Gordon Brown tells us he is the man able to pilot us through the financial crisis and the economic downturn. So what should he do?
1. Interest rates. The US slashed rates which ran at 5.25% through most of 2007, to only 2% today. In the UK Brown’s MPC (all his direct and indirect appointees) kept interest rates below 5% from 2nd August 2001 until 9 November 2006, in order to stoke up inflation, and have now held them above or at 5% ever since, to intensify the downturn. Will the PM sort out the MPC and try to make it counter cyclical instead of reinforcing the pain of the cycle?
2. The government deficit. Yesterday’s newspapers at last examine the huge drift in the deficit which readers of this blog will be acquainted with. Many now agree that this year could see an overshoot of at least £20 billion in borrowing. Some think next year will be far worse, and have gone further than me in forecasting up to £100 billion of deficit in 2008-9. Will Gordon Brown start to get a grip on the public finances, and reassure us convincingly that the deficit will not go up by these huge amounts?
3. Transparency. The PM urges the private sector to be more transparent. Will he at least adopt the same degree of transparency in compiling the government’s balance sheet as all large companies have to adopt by law? This would mean putting the pension liabilities and the off balance sheet borrowings onto the UK government balance sheet, revealing that we are around 3 times as much in debt as the official figures suggest. If he is right that confidence comes from transparency this will help!
4. Preventing another mortgage boom and bubble. Is he going to propose detailed regulation of individual mortgages, with the Regulator having a view on multiples of income and proportions of value? If so, how will he prevent banks and Building Societies issuing top up loans in addition, or sending the loan request offshore?
5. Tackling the bad debts in the system. Is he going to follow the US and offer to buy up poor performing loan packages to relieve the banks? If so, where will the money come from, and how will he price what he buys? If not, how will he respond to the US treasury Secretary’s request to other jurisdictions to follow his lead?
6. He tells us he has been presiding over markets which need to be cleaned. Will he specify in what way they are dirty and how he intends to clean them. Is he happy with current bonus payments in the banking sector? If not what can he do about it? Is he happy with Hedge Funds that follow short as well as long strategies, or is he going to ban them, forcing them all offshore? Is the ban on short selling financials just temporary, or does he wish to extend it?
7. Does he think recent large sums put into markets to improve liquidity have been well spent? Does he intend to offer more?
8. Will he give the powers back to the Bank of England that he stripped away in 1997, so they can do a better job of managing the money markets/? Does he agree the money markets have been mismanaged in recent years? Does he now regret how loose money policy was in 2004-6? Does he regret the change of inflation target he pushed through?
Some of you are bound to ask me again what I would do. I have set that out on many occasions as the crisis has unfolded. To summarise,today I would still cut interest rates, take action to curb wasteful and undesirable spending and to control public sector costs, give the powers back to the Bank of England, and ask them to keep markets more liquid. I would seek talks to ditch the current Basel II regulatory structure for banks, and seek to negotiate a regulatory framework that considered liquidity as well as capital adequacy, and which tried to be counter cyclical rather than pro cyclical. If we don’t do this we will just start another cycle in due course.