Why is the recovery so feeble?

By this stage in a normal recovery there would be rapid growth. The hesitant and much spun recovery so far is symptomatic of serious problems remaining with monetary and banking policy.

Whilst the media and political parties talk about the odd few billions, I have been trying to draw the debate onto the big numbers that matter – the £800 billion reductions in the RBS and Lloyds balance sheets last year, and the £170 billion public deficit. Yesterday the Telegraph picked up the bank contraction and gave me space to restate the case I have often made over the last year.

The main reason we have such a poor recovery is the impact of our banking regulations on lending to the private sector. This is allied to the huge imbalance between public and private sectors, where so much of the available money is pre-empted by tax and loans for the public sector, leaving the private sector short of cash and confidence. The Banking Regulator has made two big errors. The first is now well known – the failure to rein in bank exuberance in 2005-7, allowing an inflationary bubble. The second, tighening the capital and cash requirements too much near the bottom of the cycle, still goes largely unacknowledged, but is the origin of our present discontents. This is the time to allow banks to lend more without demanding more cash and capital. Those demands for more prudence should come as the cycle lifts. The first requisite for a decent recovery is sensible banking regulations that allow bank balance sheet expansion now, instead of forcing the mega contractions we are witnessing at RBS, and the lesser ones elsewhere.

The second requirement for a better recovery is recognised in the Conservative approach. We need more enterprise friendly policies to allow expansion of the private sector and the creation of many more private sector jobs. That will require lower Corporation Tax, lower small business tax, fewer expensive regulations, more tax incentive to create jobs and take risks. This needs to be balanced by measures to cut out wasteful and less desirable spending in the public sector, as we have often analysed on this site – with many examples of the cuts we need. We need to get the deficit down to ensure poor public finances do not force up interest rates as they did for Greece, and to prevent the public sector pre-empting all the available loans.

The only way out of this crisis is for us all to work harder, to earn our living at home and abroad, to make and sell more here. Government needs to help that. Present policy stifles it.

Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham Berks RG40 1XU


  1. Simon
    April 13, 2010

    We have a booming stock market, booming retail sales, a booming housing market, manufacturing was reported as growing at the fastest rate in x number of years last week, inflation is well above target. I would argue the opposite – we are making the same mistakes all over again. Interest rates are now even lower than the low rates which fuelled the reckless boom.

    Lending to individuals for house purchases needs to be much tighter, 3x salary max, 15-20% deposits required. That will sort much of the house price problem out in one swoop and make people save instead of borrow and not leave people exposed to small rate fluctuations. Sure let companies who need it have access to credit, but don't allow households to rack up huge debts all over again.

    All that has happened is we've had desperate measures to re-inflate the whole bubble like it was pre-crunch. You really couldn't make it up.

  2. Ian Jones
    April 13, 2010

    I would imagine that interest rates at 0.5% and lots of lending is simply going to tip the economy into inflation especially with 200bn of QE slopping around.

    The reason for the crash was asset prices got out of synch with real prices, the Bank of England policies have simply pumped asset prices back up and they hope the rest of the economy will catch up.

    The UK economy is totally distorted.

  3. waramess
    April 13, 2010

    The Conservatives now have a few short weeks to persuade the electorate of this. Don't be surprised if they are unsuccessful.

    I agree this is what is needed but I am not persuaded the Conservative leadership can achieve it or are indeed committed to the idea

    Over the past two years the message has not been a strong one with the Conservatives variously vowing to match Labours spending plans and sharing the proceeds of growth, neither of which give credence to them seriously pursuing a small government policy.

    What matters when it comes to gaining the confidence of the electorate is consistency and frankly Labour has the edge.

    No matter the policies of Labour are mistaken, the message has been consistent and relatively easy to understand notwithstanding the anger felt by much of the electorate.

    There is no obvious reason why Cameron should have hidden this light under a bush for so long; the socialists were unlikely to steal it, so why has it taken so long to be revealed?

    Looks suspiciously like a deal to regain the initiative from the socialists and one has to wonder what will happen to this new found policy if the Conservatives win.

    I am now a doubter and it would appear that I am in good company with a large swathe of the electorate. I will not believe it until I can see it and touch it or unless a new leader with a good provenance and consistent record on economic policy can take up the baton.

  4. Simon D
    April 13, 2010

    I agree with your comments, but your solutions are not yet on the radar and will be unacceptable to the British public whoever tries to implement them. It is instructive to compare ourselves with Canada 15 years ago or with Spain as evidenced in the Spanish Prime Minister's recent interview with the FT. This was discussed by David Starkey and Michael Portillo on Monday's 'This Week'

    Three crises may be about to come together as a perfect storm:

    1. A political crisis resulting from a hung parliament.
    2. An economic crisis resulting from the Government's inability to implement any of the measures and cuts you are advocating and
    3. An institutional crisis caused by the idea held by the British media and many members of the public that a melt down happens only in places like Greece, Spain and Ireland but cannot happen here. The British left and the trade unions will oppose cuts with a ferocity not seen since the poll tax riots.

    After the main vote on 6th April there will soon be another vote when the bond markets will have to decide what to do about the British currency in the light of political and economic paralysis. Those who have not bought gold before then are probably in for a very nasty surprise.

  5. Hugh
    April 13, 2010

    John, this is an ongoing problem, is it not. Adair Turner runs the FSA and Gordon Brown the Tripartite Regulatory thingy, so these two are responsible for keeping the banks tight.
    Presumably, one of George Osborne's first actions when he replaces Brown will be to replace Turner, who just does not seem to be able to get things moving. Tha Bank does not seeem to be quite so useless.
    Would you be available to replace Turner at the right price?

    Reply: It might clash with another job I have applied for!

    1. David Belchamber
      April 13, 2010

      Tell us more, please!

  6. John Duck
    April 13, 2010

    The current interest returns for savers aren't helping much either I'd have thought, having just had my 94yr old Grandma's savings account book flashed in front of my face……

    Interest returns on £1000 c. 2004 & 2005
    = around £28 – £36
    Just think what you can go out and buy with that….
    – a fishing rod license
    – a Nintendo DS game
    – 60 cans of fizzy soft drinks

    Care to guess how much annual interest was paid on the account (with around £1300) last week?
    The same as the price of a tray of chips, or 20p short of what it now costs me to take the bus 2miles into town to get them.

  7. John Wood
    April 14, 2010

    I am not convinced that bank lending (other in the very short term for emergency loans) is worthwhile – for the simple reason that the bank will take more money out of the economy than it puts in.

    It would be far better if the bank were to buy equity in the business and share in the proceeds of growth.

    It would also benefit if the banks and government concentrated on businesses exporting! Our balance of payments deficit in goods is £6 billion and it is only the much maligned financial services that is bringing it down.

    But each month £2 billion is leaving our economy – slowing it down and is being replaced by a similar amount of additional borrowing – which over time will slow it down more.

  8. Lindsay McDougall
    April 16, 2010

    With sterling low, we have an excellent opportunity for a recovery led by export growth and import substitusion – but only if the necessary investment capital is available.

    Gordon & Mervyn: Your bloated public sector, low base rate and QE are the problem, not the solution.

  9. Adrian Peirson
    April 18, 2010

    The recovery is designed to be feeble, Haven't you heard the news, they are setting up a New World Order.
    It's not really new, it's Global Communism, the recovery will fail, it is designed to fail, they will tell us recovery is just around the corner, they will shuffle a few deck chairs around the deck of a sinking HMS Britannia.
    The New World Order is Global Totalitarianism, why do you think they have been gutting us for the past decades, this is a clue.
    In just the same way as they do not want Great Britain to be independent, they will not allow us as individuals to be independent.
    All means of commerce and production are to be closed down and taken over by the state.
    Something went badly wrong in their childhood because they want nothing less than Total life and death control over us all.
    You do not have that control over people by allowing them to be independent and wealthy.
    There will be spin and platitudes, but there will be no recovery, they intend to bring us all to our knees until we are all dependent on the state.
    Those that are of no use……well, use your imagination, but look at the way our eldery are treated, asset stripped then disposed of in 'Private' nursing homes.

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    April 27, 2010

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