It is usually dangerous when the Establishment unites behind a single policy and says there is no alternative. The last time that happened in the UK we were lumbered with the Exchange Rate Mechanism which gave us a rapid inflation followed by a recession.
Recently in the USA the Republican and Democrat leadership united with both Presidential candidiates behind the Paulson plan. That plan turned out to be bad politics, failing its first vote in Congress, and bad economics, leading to subsequent modification by its own author.
It ws therefore a relief that this week David Cameron and George Osborne signalled that they do intend to be critical where criticism is warranted, and to offer an alternative. That is called democracy. Criticism of George Osborne is fashionable and unfair. It was George who thought up “Tax con not tax cut” to characterise the unsuccessful 10p tax band budget. It was George who rightly pointed out that the government did not mend the roof when the sun was shining, and George who is now using colourful language about a house burning down to draw attention to the problems.
The Opposition now needs to flesh out its alternative strategy to see us out of the current severe dfficulties. They can draw on the Economic Policy Report they commissioned. We called for a stronger Bank of England, making better decisions over banking capital, liquidity and interest rates.We warned against lurching from too easy an approach to credit and money to too tough an approach. We sought better control over public spending, an effciency drive throughout government, less useless regulation, and concentration by government on a limited number of things that government did have to regulate well – especially money and credit levels. We recommended a big increase in infrastructure spending, mainly privately financed.
Today I suggest a threefold aproach to the crisis.
The first is to amend the government’s way of handling its approach to the banking crisis.
I fully support the privison of liquidity and longer term loans to the banks. They must take full security for these advances to protect the taxpayer. The withdrawal of too much liquidity at times over the last fifteen months has intensified the crisis.
The government should not spend £37 billion it cannot afford on buying bank shares. It should refuse to finance the HBOS/LLoyds merger, leading to LLoyds going it alone in the private market for its capital needs. The Regulators should give HBOS and RBS time to increase their capital ratios, whilst the government makes it clear it stands behind both banks with loans and cash if needed. They could both improve their capital ratios by stopping dvidend payments, cutting very high pay and bonuses, reducing staff through natural wastage and other cost reducing measures, and reducing their loan books. It should be their choice which combination of these measures they adopt.
The government and Bank are right to experiment with other ways of lending and using guarantees to get the banking markets moving again.
The second is to get control of the public finances. Cancelling the £37 bllion will help. There are many other ways of starting to control public spending, whilst keeping every nurse, teacher, doctor and teacher and other important public service workers.
The third is to take action to stimulate the private sector, which is crashing downwards rapidly. That means cutting interest rates by 200 basis points or 2% immediatey, with the prospect of more to come if needed. It means working with the energy, water and transport industries to see which larger investment projects can be brought forward to provide some work for the construction industry. It means redoubling efforts to help people back into work who lose their jobs as the redundancies build up this winter.