The Credit Crunch and banking crash began when the UK (and US) authorities decided to bring the credit party to an abrupt end in 2007. In the UK they slammed on the brakes with high interest rates, starved the money markets of funds, and finally told the banks to lend less and save more. The credit binge was one they had fuelled in earlier years with low rates and their own special enthusiaism for off balance sheet financing. Suddenly we were all told that borrowing too much was not good for us. It appeared they wanted a new era of austerity, based on repaying debt and living within our means. The private sector was put through the mangle to squeeze out excess. The Chancellor and the Governor told us about moral hazard and said it was up to the banks to sort out excessive debts and over the top lending.
Two years on, and we live in a different world. The private sector is doing exactly what they wanted. It has no choice. Banks are dutifully hoarding cash and lending it back to the government. Individuals are paying off credit card debts, and striving to get the mrotgage under control. Businesses are being forced to sell off stock and stop investing as they cannot borrow more, or only at high rates. That’s what was what they wanted to happen because they ahd allowed the country to borrow too much. The sooner the adjustment is made the better, painful though it is. It is the price of big policy errors made in the “good” years.
Now we learn that the authorites do not like the high unemployment figures, the poor output figures and the rest that flows naturally from the credit squeeze and from their past huge mistakes. Who does? Why didn’t they listen when some of us warned them in time to stop the worst of it?
So they have come up with a great way to overcome a crisis of borrowing too much in the private sector – they are borrowing too much in the public sector instead. They are fighting fire with fire. All that they said about the dangers of excessive credit in the private sector applies with a vengence in the public sector. In the private sector if a business borrows too much it goes bankrupt. Only those who have decided to deal with it lose out. If a state borrows too much all its citizens are forced to pay the bills and suffer the resulting pain of adjustment to reality. When will the Chancellor and the Governor make their speeches about moral hazard in the public sector? Or does the Governor now live in a world where none of this debt is real, because he thinks we can print limitless amounts of money to “settle” the bills with no adverse consequences?
Between 2003 and 2006 they got regulation of private sector banking and credit hopelessly wrong. Now they are gettign public sector credit hopelessly wrong. Why do they never learn? Haven’t they grasped yet that all borrowing does one day have to be repaid. If you refuse to live within your means now, you will be even poorer tomorrow.