics.
    With role models like FDR, Gordon Brown does not.

    We need a conservative government as soon as possible to minimise the damage.

  9. jean baker
    Posted November 10, 2008 at 2:58 pm | Permalink

    Bazman,

    Witnessing unionists final destruction of Britain's shipbuilding industry was vastly different from the demise of the motor cycle industry's demise through, mainly Japanese, competition. They simply took over British innovation and produced it cheaper.
    Perhaps you're too young to remember the 'winter of discontent' resulting from destructive union activity which made that Britain was the 'laughing stock of the world' when Margaret Thatcher was elected. Nulabor's casino capitalist socialism has bankrupted Britain for generations to come …. taxpayers are used to profit and gain with 'closed shop' PFI's etc.

  10. Wealth Creation
    Posted November 18, 2008 at 10:32 am | Permalink

    I hope all is well. I'm out trying to find some other people with some of the same interests I have.

    Hope all stays well.

    Chuck

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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