This year I have read many times commentators and market experts tell me the USA is â€œalready in recessionâ€. They should take a look at the first quarter figures, which shows the US economy still grew at 0.6%, thanks to improvement in exports following the devaluation of the dollar, some increase in government spending and stockbuilding. So far itâ€™s on course for the sharp slowdown without two negative quarters. The Fed once again confirmed its determination to prevent a recession by cutting interest rates to just 2%. This quarter should see some modest stimulus from the tax cuts, whilst the second half of the year will see more impact from the shift to cheap credit. At some point even the very distressed housing sector will stop falling, as it has crashed so far.
Meanwhile on this side of the Atlantic we get a pep talk from the Bank of England, telling the banks they should lend more! Is this the same Bank of England that was telling bankers last autumn they were lending too much to the wrong people? Do they still belong to the tripartite regulatory system, which is telling banks they need to have more capital and more cash just to sustain the business they have already written, let alone to offer any more loans? Does the right hand know what the left hand is doing in this three way split of a regulator?
No-one pretends it is easy to move from credit being too readily available to a situation where levels of credit are appropriate. It is wrong to claim it is all the banks fault â€“ it was the authorities who encouraged the excess lending by setting low interest rates and drawing up regulatory rules which encouraged off balance sheet wizardry. The UK has decided to go for boom and bust banking, lurching from too much credit to the absurd spectacle of a government owned mortgage bank halving its very extensive mortgage book over a three year period, whilst the government and its agencies urges the banking sector to lend more! It will take time for the effects of the wind down of Northern Rock to work through the system, thanks to bad decision to nationalise it. We will pay a price for the authorities not making the Â£50 billion of swaps available last August to prevent the run on the Rock, and pay a further price for now owning a business which they want to halve in size, with all the lost jobs and downward pressure on the housing market that entails.
The US is handling this credit crunch better than the UK. The UK authorities should study the US response more, and should stop making the problem worse through regulatory confusion and inconsistency. The government should reinstate the Bank of England as principal banking regulator, going back to the pre 1997 system. That worked better during periods of error and crisis.