Yesterday I was asked by one blogger if there is a beginner’s article, and by another to set out a Conservative alternative to the current “rescue” policy. So let’s ask today Why aren’t the UK and US initiatives working? In doing so I will answer these points.
There are four main reasons why it’s not working.
The first is the authorities did so much damage, both by stoking up credit and then by tightening too much too quickly, creating a very nasty crash. It was bound to take time to deal with the injuries from the crash. Some readers will remember how I shouted at the authorities to relax their grip earlier to avoid a bad downturn, but they were adamant they would not do so. The results were entirely predictable. It was a crash they created, so why are they so surprised?
The second is that some of the actions now taken to relax, especially lower interest rates, take at least a year in normal conditions to work through. These authorities have been driving by looking in the rear view mirror instead of looking ahead, so no wonder they keep crashing. They now need to be patient and to start looking ahead.
The third is the state of the banks, who have made such huge errors along with their Regulators for the last seven or eight years. The banks need to be mended before economies will work at more normal levels of activity and growth.
The fourth is that confidence is low, and is being driven lower by the foolish responses of the authorities pursuing weekly initiatives that are all going to cost mega bucks for taxpayers. The authorities wrongly think that transferring the bad and doubtful debts and the bad investments from the banks to taxpayers solves the problem. It doesn’t. It creates a new problem – weaker credit status of the governments themselves, and in some cases like Iceland national bankruptcy.
So what should they do?
They were right to cut interest rates, though they did it a year too late. This will have some beneficial impact in due course.They have now cut them more than is sensible.
They should concentrate on getting the banks to change their approach. Banks need to cut their costs substantially. They have staff numbers and pay levels geared to the heady days of the credit bubble. They need fewer people paid at realistic levels to handle personal and business banking. They need to cut back their investment banks massively, closing out positions, selling investments and trying to minimise the losses whilst owning up the them and reducing the risks of their books. The larger weaker banks need to raise money by selling off parts of their businesses to those with cash and more wisdom to run them better.
Governments need to stop shoving cash down bankers throats as a reward for bad conduct. Under the current model the banks that did the worst job get the most cash from taxpayers. No wonder nothing works. The bad banks have to slim down and sober up quickly. Taxpayer cash delays them doing that.
If the authorities continue to follow the present absurd model more countries will have their credit worthiness brought into question. The main country players are already trying the competitive devaluation game to steal a march on others, and trying to find ways round the international rules to limit trade and encourage business at home. It is not a good background to recovery. No wonder markets still find it difficult to be confident about the future.
Trying to print the right amount of extra money to turn the economy without creating inflationary fears is not an easy trick to pull off. It would be more plausible as a strategy if at the same time governments reined in their wilder – bank oriented- spending – and showed they recognised there have to be limits to how much risk taxpayers can run and how much borrowing they can repay. Present actions show that governments have learnt nothing from the Credit Crunch. What was it all about, if it wasn’t designed by the authorities to send a warning to people and companies not to borrow so much? Why is it then a good idea for people and companies to be forced to borrow even more in the name of the state?