I try to give credit where credit is due. The BBC this morning allowed me with Roger Bootle to give a good airing to differing approaches to the Credit Crunch. It was refreshing to be part of a discussion and interview where we were not subjected to the idiocies of spin and interruption at all stages, or prevented from developing an argument. I hope it worked for the audience, who could hear for themselves the range of arguments over how to mend banks, stimulate demand and balance savers against borrowers.
I see and hear in today’s media that “quantitative easing” is back on the agenda as a possibility “if all else fails”. I would urge all those about to broadcast or write on this subject to take the precaution of first reading the latest Bank of England Weekly statements. These show that quantitative easing is well underway. The Bank’s balance sheet has ballooned from well under £100 billion last September, to nearly £240 billion by the year end. Just picking up tittle tattle from “sources” can be very misleading.
Actual printing of bank notes has been more limited, but these are up over the year by more than 10%, well ahead of the fall in economic activity and price increases.
The fact that none of this is working as people hoped, and the big cut in interest rates has not yet worked, means one of two things. It means that the usual time lags have been forgotten. Because the authorities left it too late, they are now in panic mode because the response is predictably going to be later rather than sooner. Or it means the banks are so broken by the current regulatory system and their own bad lending in the past that they cannot respond in the usual way to a very strong monetary stimulus.
I return to the image of the person in the shower. They have now turned the shower up to hotter than it has ever run at before, by both very low interest rates and quantitative easing. If the shower is still working, after a delay we will get scalded. Alternatively it is possible the shower is broken, in which case twiddling the controls will make no difference. We need to mend the shower.
So please, government, call the banks, the FSA and the Bank of England in, and sit down to discuss what kind of banking package will get banks lending a bit more at sensible rates related to the current low base rate, whilst trying to ensure the taxpayer can afford it. At the moment the capital and liquidity requirements on the banks are pulling in the opposite direction to the monetary policy, creating a very bleak economic prospect for non banks without access to state funds. We need a resumption of sensible lending levels at reasonable rates. We also need to keep a strong bank deposit base, which means allowing a decent return to savers.