It Is Not Working

03 January 2009 - It is not working

The gut anti-reaction, voiced in this diary pretty much from the start, to the plethora of measures to get credit flowing again, is that it will not work. The raising of the Tier 1 safety net for bank reserves that in turn caused banks to take new funds either from shareholders (largely failed) or central government or foreign investors (largely overseas quasi-governments) has had an effect. But it has been the opposite of that intended. If you force banks to take on expensive debt - preference shares with a huge dividend attached - and attack their very independence with also expensive equity stakes, it is just as likely to make them more conscious of the weakness of the balance sheet that started the process. So were they likely to loosen their lending criteria to proper customers alongside ceasing to lend to improper ones? Then there was the idea of making huge loans available, guaranteeing deposits and inter-bank balances and intervening directly into the credit markets. Even quantitative easing, that is, printing money. These latter actions had more chance of success but the effects have been marginal. 

The point is that markets, any markets, are difficult to manipulate. Sometimes, like smoking too much, drinking too much, snorting too much, consequences have to be faced. Why is spending too much any different? Yet right now in the UK we have the ludicrous situation where retailers are being encouraged to discount heavily to get the masses to spend what we know this group haven’t got and weaken the already weak sector even further. If regular readers of this diary have picked up nothing else, then surely it is that today’s cash-flow is no indicator of future survival. Businesses have to be profitable and individual householders have to be profitable. Borrowing to spend is stupidity in the extreme unless that spending itself is profitable.

This is not a lone-voice view. Serious economists and government ministers as far apart as Australia, Sweden and Germany have already expressed their reticence to follow the spend route. Expect more to follow.