Let me begin today by reassuring the politically correct monitors that I am not in the “Do nothing” camp when it comes to the economic crisis. Indeed, anyone who has looked at this site for the last eighteen months will know I was in the do something camp – cut interest rates, make more liquidity available, change the way of helping the banks – long before the government.
However, there is one thing worse than doing nothing, and that is doing more wrong things. Some of the action the government has taken has made matters worse. I think in particular of the VAT cut, which was never going to stimullate spending; the nationalisation of two mortgage banks which meant effectively withdrawing them from the new mortgage market and sacking lots of their staff; and buying shares in 3 other banks without revaluing their assets or putting in a plan to make them more successful.
The government needs to review its current range of measures, dropping some, carrying on with some, and introducing some new ones. Today it is too hectic. It expects instant results when problems are deep seated and are going to take some time to work through. It has forgotten that it always takes a long time for lower interest rates to stimulate activity and eventually to raise inflation, just as it took a long time for higher rates to bring everything to a grinding halt and then to curb price rises. The same is true of their move from easy regulation to tougher regulation of the banks.
So what is my short list of policies to drop or reverse?
1. Cancel the VAT reduction
2. Sell Northern Rock and Bradford and the Bingley mortgage business for whatever they can get for them, so they can start to work again.
3. Give the banks more time to raise their capital ratios and agree a faster timetable for repayment of the government Pref shares
4. Announce no more interest rate cuts for the next six months, to give money and savings markets some chance to settle down
5. Announce some tax cuts that put money back into people’s pockets.
6. Announce lower public borrowing figures based on 1,2 and 3 above being considerably larger than 5.
7. Announce that the government is concerned to keep overall public borrowing under some kind of control, adjusted for the cyclical effects.
My worry about present policies is the government is expecting the state to do too much. It wants the state to be lender of last resort, borrower of last resort and spender of last resort – indeed, to be lender of first resort, borrower of first resort and spender of first resort as well. I have no confidence that this is going to work economically. More importantly, how compatible is this with a free society, and with a free enterprise economy? The more the state did in Eastern Europe, the further living standards fell behind the West in the second half of the last century. The government needs to be wary of being dragged in to making too many financial and commercial decisions it is not equipped to make.
(I have written at greater length about the origins of the crisis and the government’s handling of it today in the Sunday Telegraph.)