Most of us have to accept we are going to lose from this financial crisis.
Here in the UK the financial losses are going to be large. All homeowners are going to lose a substantial part of the capital value of their home. Some homeowners will lose their home, as they give up the struggle to pay the mortgage. Anyone with shares held directly, or through an investment fund or through a pension fund has already lost a lot. People owning businesses will find it more difficult to make a good living in the year ahead, and the value of their business will fall.
To those bloggers who tell me this is a necessary and useful correction, I say there will be a lot of human misery on the back of this big reduction in wealth. It will lead directly – and quite quickly now – to more people losing their jobs, more businesses cancelling their expansion plans and to less money for charities and good works. It is a correction which has got out of control and will do too much damage.
The issue for the authorities is simply this. How big a crash do they want? The Central banks triggered all this, by first allowing an overexpansion of credit and debt, and then deciding they wanted to bring the borrowing party to an end. Now we need to know how much they want to cut total debt by? They have clearly decided on a crash slimming programme of borrowing- which may now be getting out of their control, so fierce are the deflationary forces they have unleashed. It would have been more sensible to start to correct the excess earlier and at a slower pace. Now we are doing it at break neck speed, markets need to get a feel for how much debt the authorities want to take out of the system, so that market participants can start to make some realistic calculations about how big and how profitable banks will be in the future.
I have seen one forecast that the US wll take around $1 trillion out of total private sector borrowing in this adjustment. Some of this will go through write off of debt that cannot be repaid, and some from repayments from solvent institutions and individuals. Maybe the UK authorities are trying to take around £200 billion out of UK private sector debt. If so it would be helpful to know, and banks could work out how best to do it on what time scale. If the authorites, seeing the damage too sharp a deflation causes, now want to see debt stabilised rather than reduced, then they need to slash interest rates and redouble their efforts to pump cash into the system. There is no point in slashing private sector debt, if to do so you simply transfer it to public sector debt and put the taxpayer on risk.
Meanwhile the UK is having one of its idiotic arguments about whether we need more or less regulation, as if this were the issue. I know of no serious commentator on money, credit and the economy who thinks the authorities should wash their hands of responsibility for controlling total money and credit in the system. The issue is not whether to do it, but how to do it. Clearly the method chosen in the last ten years, the so called independent Bank of England, did not work. Credit was not properly controlled on the way up, and is now imploding dangerously.Large amounts of new mortgage regulation did not regulate the main things that matter – how much credit is lent in total, and how much to each individual in relation to the home value and income.
We now need some guidance. I would suggest that now the problem is far too little credit is being extended. The nationalisation of one and a half mortgage banks has hit new lending badly, removing two important institutions from new lending altoegther and burdening taxpayers with big commitments. The uncertainty over banking capital has also frozen the private sector. Can’t the regulator make a reassuring statement, telling us in its view all the main banks have more than enough capital to get on with their jobs – or that they are about to raise more than enough? Can’t then the bankers use the government guarantees to start lending again?
The authorities tried to reduce debt too far too fast. They need to signal that is not now their intention. Concerted interest rate cuts on a big scale would help do that. It would also take some of the pressure off borrowers. To those that say this in unfair on savers, I say it is necessary for savers protection. As the Icelandic banks have shown, it does not help to offer savers a good rate of interest if the borrowers that pay the interest to the banks can’t afford it and the bank runs out of money to pay the savers.
Savers and borrowers are hitched together. Both are going to be worse off in this crunch. The issue is how can we find a level of interest rates, banking cash and capital which allows the system to functon sensibly again.