Panglossian or prescient?

Ivy Eileen

Some days ago thought of something similar - problem: banks won't lend to each other ... answer: banks put their surplus with the Treasury(in UK, the B of E) which in turn lends out to the market. Result is that the same money (broadly speaking) gets into circulation. Only problem, of course, is the Treasury (or, in UK, B of E) takes the credit risk .... but it has to be in order to grease the wheels.

Regarding the "Swedish Plan", here's an alternative - Govt. take loan stock (with conversion rights) in relevant UK banks, which is fraction paid up according to circumstances. If whole sum required then pay up in full by tranches as and when required. If not required in full (as, e.g., market improves) do not pay up balance and leave partly paid. If banks' financial position improves then can redeem - alternatively, Govt. can convert into equity and as with BP in Wilson era (much to Wedgwood Benn opposition) sell off to private investors in the stock market. This is outline, conversion etc details to be negotiated. Just a thought or two, of course ..........

Get Shorty

Nouriel Roubini is the godfather of the Crunch and he reckons we will have a 'severe' recession. Which sounds like a depression to me. Jon Moulton of Alchemy thinks it will take five to seven years for the UK to recover. I'm sticking with the guys who warned this would happen and have shown us the roadmap.

Ian C

Things are and have moved so fast that they could be right.

As they say, the state (on both sides of the pond) have become banker (and insurer) to their nations. This was necessary to unblock the jam. But the other thing that is necessary is that the losses are realised and lessons learned - now. If they are not the result will be worse carnage down the road.

And, perhaps more importantly at this time of fear and doom is that pumping in this money is highly inflationary and at the same time allowing silly people off the hook of their stupidity because there are currently more pressing things to think about.

The speed of things happening in this instant glbalised world measn that the crisi is likely to be over an dthe next phase being got on with, before anyone - especially the authorities - have noticed. That is when the real danger is, now that we are almost through the previous one (from a building blocks in place point of view).

Low interest rates and a return to 'normal lending' is needed like a hole in the head. But that is what we will get if we are not clever. What (Democrat/Labour) government was ever clever? FDR's was.....

Hugh

I remember Burmah Oil, was'nt it Wedgwood Benn who made the decision to zap the Widows and Orphans. More hard nosed than any capitalist, sorry any other capitalist. If all goes well the same will happen again.

Hysteria

some pain nees to be felt - at every level - if we are not going to have a societal train wreck later.

David

I don't understand. Here is Kotlikoff last year, before the crisis erupted:

"Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going
broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future. The paper offers three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy: a retail
sales tax, personalized Social Security, and a globally budgeted universal healthcare system."

http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf

The bailout does nothing to change the fact that the United States was "going broke" before the crisis, and does nothing to radically reform fiscal institutions does it? Why has Kotlikoff changed his tune?

oldtimer

We need to remember that, in the UK, all tax payers have a large ball and chain firmly clamped around one ankle, marked government debt. Many tax payers have a second ball and chain attached to the other ankle, marked personal debt. I share the Jon Molton view (noted above) that it going to take years for to benefit from any recovery. If the debt doesn`t get you, look out for inflation and a devalued £.

Fergus Pickering

Hysteria,when you say some pain needs to be felt, are you speaking as an economist or a moralist? Or, to put it another way, why does some pain need to be felt?

Hysteria

Fergus - if a market economy rewards risk takers, and punishes bad risk, then "bailing out" individuals or institutions removes them from the consequence of the decision, and hence does nothing to prevent recurrence.

If "someone else" comes along to the rescue (in this case the tax-payer) then why would anyone choose anything other than a high-risk strategy?

This is not to say that we should not provide "safety nets" for the really deserving and most I think agree to contribute to this effort (although we can debate why this defaults to a tax and spend system and not a voluntary contribution system - but I digress)

So whilst it is bad news at in individual level, from a wider perspective then some "pain" needs to be felt.

Don't know if this is a moral or economic view - it's just mine!

John MacLeod

I'm afraid this Washington Post analysis is nonsense. President Hoover did not ' stand on the sidelines and marvel at the chaos'; he jumped in with panicked interventionism, pumped $$$$$$$$$$$$ into propping up banks, buildings-and-loans etc. and as a result turned a crisis into a disaster. Present Roosevelt brought in confidence, basic social security programmes and untold acronymns, but it was not his administration that ended the Great Depression: it was the Second World War. Read Paul Johnson's robust analysis in A History of the American People (1997.) The myth of laissez-fair Hoover and the Keynsian white knight of FDR is long overdue the torpedo.

Puncheon

Hysteria - I agree with your line. I am not rich, in fact I'm retired and likely to be beggared by inflation - as was my parents generation by a previous socialist Government, but I digress. Like many others, I lost £1000's in the 80's stock market crash that I could ill afford. Did we whinge on and demand the taxpayer compensate us? No we didn't, we just tried to learn the lesson and got our heads down and spent the next 10-15 years working hard to repair the damage. Like many of my vintage, I am weary of a younger generation that thinks that all it has to do is cry long enough and loud enough and it will get whatever it wants. Well, boys and girls you are about to discover that a risk free world, run by the kind compensation fairy is just another cruel left-wing deception. Of course, as individuals we do what we can to minimise the pain and suffering of others, but the idea that any Government can abolish the results of our own folly, or just plain bad luck is pathetic and dangerous nonsense.

Herbert Thornton

The entire crisis has, we are told, come about because - in its simplest terms - many people & companies that have borrowed money can't pay it back and on such a scale that there has been a massive failure of trust.

Is it an entirely silly question to ask - why can we not prevent the building of these horrendous financial labyrinths - composed of Collateral Debt Obligations and so on - that have become so disastrously inoperable & caused this general loss of trust? Is our system of lending & borrowing either necessary or desirable?

In the case of companies, I've always understood that the idea of a limited company was invented so that businesses could raise money by selling shares to the public, and so that the liability of shareholders would be limited to the amount they'd already put in to the business. You paid your money hoping that the company would thrive and you'd get your share of the profits: if it failed, then your money was lost. People doing business with the company would be on warning that the liability of the company (and of its shareholders) was limited.

So, to come back to my silly question - what if companies were forbidden to borrow money and allowed only to get it making profits or by issuing more shares? And, moreover if owners could not borrow money by pledging their shares, but only sell them outright?

And similarly, why should individuals who want to buy goods have the power to borrow? That would mean that they would have to exercise thrift and buy only when they had accumulated enough money to make the purchase.

But, you ask, what about Houses? Don't we at least need a system that uses mortgages? Again, I ask - why? If an aspiring house owner hasn't yet saved up enough money to buy one, why can't he and the "lender" buy the house jointly with an agreement between them that the aspiring house owner would buy the house from the other joint owner by installments. And if the aspiring owner can't keep up the installments, the house is sold and the two of them divide the proceeds proportionately according to how much each has invested in it.

More importantly, would it work and if not, why not? I expect the main argument for allowing lending and borrowing is that it speeds business up. But at what price? If there's an analogy with engines, any engine that runs too fast will fly apart - and our lending & borrowing system seems to have started to do that.

I'm certainly not a Muslim, but would a prohibition on lending & borrowing be what's called Islamic banking?

Augustus

The W.P. article is basically right to show a degree of optimism. However, a recession on a sizeable scale is a certainty. and it will take longer in America to blow itself out that on this side of the pond. Given time things will right themselves.
The debts which have been created by the enormous bank over-extensions need to be fulled transferred on to government books. Interest rates have to be lowered, which is now happening, to combat inflationary pressures, and values in the market place have to be re-established. We are all in for a downturn, of that there is no question. It will not right itself anytime soon, of that there is also no question. It will simply take time.

Herbert Thornton

One more thing - James Forsyth says that this all strikes him me as slightly too rosy, but that talk of the next depression is decidedly over-egging the pudding.

Those are quite descriptive metaphors, but while it is clear that the President is horrified at the mayhem the foxes have caused in and to the hen-house, it very much disturbs me that he has entrusted the task of repairing the damage, and of protecting the hens, to some of the worst foxes.

Consequently I am rather less inclined to sit on the fence. I doubt very much that we have the best of all possible hen-houses, and I think the President's first priority should have been to keep the foxes out.

I expect - unless fox-hunting is made lawful again - that the foxes are merely going to take charge of the hens' food supplies, all the while continuing to fatten themselves and their litters with juicy morsels of hen.