Thursday 15 January 2009

The time for action is NOW! (initiative no 245)

Clearly we are in an economic mess. It’s not immediately relevant as to whose fault it is, and of course there are many causes: it’s not just “America” and the occupants of No 10 Downing St are not innocent. But the focus should be on helping the situation.

I can’t understand why so many presumably smart people in the Government, the Treasury and the Bank of England are doing so little (although talking so much). I talked about the irrelevant budget a couple of months ago. And until today nothing has happened since. Although there have been plenty of commitments, presentations and initiatives.

Lots of things are wrong. But the really critical point is that the banks are unable to lend money. Not because they don’t want to – it’s how they make money, it’s how they can rebuild their capital. It’s because they haven’t got enough money to lend. Yes, the Government has put money into some banks and nationalised a couple of others. But (understandably) it wants that money back and it’s charging a lot for it. So it’s not really any help. In addition, it was designed to cope with expected losses on the existing assets banks had, not to support new lending. So it’s really misleading for Ministers to express anger that banks aren’t lending having been given public money. They knew from the beginning that it wouldn’t help. And I’m a bit surprised the LibDems have started to say the same thing.

Last week’s reduction in interest rates by 1/2% was just silly. After the major reductions so far the impact on business will be minimal, as it will be for households because of the cap on rates reductions. But further reductions will harm both savers and the rebuilding of bank capital, both critical for the long term success of the country. The major problem is, as noted above, the supply of loans, not the price. The Bank and the Government seem blind to this. (They are not alone: a coherent view opposed to mine was set out by Kaletsky in the Times: I think he misses the point that savers are prudent: if you fine them or even just reduce rates to nil, they won’t rush out to spend all they have. In fact they will probably save more because the economy must be so bad).

How do you increase the supply of loans? I have written before on the need to cleanse the banking system by setting up a bad bank to absorb the rubbish assets. And at last people seem to be talking about it.

But in the short term, providing a series of loan guarantees would probably help the most. This was suggested by the Tories ages ago....and at last the Government has announced a plan for something similar. But to me it’s another misguided effort, too little too late. It’s focused on small businesses so it won’t help small businesses with big customers or suppliers. It’s bureaucratic, by demanding too much information and process, obviously having been developed by people without business experience. My guess is it won’t work well.

It’s not helped by the focus on presentation. Tuesday evening’s news and comment was all about the plans – as were early Wednesday morning’s, because of leaks and briefings to favoured journalists. But the details weren’t announced until Wednesday morning. So all the commentators could do was talk about what the Government had wanted leaked. And now the details are out, its old news. Especially as by co-incidence the decision on Heathrow’s third runway was announced this morning. So the inadequacies of the guarantee scheme aren’t properly explored. Just why do the media fall for this? Why don’t they wait to see the real story?

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