There were two messages that came out of Bank of England Governor Mervyn King's press conference and the Bank's Inflation Report, apart from the obvious truth that a sharp but relatively brief recession is on the way, if not already here.
First he wanted to signal to the Great British Public that he will cut interest rates to whatever level he deems necessary to avoid a deflationary slump. So good news there. Second, he wanted to tell the Government not to overdo it. He made plain that he expects any "fiscal stimulus" - tax cuts and public spending boosts - to be temporary and made with a clear plan about how the Treasury proposes to get tax and spending back on a sustainable basis, as minister Tony McNulty suggested yesterday, when he told us we'd get tax increases in future. If that does not happen, says Mervyn, we'll see interest rates higher later on. So, one way or another, we'll be paying for this mess way into the future.
Ah, memories. Some of us are old enough to recall the IMF visit to Britain in 1976, and the range of "monetarist" solutions forced on an unwilling Labour government by the Fund. The medicine was probably a bit harsh, and in fact the IMF monies were repaid fairly early, when North Sea oil revenues came more strongly on flow. Then Denis Healey could declare "bugger off day" when he could get on, as Chancellor, with running the economy our way, though he retained many of their principles, such as keeping public spending under control and watching the growth in the money supply.
Ask any economist about the public finances, and they'll tell you they're awful. There'll be some jargon surrounding that judgment, but that is what they are - awful. Borrowing is about three quarters as high again as it was this time last year, and for obvious reasons. Tax revenues are down - especially stamp duty - and unemployment benefit payments are up. Soon we'll see the Government borrowing record amounts, before any bank liabilities are taken into account.
Yet should we be worried? Not necessarily. Often this type of borrowing would lead inexorably to inflation, but there seems little danger of that happening this time. The GDP numbers on Friday will most likely show the UK economy shrinking and well on its way to recession. Inflation does not flourish in such a cold climate. So the chances are that we can have our public spending projects, such as Crossrail, and maybe even tax cuts, and we needn't worry about the consequences. Need we?
Two million. That will be the headline unemployment number by Christmas. Whatever happens to the banking system, this rise in joblessness is already "baked in". Longer term, the banking rescues should help stem the increase a bit, but be in no doubt that a recession is on the way; it is merely a question of how long and how deep.
The UK's flexible labour market is supposed to be one of its great
strengths, meaning that we are inclined to accept lower pay rises for
fear of losing our jobs, in return, if you will, for keeping our jobs.
In other words there are two types of slowdown.
Even before they were printed, the IMF's latest economic forecasts were
way out of date. As it is they are still uncommonly gloomy; the first
year of recession in the UK since 1991, with a shrinkage of 0.1 per
cent predicted in 2009, after 1 per cent growth in 2008; the global
economy growing at 3 per cent, close to the IMF's definition of global
recession; our house prices still apparently about 25 per cent
overvalued; and "the world economy is now entering a major downturn in
the face of the most dangerous shock in mature financial markets since
the 1930s". And "recovery later in 2009 will be exceptionally gradual
by past standards".
Given what's happened just in the past few hours, let alone weeks or days, that must now be revised down. Shock laid upon shock.
There is an odd smell in the air. The authorities' rescue plan for the banks feels just a little like those attempts to save the pound before any of its frequent devaluations in the past. Let's see: we've had trillions of dollars, pounds, euros , yen and anything else thrown at this crisis, but with remarkably little real effect. So we may be coming to a point where, as in 1992 with sterling, the forces of the market place are so powerful that they can overwhelm national governments, even when they act together. So the equity stakes that Darling and Brown are taking in our banks may, before too long, be greatly devalued themselves, another loss of taxpayers' money. That is a frightening thought.
David Cameron was wise to insert an unscheduled speech on the economic crisis into Conservative conference this morning. It means that he can be all statesmanlike on the TV, and get his soundbites into all the news bulletin "packages". So far the Tory conference has been knocked out of the news by the financial crisis, and they need to elbow their way back in. No doubt Mr Cameron too feels that he ought to make a contribution, no matter how small. But it is small; not even President Bush can restore confidence to these troubled markets so I doubt the leader of the opposition can.
One day though, in government if they ever get there (I don't think it's a forgone conclusion) they will have the task of fixing all this. As it happens I think George Osborne and Cameron have got some very sensible ideas to reform the public finances and bank regulation. Good luck to them on that, but it will be a little late. As Tony Blair always thought, one day in government is better than a thousand in opposition.
It's hardly the talk of the bars and cafes of our damp little islands, but we should all understand why the so-called Paulson Plan matters. Take a look at the Halifax Bank of Scotland share price. It's pretty fragile on the whole, and at a big discount (say 17 per cent) to the price of the supposed deal that the PM brokered with Lloyds TSB to take them over last week. In other words, the market doesn't think Mr Brown's sponsored rescue is actually going to happen.
The most precious commodity in the financial markets isn't oil or platinum or gold - it's confidence. Yesterday and this morning you could almost feel it ebbing away from HBOS.
The share price collapse said it all. If it were just that then that would be bad enough - the terror was that this should spread in an inchoate but powerful fashion to retail depositors. Then the game for any bank really is up, just like we saw at Northern Rock, except the Halifax is much much bigger than that.
You can read the US rescue of the Freddie Mac and Fannie Mae mortgage agencies two ways. Does it prove the folly of having a quasi-state guarantee for mortgage backed bonds, and thus discredit the idea of state intervention in the housing finance market? Or does it in fact prove once again that when there is market failure on this scale only the resources of the state can rescue matters, this underlining the case for state intervention?
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