Do nothing or do the wrong thing – please don’t let that be the question

Let me begin today by reassuring the politically correct monitors that I am not in the “Do nothing” camp when it comes to the economic crisis. Indeed, anyone who has looked at this site for the last eighteen months will know I was in the do something camp – cut interest rates, make more liquidity available, change the way of helping the banks – long before the government.

However, there is one thing worse than doing nothing, and that is doing more wrong things. Some of the action the government has taken has made matters worse. I think in particular of the VAT cut, which was never going to stimullate spending; the nationalisation of two mortgage banks which meant effectively withdrawing them from the new mortgage market and sacking lots of their staff; and buying shares in 3 other banks without revaluing their assets or putting in a plan to make them more successful.

The government needs to review its current range of measures, dropping some, carrying on with some, and introducing some new ones. Today it is too hectic. It expects instant results when problems are deep seated and are going to take some time to work through. It has forgotten that it always takes a long time for lower interest rates to stimulate activity and eventually to raise inflation, just as it took a long time for higher rates to bring everything to a grinding halt and then to curb price rises. The same is true of their move from easy regulation to tougher regulation of the banks.

So what is my short list of policies to drop or reverse?

1. Cancel the VAT reduction
2. Sell Northern Rock and Bradford and the Bingley mortgage business for whatever they can get for them, so they can start to work again.
3. Give the banks more time to raise their capital ratios and agree a faster timetable for repayment of the government Pref shares
4. Announce no more interest rate cuts for the next six months, to give money and savings markets some chance to settle down
5. Announce some tax cuts that put money back into people’s pockets.
6. Announce lower public borrowing figures based on 1,2 and 3 above being considerably larger than 5.
7. Announce that the government is concerned to keep overall public borrowing under some kind of control, adjusted for the cyclical effects.

My worry about present policies is the government is expecting the state to do too much. It wants the state to be lender of last resort, borrower of last resort and spender of last resort – indeed, to be lender of first resort, borrower of first resort and spender of first resort as well. I have no confidence that this is going to work economically. More importantly, how compatible is this with a free society, and with a free enterprise economy? The more the state did in Eastern Europe, the further living standards fell behind the West in the second half of the last century. The government needs to be wary of being dragged in to making too many financial and commercial decisions it is not equipped to make.

(I have written at greater length about the origins of the crisis and the government’s handling of it today in the Sunday Telegraph.)

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25 Comments

  1. Ian Jones
    Posted January 11, 2009 at 9:14 am | Permalink

    Once again another straight forward and effective blog which seems to be the opposite to the rest of the media! As you state there is not going to be a magic bullet, the policies already put in place will take 12-18 months to feed through.

    You are right to be concerned with the Government getting too involved in supplying money to business. It is one thing to support the provision of capital through banks for investment but the demand from business is for working capital to tide it over until its customers pay. If the final end customer never buys then the Govt ends up owning nearly all the debt accumulated to get the unbought product to market! It will also find businesses get used to the new arrangement since it will be cheaper to borrow capital than elsewhere so how will the Government switch off the financing?! Ultimately the taxpayer would end up with huge losses or owning a signifcant number of businesses!

    It is worrying how quickly we are heading towards a socialist paradise without taking the time to examine the consequences!

  2. Ross
    Posted January 11, 2009 at 10:05 am | Permalink

    Let’s be more realistic about how long all this might last. Consider the following possibilities:

    (1) Perhaps the depression will last about 18 months with a peak-to-trough house-price fall of a third. This is what Varley believes and Gordon Brown apparently hopes

    (2) Perhaps it will last about four years with a house price fall of a half. That’s the view of the most convincing economic analysis I’ve seen – Google Reinhardt and Rogoff, “The Aftermath of Financial Crises”.

    (3) Perhaps it will be like Japan, or the 1930s – a ten-year depression with a house price fall of 80%.

    Let’s be cautious (rather than fearful) and assume (2). What are the reasonable policy options then?

    • Robert
      Posted January 11, 2009 at 4:36 pm | Permalink

      Ross, I would put a 80% probablity on (2) and 20% on (3) – I still believe that John’s proposals would still apply. There is no magic short cut to get us out of this recession caused by our 4 year borrowing binge. At best we will eventually kick-start some form of lending over the next 6-12 months but as posted many times before personal and corporate and governmental balance sheets need to be rebuilt at a time of contraction otherwise we will only delay and defer any real chance of recovery.

  3. mike cassidy
    Posted January 11, 2009 at 10:24 am | Permalink

    Nice one JR.
    the trouble is with Brown, the Prime Chancellor is that we are not simply subject to his misguided, ill informed financial decisions we are also at the mercy of his ‘dogma’ which is left wing and like his own ** ‘all controlling’ personality-he seeks along with his cabinet cabal ,an all controlling state.

    **Why for heavens sake does he deem it necessary for him to ‘chair’ an employment forum tomorrow??

    His borrowing will not resolve our current ‘Brown aggrevated’ finacial woes-it may ease for some their financial plight, but it will cause long lasting misery FOR ALL to pay back these funds.
    please never forget that Brown (and Blair) rode this debt fuelled boom and Brown in particular constantly claimed credit promising no more boom and bust yet giving us both!!

  4. mike cassidy
    Posted January 11, 2009 at 10:29 am | Permalink

    If i may?
    Brown knew what was going on as regards the debt fuelled boom- he had witnessed it before attacking conservative Chancellor of the day I quote Brown, in the House of Commons
    1st November 1988-
    Quote ‘This is a boom based on debt’

    yet went and did the same and claimed credit for it -he knew what was around the corner for millions of ‘fellow Britons’!!

  5. Kit
    Posted January 11, 2009 at 10:36 am | Permalink

    Please can we have more “do nothing” politicians. Just imagine if the Labour government had just “done nothing” for the last 11 years.

  6. Obnoxio The Clown
    Posted January 11, 2009 at 10:50 am | Permalink

    John, as a minarchist, I wish the government WOULD take the “do-nothing” approach and let the market heal itself, which will be quicker and less painful overall.

    I wish Call Me Dave would wear the epithet with pride and use it to inform his own policies.

  7. Brian Tomkinson
    Posted January 11, 2009 at 11:01 am | Permalink

    JR: “The government needs to be wary of being dragged in to making too many financial and commercial decisions it is not equipped to make.”

    Sorry, Brown has been doing this for the last eleven years and won’t stop now! As for a free society, who believes that Brown has the slightest interest in any such thing?

  8. Bryan Davies
    Posted January 11, 2009 at 12:15 pm | Permalink

    John great blog. Trouble is, all the Tory “big beasts with practical policies are outside the shaddow cabinet.

  9. Nick
    Posted January 11, 2009 at 1:00 pm | Permalink

    Cut public spending, drastically, and increase the tax threshold to the poverty line.

    You know, and I know that government doesnt’ get value for money. Brown paid 6.5 billion over the market price for shares in HBOS, RBS and Lloyds. That’s a loss.

    If you cut back the state and lower taxes, then people will spend and spend efficiently.

    If the government pays off its borrowing, then the economy recovers.

    If you have compulsoary saving for retirement (stop accruing the state pension), then funds will be made available for companies to invest.

    Sorting public finances out will give the confidence to the world and the UK in the UK economy.

    Nick

    • Alan Wheatley
      Posted January 12, 2009 at 9:37 am | Permalink

      The idea that saving for retirement should be compulsory is unappealing. Once upon a time the idea that saving for a pension was a sound investment was an easy argument to make. Brown changed all that with his 1997 budget by removing the tax exempt status of the dividend on shares held in a pension fund. Not only did this devalue pension funds, it also broke the faith between pension savers and the government.

      Until that point the gains within the fun were tax free, and tax was paid once the fund started to pay the pension. That was the deal. Brown’s 1997 changed the deal. But the critical point is that not only did pension fund holders not have any say in the new deal, but they could do nothing about changing their pension investment if they did not like the new terms.

      Pension advice is traditionally to start saving for a pension as soon as possible, but that is a forty year act of faith. The Brown budget having broken the principle of pension saving and got away with it, and the new arrangement being accepted by the opposition, it seems reasonable to expect more of the same at some time during a working lifetime. Thus, what was a good deal is now less good, and is shrouded with uncertainty. It is hardly any wonder if workers find saving for a pension less attractive.

      For the government to force people to do with their own money what they do not want to do is an extremely unappealing feature of an overly authoritarian state.

      • Nick
        Posted January 12, 2009 at 11:50 am | Permalink

        I agree. So what’s the solution. It’s not to ban compulsoary savings, it is to make it imposible for governments to do this.

        Here’s my proposal.

        Scheme is introduced. Part of it says that it can only be changed by a referenda.

        Second part says that if the fund is taxed, people have the right to the cash prior to taxation, tax free. All of it.

        Turkeys don’t vote for Christmas. No one is going to vote to have their fund taxed. The majority will be those that are saving.

        Forcing the referenda issue makes it impossible for Brown to go and tax, since he won’t get the electorate for vote to be stuffed.

        ie. It’s a case that a pension is financial engineering that turns a tradeable asset into a non-tradeable asset. Until that’s removed, I’m not going to use a pension

        For the government to force people to do with their own money what they do not want to do is an extremely unappealing feature of an overly authoritarian state.

        The consequences of not doing this, is that 50% of your income gets taken to keep the feckless in fags and booze.

        I would rather have forced saving for the minimum income in retirement and unemployment, than have 50% of my income taken for the feckless chav.

  10. kevin
    Posted January 11, 2009 at 1:08 pm | Permalink

    labour keep spreading lies about the conservative party but some times the conservatives dont stand up for themselfs wasnt there a global recession in the 1980s when the tories was in power but labour just blame it all on the tories and say its your fault but when labour in a recession in 2009 its not them its the global economy fault, right lets make some things clear people aint saving so the banks aint leading money thats the problem who reduced our savings was it america was it america who axed tessa accounts that gave a higher return to savings investments tax free or was it labour who was it that bought in the complex ISA accounts and reduced the investment returns was it america or was it labour who done the pension raid was it america or was it labour who taxes everybody to the hills and then cant understand that business is going bust was it america or labour and last but not least who is running great britain is it america or is it labour? Labour like to pass the blame onto everybody else but not themselfs if its not labour fault and labour have no control then why are people voting for them and if they do have control and they created the mess that we are all in today why not kick them out of office the sooner uk plc can start to heal again LABOUR HAS NEVER WORKED IT NEVER HAD IT NEVER DID DONT LET THEM RUIN BRITAIN AGAIN AND AGAIN AND AGAIN BECAUSE BRITAIN DESERVES BETTER ps one last thing who fault is it that government dept is around a trillion pounds mark is it america fault or global economy fault or the labour government fault.

  11. rugfish
    Posted January 11, 2009 at 1:09 pm | Permalink

    Every now and again, just when I’m beginning to think that political debate with these guys is futile, I get a surprising rally from someone or from some source of information I mysteriously happen to come across which makes it all feel worthwhile again where previously I’d felt alone in the beliefs I hold that “things could be better”.

    Only the other day as I sat watching Obama give his speech in Virginia, I felt that this man is in tune. He knows we need change and he set about delivering what to me was a very clear statement as to how he intends to achieve it. Thus I could hardly wait to blog about Obama because I too believe that the constant up and down of economic boom and bust, surely cannot be what this world we call our home is all about. I just know and feel there must be another way of running the world which can bring peace, security, fairness, freedom and justice and economic betterment not just to “us”, but to the world. I have to quickly add that I’m not talking about socialism, communism or capitalism or any other ‘ism’, I suppose I’m talking more about what to me, freedom really means.

    Then I came across a video by Michael Palenti and another from Ron Paul. I received a few messages of support for the views I express on here and other places and I’m fighting fit again, ready to cover and say what I feel about what I see as a complete mess and a disgrace of our political and economic situation which is more aptly described here by another controversial diatribe from a guy which I confess I’d never heard of until 30 minutes ago.

    This is his piece on the economic ebb and flow of supply and demand. It won’t of course be to everyone’s taste as it’s quite a lengthy piece, but saying as it’s Sunday morning and I have nothing better to do at the moment I bothered myself to read it fully and took away a clear historical and quite accurate account of precisely why our boom and busts occur.

    It is as I thought. It’s THEM. Our leaders fault. And before I copy the link here for other readers, I’d end that by paraphrasing Michael Palenti when he says; ‘We have to stop seeing them as stupid and start to see them as dangerous’. Further, that ‘we can’t say our leaders are stupid if we were the one’s who elected them to lead us unless I guess you come from America’. ( His joke for Canadians ).

    The article ( from 2006 )

    http://www.commondreams.org/views06/0514-20.htm

    • brian kelly
      Posted January 12, 2009 at 1:36 pm | Permalink

      Well, of course it’s THEM – our leaders. In our case it’s our leaders the Labour Govt. They don’t know how to run a capitalist economy – they think they know how but they can’t. They are ignorant in the true sense of the word. It is a very long and complex subject. But the problem we have is not with the free enterprise capitalist system but with the people who have been running it in the USA and UK these past years. The real culprit is Alan Greenspan [Gordon Brown’s proclaimed great guru – funny you don’t hear Brown boast anymore of how he follows his every word – another example of his fatuous ignorance]. The idea of any organisation is to devise an efficient system or structure with appropriate checks and balances [not many but rigorously enforced] – a system which virtually runs itself – a system which will prosper greatly with wise, knowledgeable, intelligent leadership and will survive even with bad leadership. But bad leadership sustained for too long will destroy even a good system. To a great extent that is what we have in this country – a system built up and honed over centuries. But I will say ‘had’ – because this govt is a benighted govt which is fast destroying everything which is good in our system. Can we recover? Every week that passes without a change of govt makes that task much harder.

  12. Neil Craig
    Posted January 11, 2009 at 1:27 pm | Permalink

    I would still like to see corporation tax cuts & regulatory cuts not only to stimulate the economy but because they would have a long term structiural benefit of not only getting us out of recession but of improving our actual growth rate.

    It also strikes me that financing X-Prizes would not only improve our long term technological capacity & give us something as a nation to be proud of it would also provide as much stimulation as more personal spending & all concetrated in the most Hi-tech parts of the economy.

    If a 2.5% costs £12 billion & we could get a fleet of British orbital spaceplanes with an X-Prize of £0.5 bn (Jerry Pournelle’s estimate) surely the latter is worth doing. If he is wrong, of course, it costs nothing, that being the nature of prizes, but would still certainly have some stimulatory effect – not many government programmes you can say that about.

  13. Derek
    Posted January 11, 2009 at 4:08 pm | Permalink

    With regard to the NR & B&B sale you suggest. Would this be assuming no additional underwriting of the mortgage book by the govt? Is it nor likely they would have to offer a reverse premium to get them off their hands. Would this be a price worth paying to get the mortgage market moving again.

    Reply: Put them up for auction – as they will lose taxpayers more in the months ahead it would be well worth getting rid of them soon and giving them a chance to build some new business.

  14. Matthew Reynolds
    Posted January 11, 2009 at 4:14 pm | Permalink

    John Redwood is right with what he says. I would build on that further by pledging a three year 100% real-terms public expenditure freeze to be secured by asking The Center For Policy Studies & Adam Smith Institute to devise reforms to stop the state wasting £100 billion p/a ( as highlighted by the Tax Payers Alliance). The aim of the reforms should be to save enough money within three years to freeze government expenditure in real terms with a view to cutting the budget deficit and gradually easing the tax burden. This would be called sharing the proceeds of spending cuts between national debt control and tax relief. The first two years could be just deficit reduction & axing the planned Brown-Darling tax hikes – year three could see more stress on tax reductions.

    We need to stop excess public borrowing plunging us into an Italian style crisis and high taxes causing Carter Malaise style chaos.

  15. mikestallard
    Posted January 11, 2009 at 5:29 pm | Permalink

    http://burningourmoney.blogspot.com/search/label/central%20banks
    I was interested to look at the figures on this site. According to BOM, the banks have not stopped lending at all: rather they seem to be lending at the same rate. There is a useful little table of this.
    Why won’t the government do the obvious thing and simply cut back? Your first and second points are ways which, it seems to me, would be painless. Still massive amounts of new non-jobs are being offered, (presumably with pensions) and every day we get a new million pound expenditure idea.
    Is it that they are still the Trotty students that they were back in the 1970s, who believe in the dictatorship of the proletariat?
    Is it that they truly cannot see the difference between real nurses, doctors, teachers, and policemen and their client jobsworths with stripy suits, flash offices and first class rail tickets?
    Is it that they truly believe that they know best what is good for us and that it is their duty to lecture and educate us into being better people like them – a sort of 21st century Calvinism?
    Or, most sinister of all, are they trying to buy just a smidgeon of prosperity before the election by borrowing?

    • mikestallard
      Posted January 11, 2009 at 5:31 pm | Permalink

      PS – Lovely article in the Telegraph. Well written!

  16. Jack Maturin
    Posted January 11, 2009 at 8:33 pm | Permalink

    Doing nothing would have been preferable to all of the stupid actions Brown has engaged in so far, to prop up his client state. But if the government must do something, can I propose my own six-point plan?

    1. Sack every government non-jobber in the land and give the savings back to the rest of us as personal tax cuts.
    2. Get the government out of private business. The government can hardly run the post office, so why it thinks it can run the infinitely more complex banking sector is beyond me.
    3. Abolish all corporation taxes, employer national insurance taxes, and every other kind of company tax that inhibits people from investing in Britain and providing British people with productive jobs.
    4. Abolish all savings taxes for everyone, to encourage people to start saving private capital which can then be used to invest in productive wealth-generating projects rather than wasteful ‘Bridge To Nowhere’ government projects.
    5. Move the pound to a commodity-based 100% reserve money standard of either silver or gold and abandon fiat currency after the government has now proven that it cannot be trusted to manage the money supply. (Actually this proposal is going to come true anyway, regardless of what anyone in Whitehall might want – all fiat currencies eventually become worthless, but at the rate the government is now printing money, the pound will simply disappear within the next few years and the only way out from that hole will be to adopt silver or gold as true money again. It will either be that or adopt the Chinese Yuan.)
    5. Abolish the Bank of England and let the free market work out interest rates, rather than the government bureaucrats who got us into this mess.
    6. Announce that the government is going to start paying off all of its debts and then living within its tax-income means for the foreseeable future. Further announce that it will become a government priority that Tax Freedom Day, which currently occurs on the 2nd of June, will be brought back to the 1st of May (then the 1st of April, the 1st of March, etc.)

    That ought to do the trick.

  17. David T Breaker
    Posted January 11, 2009 at 8:58 pm | Permalink

    I think the all too much forgotten problem is the low rate of savings. Until the banks are recapitalised through deposits, they won’t have anything to lend out as I can’t see the wholesale money market returning any time soon. The higher government debt makes matters even worse by crowding out the private sector from the credit market. When will common sense return?

    newsjunction.co.uk/news

  18. Brian
    Posted January 11, 2009 at 9:38 pm | Permalink

    I am a big fan of this blog but take exception that Northern Rock should be sold for whatever they get for it.

    The government hasn’t paid former shareholders for their shares and these shares should be returned to shareholders not sold on.

  19. Anne Palmer
    Posted January 11, 2009 at 11:05 pm | Permalink

    Like John Redwood, and probably many other people, I thought the reduction of VAT was a rather silly move to make, particularly so at Christmas time when many stores reduce items to beat the January sales. The goods bought, would have been ‘sold’ in time for Christmas anyway (If you can understand that muddled sentence)

    One thing I do know, is that no good will come out of borrowing more money to get yourselves out of debt.

    I stated at one time trying to find out just how much money this Government had committed the next generation to through PPP/PFI only to find out that it may not be the next generation because it can be anything from 30-50 years. And what if some of those firms are in difficulty during this time? I do know the figure is in the Billions. Even though we are not in the Euro, we still-as long as we remain in the EU have to comply with the EU’s Stability Pact!

    What gets me in all this, our Contribution (billions also) to the EU will be paid on time without a second thought to all the debt the next generation are going to have to pay re PPP/PFI.

    I also tried to find out exactly how much “Crown Land” had been sold off by this Government and what they had done with the money from that. Some are recorded, but I had to give it up in the end.

    Your seven points seem fine to me, but the burden for future generations is too heavy already. I just hope and pray they do not just print more and more money.

  20. THE ESSEX BOYS
    Posted January 11, 2009 at 11:20 pm | Permalink

    Some great stuff today, notably from Mike Stallard and Jack Maturin. These non-jobs have been eating at us for years and we’ve written, blogged and gone on-air to no avail; nobody in government or opposition takes it seriously, possibly because they don’t want to rock the pension and perks gravy train for themselves.
    Encouragingly, as so often happens, the Mail is taking it up as a campaign theme and perhaps will again shame Westminster into action!

    Re NR & B&B…we doubt the government WILL be brave enough to auction them and cop the loss so another thought being kicked around the roast beef and yorkshire at lunchtime…

    Why not run them as the kind of bank we – and it seems the government – have all been wanting? One that keeps its costs low; pays no executive bonuses or golden handshakes; that lends the money the taxpayer has given it at reasonable lowish rates; that offers concessions to first time buyers without throwing caution to the wind; that is day-to-day managed by old-fashioned pre-1997 bankers who do not waver from the basics of banking, avoiding all ‘modern instruments’.

    Perhaps there’s a minority partner like Tesco who know about sound financial discipline without being steeped in banking culture and who have firm management and thrustful marketing disciplines to practice and teach. The partner would have the option of buying additional equity and other relevant partners could be introduced or a flotation might take the bank off the government’s hands in due course – quite possibly at a profit.

    Rather than an auction at a big loss or knock-down price it’s a bit like the wise decision one of us took recently in ignoring accepted wisdom of getting shot of his late mother’s faded and run-down house as it stood. Instead, for £2,000 he threw out the old furnishings and borrowed some modern pieces. Replaced the carpet throughout, redecorated and then enthused the estate agents. The agents’ revaluations were 20% higher after the work and he achieved that full price with several disappointed would-be buyers! Any thoughts out there?

    By the way the Roast Beef was delectable and we raised a glass of merlot to JR for a great week’s blogging!

    Reply: Yes, your analogy with the house is a good one – cut the costs and sell the bank shares on. The current cost model of the nationalised banks is absurd for loss making public sector businesses.
    There are too many non jobs in the public sector, starting with all that unloved unelected regional government.

  • About John Redwood


    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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