There is some good news about the massive £157 billion the UK government has decided to borrow this year. They seem determined to use the banking system to lend them some of the money, to make it a bit easier to lay their hands on it and to try to keep long term interest rates down.
They will also doubtless keep up the regulatory and actuarial pressure on pension funds, which has been a feature of recent years, to get them to lend more to the government as well. Indeed, the policy of undermining the pension funds, forcing many of them to close for new members or even for continuing member contributions, was a stroke of genius for funding the government’s excess spending. The more pension funds that are “mature” or closed, the more they have under current actuarial and regulatory practise to buy government bonds. The government created a virtuous circle for itself, creating more natural buyers of government debt at ever lower interest rates.
The bad news is that all this borrowing is not achieving the desired effect of stimulating the economy and sorting out the banks. All the time the banks are sending much of the money back to the government at a loss, the private sector will be starved of funds and the banks will remain weak owing to poor profits.
So what should the government do, I hear you ask me again? Let me briefly repeat:
1. Cancel the VAT reduction early.
2. Revisit the regulatory framework for the banks, to give them some more transitional capacity to lend by amending the Tier One Ratio and related rules
3. Revisit the £450 billion package of bank support, so the banks wish to use it more
4. Reaffirm government support for all the major UK banks
5. In private negotiate the repayment of the Preference capital to taxpayers through asset sales, item 2 above and banks generating more profit.
6. Accelerate Gershon style public spending reductions.
7. Cancel undesirable public programmes like the ID card and related computer databases.