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Six ways to get the economic motor running

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    Six ways to get the economic motor running

    http://www.telegraph.co.uk/finance/e...r-running.html

    The Treasury and Bank of England must move fast with radical plans to bring the financial crisis to an end, leading economists have said.

    Alistair Darling must also beware over-borrowing and leaving the UK with a dangerous legacy of govern-ment debt, according to the academic and independent economists surveyed by The Daily Telegraph.

    The growing consensus is that the Government should not waste any time in moving on to measures such as quantitative easing and further bank bail-outs despite the fact that interest rates have yet to hit zero. It follows the Bank of England's insistence earlier this week that "further measures" beyond interest rate cuts are necessary to stop the credit crisis intensifying.

    Steve Nickell, a former Bank policymaker, said that the Government may need to set up a guarantee system for bank lending, while Dr Peter Warburton of Economic Perspectives said that among the essential moves is the need to overhaul the accounting rules for banks and also to start under-funding the UK budget deficit. All of those surveyed backed plans to increase the quantity of money in the economy.

    Alongside these recommendations, Patrick Minford of Cardiff University warned the Government not to spend further amounts on fiscal stimulus, since doing so could undermine the UK's credit worthiness and drive up interest rates.


    Peter Warburton, Economic Perspectives

    I don't think rates ought to be cut any further. You don't have to wait for zero before embarking on unconventional measures, there are plenty available.

    The six main objectives include:

    1 Normalising the inter-bank market by providing as much central bank liquidity as is necessary through as many different channels as is helpful.

    2 Suspending inappropriate capital adequacy rules, such as Basel II. Until the rules can be redesigned to work counter-cyclically, my suggestion is that banks' capital requirements revert to and are frozen at their end-June 2007 levels.

    3 Restoration of profitability to the banks. The higher the profits, the faster the writedowns can be achieved and the sooner the self-healing properties of markets can take over. Currently the authorities give support to the banks with one hand and seek to punish them with the other. This ambiguity needs to be removed to allow banks to rebuild their profitability.

    4 Redirection of banks' lending capacity towards non-financial companies and households.

    5 Reversal of the Debt Management Office's over-funding of the budget deficit.

    6 Discouragement of flows into National Savings and other tax-free savings vehicles.

    I think from start to finish we'll do well to get away with a downturn of less than three years. If we consider that we started April-May last year, then we are hoping to get out of it in early 2011, so clearly we are in for a long haul here, with a major correction of relationships that had become entirely unsustainable. It will take time.

    We should probably expect to see two years of minus signs in front of gross domestic product figures. We should be prepared for that.


    Stephen Nickell, Nuffield College, Oxford

    I'm rather sad I'm no longer on the Monetary Policy Committee at a point like this: it would have been very interesting [he was a member from 2000 to 2006].

    I'm rather in favour of quantitative easing. It involves the Government spending money without having debt.

    In normal times that's a recipe for inflation, but in circumstances where there is plainly spare capacity, it seems like a reasonable mechanism for funding. My instinct is that until in some sense the credit crunch sorts itself out or is sorted out, then we are going to have a severe recession which could last well beyond this year.

    Plainly, either it sorts itself out when trust returns to the system, or is encouraged to come back into the system by some mechanism of guarantees on lending. This is clearly another step which could prove necessary for the Government. If people don't have access to credit they contract their activities. Fundamentally, in order to carry on certain activities you have to have access to capital, and quite a significant proportion of businesses don't have stores of spare cash. The consequence is that they will find it very difficult to expand, and some clearly have got to expand to take up the space left by the exit of some businesses, such as Woolworths.

    Likewise, I'm extremely concerned about the housing market. First-time buyers have to have access to credit or else house prices will keep falling. Every year there are a bunch of last-time sellers plus some new-build houses on top of that. First-time buyers have to move in to fulfil that space. There are plenty of potential first-time buyers out there but they are finding it very difficult to get mortgages.


    Ray Barrell, NIESR

    Fiscal fine tuning is a bad idea. What we need is coarse tuning. In normal times all fiscal policy does is shift spending from the future to the present with no net gain. In a banking crisis some firms are credit constrained and reduce staff or go bankrupt. Fiscal policy – cutting National Insurance for employers in particular – reduces the constraints.

    Fiscal policy in a banking crisis raises output by more than the offsetting effect in the future. That is why the IMF recommends it. It will work in the short term, but it cannot be used year-after-year – the Japanese made that mistake in the 1990s.

    Quantitative easing means two things: 1 The Bank buys private sector assets (making a market in them where it has failed) and prints money to do so, rather than it being financed by issuing bonds. It's a good idea and could reduce risks in bank portfolios and help reduce borrowing constraints, but it may be pushing on a string. 2 The Bank buys government bonds with cash, with the intention of pushing expected interest rates down. This should cause the pound to fall, but if every government does it, it will be less effective.

    If the Bank has to act, it can only cut interest rates or do easing. These are not very effective in a crisis. They are also risky. An economy awash with liquidity raises the risk of a resurgence of inflation when the situation rights itself .

    What is needed is significantly more capital inside banks. The Bank cannot provide that. Only the state can do so, and unless
    we see US, UK, German and French banks in public
    ownership soon with much
    more capital than they currently have we are in for trouble.

    Call it "foie gras" economics if you will – the banks may not want it but we will enjoy it.


    David B Smith, Beacon Forecasting

    This is not Armageddon; this is recession. We are behaving in a way that assumes it is Armageddon.

    What we're doing now, in terms of rate cuts and fiscal stimulus, will not prevent the current recession, but it will have serious consequences at some point in the future. Given that there are now similar moves taking place across the world I envisage some problems. Even at their current rate, lower interest rates will put a hell of a lot of stimulus back into the economy, and we could easily go back to boom and bust again.

    The Keynesian bandwagon has allowed the Government to go on huge spree, and the evidence from the 1990s is that you could easily have a situation where public spending holds up GDP but also induces a collapse in private sector activity which could be equivalent to the Great Depression.

    The economy should return to its underlying growth trend with no permanent loss of output beyond that already caused by Gordon Brown's manic interventionism, unless the quack measures now being introduced by politicians make matters worse rather than better.

    This happened with Roosevelt's New Deal and is likely to happen in the US, Britain and other modern economies.

    We are producing a big package that looks like the kind of thing that got us into trouble in the 1970s. This looks much more like Edward Heath in 1972-74 than the more effective and well-thought out policies the UK carried out in the 1930s.

    However, we've never experienced anything like this before. There is no modelling for credit rationing. It's a bit like the Holy Spirit: you can't get a handle on its effects.

    #2
    Linda Yueh, Pembroke College, Oxford

    The financial crisis is not over. The deleveraging process is still playing out. I think we need some form of economic stimulus in the UK and the US, though this is by no means guaranteed to work.

    The US has already done quantitative easing to some extent, and it's not a bad idea; when you have so much debt in the economy and a risk of deflation, having some degree of quantitative easing, thereby putting more inflation into the economy, makes sense. What you want to avoid is "seniorage" – where the government prints money to pay off its debt – though the UK is a long way off that now.

    Clearly it makes sense for the Government to keep the fiscal side of things as neutral as possible. The amount of debt it is planning to take on is extraordinary by UK standards. Its argument is that you need to put money into the system, and Government spending is one of the primers of the economy. And although most governments are following similar policies, there is a question over whether the amount they borrow will contribute to a long period of stagnation.

    The Conservatives, on the other hand, seem to be taking a position that is far away from the consensus.

    Ultimately, this is a question
    of compromise: what is the
    worst outcome – avoiding a depression or increasing the
    level of indebtedness and a risk
    of increasing inflation expectations?


    Andrew Clare, Cass Business School

    Desperate times require desperate measures.

    I am in favour of fiscal stimulus and some form of quantitative easing. If we accept that housing is at the heart of the problem you may as well go for the heart [of the matter] rather than dancing around it. Standing there and doing nothing is really not an option. Yes, the end result will be higher inflation at some stage, and there is moral hazard in all of this, but we are beyond that point now. We have to help those people who are most vulnerable.

    The Bank of England should buy assets, and I support Fathom Consulting's idea to embark on quantitative easing by buying property rather than other assets. This would get straight to the heart of the matter.

    I think something like this is probably going to be needed at some point. Of course, we don't want any policy which unnaturally boosts housing market activity. But we want to make sure that we don't end up in a 1930s scenario.

    We know that retail price inflation will dip this year. What we don't want is for that deflationary mindset to set in – people need to be reminded that it's a blip. We don't want them to do what the Japanese did and to start saving 15pc-20pc of their incomes.

    Average inflation and interest rates will be higher in that post-recession period; growth will be constrained by that, because the Government will have to pay back this debt, and in the long run the housing market will always be prone to bubbles, but first things first, we need to extricate ourselves from the current mess.

    Comment


      #3
      Redwood

      Some of you may have heard the magnificent analysis John Redwood gave of the economic crisis on Radio 4's Today programme this week; you may even have read his superb blog, which has been ahead of the proverbial curve for months in identifying what must be done.

      John Redwood's Diary

      He is one of only two Tory MPs who really gets what is going on – the other is Michael Fallon. Yet, whenever Tories are asked why this brilliant man, who would make mincemeat of Alistair Darling in the House of Commons, is not in the shadow cabinet they tell us he is not a "team player" and, more to the point, he supposedly looks like a character from Star Trek.

      (Simon Heffer)

      Comment


        #4
        a squirt of "easy-start" into the carb - put on the jump leads: vroom!

        Comment


          #5
          Abolish maternity leave.

          Comment


            #6
            HMG buying property would be a good stimulus, increase confidence and also increase the amount of council houses, which we are all told is badly needed.

            This sounds like an opportunity not to be missed. The problem is that we have a dithering government !!

            Comment


              #7
              Borrow enough money to pay off the national debt - sorted!

              Comment


                #8
                Originally posted by Doggy Styles View Post
                Borrow enough money to pay off the national debt - sorted!
                Print

                Comment


                  #9
                  Originally posted by Doggy Styles View Post
                  He is one of only two Tory MPs who really gets what is going on – the other is Michael Fallon. Yet, whenever Tories are asked why this brilliant man, who would make mincemeat of Alistair Darling in the House of Commons, is not in the shadow cabinet they tell us he is not a "team player"
                  I remember when John Redwood was in Maggie's cabinet. Yes he's (supposed to be) brilliant, but he certainly wasn't a team player and was a total liability politically. Remember him singing the Welsh national anthem? Oh dear.

                  Bringing him back now would be very unpopular - he's seen as an "old school" Tory, like Michael Howard et al. No matter what he has to offer, he should stay in the shadows perhaps advising.

                  Redwood is like the techie that most companies have where they say "oh he's brilliant but we wouldn't let him meet a customer".

                  And he wouldn't take Darling to pieces, as I recall he's a poor public speaker.

                  Comment


                    #10
                    solution

                    the best thing to do would be to sack all those idiots, put responibility in the higher echelons of british society, and put a sound financial system in place, without excessive debt, without a uk governement having to print money like zimbabwe

                    Comment

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