If only authorities would do the right thing.. Printing money will slay the recession..
We’ve been arguing it half a year ago (The Zimbabwe solution), and recently again (eerily similar to the article below from today’s Guardian, in fact). More authoritative people than us are saying the same. What’s more, it’s being put into practice. In the UK (the article is about that), but also in the US. This is a good sign. It needs a grander scale though..
There was the first sign last week that the cumulative impact of the government’s policy may eventually turn round the recession. That doesn’t mean there aren’t potential disasters ahead. Barclays will probably follow Lloyds and RBS into majority public ownership, there is a possible bail-out of a big insurance company, another 15% fall in house prices, a period of disinflation and at least a one and a half million rise in unemployment. This will still feel like the catastrophe that it is.
Nothing exemplifies this more than yesterday’s news that Lloyds Group has followed RBS in the realms of zombie status. The taxpayer now has to guarantee a quarter of all UK lending, which represents the end of the British financial system as we know it. We are living through terrible times – and the risk of a global depression is very real.
But economies have a lot of upward momentum built in. Goods wear out and need to be replaced. Houses that will have fallen 40% in value over two years will start to look cheap. Shops and businesses will have to re-order goods from factories as stocks run out. Cheap money and cheap petrol will boost our real incomes. Oil at $40 a barrel will be a trillion-dollar stimulus to the Western economies in 2009. Global economies have always responded in the past. They will again.
After all, recessions don’t go on for ever. This one is already nine months long: another 12 months of continually falling output, which is highly likely, would make it the longest since the early 1930s. What is needed is some trigger to make people think that, after all, the world will not end. There has been the biggest devaluation in modern times, virtually free money and a huge fiscal deficit. All are stimulatory. What we have needed is more measures to put a floor under the economy next year; for if confidence can return, the upward movement may be quite sudden.
Last week we got one such measure. The Bank of England’s announcement that it will buy £75bn of government securities over the next three months out of its own reserves, then spend another £75bn in the same way on a combination of government securities and commercial paper, was in many respects more important than the autumn’s £15bn VAT cut. This is “quantitative easing“: doling out Bank of England cash in vast quantities at negligible interest rates to boost lending and spending on an epic scale.
Critics have been quick to say it is no more than printing money, putting the Brown government in the same camp as Zimbabwe, Weimar Germany or Henry VIII – a monarch who repeatedly recalled coins to be reminted with less gold and silver so that he could sustain wanton spending. Lib Dem shadow chancellor Vincent Cable has warned it is a return to boom and bust, and that the move presages inflation. He is not alone.
But I suspect Cable’s gloom has got the better of him. This year Britain’s nominal GDP – the value of the combined contribution of output and inflation – will actually drop by some 3-4%. Money held by households and firms is contracting – a harbinger of disinflation and slump. The Bank of England correctly says instead that it wants nominal GDP to rise by 5% as soon as possible, and that cannot happen while critical stocks of cash are falling. So it is going to resort to the printing presses – or a click on its computer screen – to reverse the trend. Would we rather the Bank accommodated declining GDP? Or try to stimulate it?
Although everybody is rushing to say how unusual the approach is, in fact it is only a variant of the way Britain used to run the financial system until it fell into the hands of the market fundamentalists. We used to siphon quantities of cash out of bank balance sheets in booms, making them sterilised reserves at the Bank of England; and in downturns release the cash back. It is still how most banking systems in Asia are run, and when the European Central Bank was established- to derision in London – it retained the facility.
However, these reserve requirements were abolished by Margaret Thatcher in 1980 as a keystone in her free market revolution, so that by the late 1980s every control and regulation on City lending had been scrapped. Bankers said they represented an unacceptable tax on banking: a number of us warned that without such controls, especially reserve requirements, there would be another runaway credit boom to follow that of the late 1980s – only much worse. Without better regulations on banking, which enjoyed so many other privileges, the inevitable bust would follow the boom.
Re-reading now what I wrote in a 1990s report called “Good Housekeeping: how to manage credit and debt”, makes me both heavy-hearted (so much was avoidable) and furious (conceding the bankers’ case has imposed misery on millions).
But there is a conclusion for today. If we are lucky enough for prices to stop falling soon, and inflation to reappear as a genuine prospect – spelling as it will hope of recovery – the Bank of England can act as it once did before Thatcher. It can siphon inflationary cash out of the system by requiring the commercial banks to lodge deposits at the Bank – quantitative tightening. Indeed, the chancellor should institutionalise the approach and re-establish a permanent reserve requirement regime.
Yet to get to such a hopeful point, the cash injected into the system in the months ahead has to be lent, spent and not hoarded. Here the government has to make three more major moves. It has to create some “good” banks fast which will close the gap left by the flight of foreign banks; it should create a National Infrastructure Bank, a Housing Bank and Knowledge Bank, all of which can raise cheap finance by Bank of England purchases of their debt. Then it has to create some demand for loans.
In the budget, the chancellor should announce two measures to encourage borrowing and spending. There should be income contingent mortgages, so that repayments automatically adjust to borrowers’ fluctuating incomes and home equity can be insured. And he should also announce a job guarantee for every unemployed individual out of work for more than a year.
In other words, come what may, there will be work and you will be able to service your mortgage. Do all this and the economy will stabilise next year. But what a price we have all paid for bankers’ freedoms.