Is there a Plan B?
A few random thoughts in the gloom this morning:
• The Tories have a difficult game to play trying to persuade people they have anything very useful to say in the current financial crisis.
• The bloom is off Vince Cable. Once a beacon of light in grim times, the Lib Dem Treasury spokesman may have devalued himself with his call to suspend the independence of the Bank of England (when he boasted to his party conference that he wouldn't, while the stupid Tories might).
• Among the casualties of the banking crisis, we must now add Scotland's First Minister and SNP leader, Alex Salmond, whose dream to be part of an arc of prosperity that included an independent Scotland, Ireland, Iceland and Norway now looks more like the stuff of nightmares.
• As markets continue to plummet, it is becoming clear that, contrary to earlier reports, Gordon Brown cannot walk on water.
The great Cambridge economist John Maynard Keynes once said that cutting interest rates in a slump was like pushing on a piece of string - in other words, it had no effect. The world's leaders must be worried that the same could be said for all of their policy responses to the banking crisis.
They've recapitalised the banks, guaranteed inter-bank lending, cut rates and ensured the financial markets were awash with liquidity - yet still banks won't lend to each other (never mind to you or me) and stock markets remain in freefall.
Everybody (bar government ministers in public) is assuming that the bank rescue plans have come too late to stave off a serious global recession - and that's what's prompting further massive falls in the world's stock markets.
Yesterday, the Dow Jones suffered its second biggest drop in a single day, down almost 8%; in Japan, the total value of the country's top companies plummeted by nearly 10% overnight; this morning, the FTSE is already down another 5%. Mr Brown should stop smiling.
The latest economic statistics on both sides of the Atlantic are unanimously grim: British inflation and unemployment are worse than they've been since the early 1990s and American retail sales are down 1.2%, the biggest fall in three years.
The US Federal Reserve's beige book, a key survey of upcoming economic conditions, reveals pervasive weakness across the US, with tight credit, deteriorating consumer spending and a weak labour market.
Even emerging economies, including China, are starting to look fragile. So much for so-called "decoupling" theories suggesting that they could carry on regardless, even as the West went to hell in a handcart. Always nonsense - now seen to be so.
The only "good" news is the collapse in oil and food prices. Indeed, all industrial commodities are on the slide - but is that really "good" news? When commodities collapse, it is proof positive that we're heading for a serious recession.
This morning, our guest of the day is Christopher Meyer, once our man in Washington DC. We'll discuss with him why unprecedented global co-operation doesn't seem to be working. We'll look more closely at the bank bail-out plan: is it just a temporary failure or will it simply not work - and if it doesn't, is there a Plan B?
And Richard Nixon is our president in the limelight this morning - topical with the release of the Nixon-Frost interviews film - and we'll look at the current presidential election campaign after last night's final McCain-Obama debate with Sir Christopher and Reginald D Hunter.
McCain actually did rather well but polls show that Obama was regarded as the clear winner. It looks like McCain and the Republicans are cruising for a bruising.
Let me know what you think about any or all of the above using the comments box below.
© MMIX~RS~q~RS~~RS~z~RS~53~RS~)
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So despite our £37bn stock markets are still in free fall!
The banking bailout is just an APPEASEMENT to GB's friends in the city. Friends he may well need after June 2010!
(In Mondays blog I likened GB to Chamberlain - in hindsight Chamberlains "peace in our time" seems to have lasted longer than Brown's)!
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Given the financial system is seemingly on the edge of being in terminal decline shouldn't us savers (everyone with any money in the banking system) have a collective voice to represent our interests.
If the Government are demanding 12% on bank preference shares how come us bank savers struggle to beat inflation?
Not only are interest rates barely able to beat inflation but we are being taxed on the inflation element of bank interest !
Stability will return when savers feel we are getting a fair deal, deposits are guaranteed and we get above inflation returns (the inflation element should not be taxed) .
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Gordon Not Flash, Trash
Bet McCavity isn't around for comment for a while.
On the Tory comment above, what can they say? The fact is that changes would have been made long before recent events. They supported the actions of GB and AD as they had painted themselves into a corner, and there could be no plan B. The secret as you will know, that you have always to allow yourself an opt-out if required.
So much for experience, same old Gordon, same result....
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confidence is the work of weeks and months not overnight. The usual yapparrazzi are saying the despite various plans the markets still go down. It must be the education system that let them down in their understanding of markets or they are being mischievous?
forget the stock markets the only market that reflects what is going on is libor and things like short stirling. The rest is just consequences that stem from that freeze
the most important thing for job creation in the uk is a feed in tariff. It creates hundreds of thousands of jobs, billions in income and lowers bills. The uk is almost unique in smothering it. 19 nations in the EU have it.
Given all the positives for everyone who is the one negative for? Foreign multinationals and nuclear. Which would explain for whose benefit the govt is really opposing the feed in tariff bill?
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Why not bring forward the Autumn statement, and slash Government and Town Hall waste. The Health and Safety Lot can go in the bin, and perhaps the Bin Police could Empty them out instead of reporting them as being the wrong kind of waste.
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The problem with our financial system is that there is no logic attached to it. It is rife with speculation and falls foul to emotion rather than common sense. What the worlds economy needs is the security that would come by creating a single currency where 1 unit in the USA = 1 unit in the upper reaches of the Amazon Jungle= 1 unit in the Russian Step Lands. We need Governments to control our economies not the speculators who have found it so easy to cause runs on currency, or the global corporations who constantly move around the globe to increase their profit margins plunging the community they abandoned into crisis. What is happening now is clearly the result of the abandonment over the last 25 years of communities that can no longer afford to live the dream. The Banks lending more and more to communities that were practically bankrupt, at the behest of Government's who could only cry out for more growth instead of admitting he reality of the situation and the need for a radical re think of the way we pay for our way of life.
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We rightly have finally been told too low rates caused the whole problem. Banks in the real world are not using using fake government set lower rates. So what fools want to think the answer is LOWER rates. That caused it, so repeat it only worse, even lower! Idiots. Money is short, increase the price for it, raise rates. Companies want to have loans, far far more than caring about the rate it costs. Higher rates also help do the right essential thing that all but the BBC want, lower house prices.
Rates should be aimed at becoming Much higher as a general rule all the time, and maintaining them relatively there all the time. They should never ever fall below 5% and in boom times be closer to 10%
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It is time to stop selling the idea that the only useful life is one spent in school, university and then a career in the city.
Basic skills are being lost, even the ability to cook a meal.
I have worked with my hands all my life, I do not want a life of riches, I have a good life.
Our children need to know there is a life other than selfish greed.
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Keynsian theory ?
Never heard of it until the last few days.
But I have been saying that I'd raise interest rates rather than cut them, without realising it was part of that Keynsian theory.
Basically, its common sense. If borrowing money and the lend, lend, lend culture has brought us into this mess, making money even easier to borrow is only going make things worse...
Somebody mentioned contra actions a few weeks ago, on Andrews News24 special. Raising interest rates in the current situation is just such an example of contra action.
Complex systems must have restraining mechanisms and feedback processes to keep them stable, or the system self-destructs. Contra actions, such as raising interest rates in a recession, would provide such a mechanism. At the very least, the world needs to be looking at this idea, maybe at the imminent G7/G8 conference, due in the next few weeks.
What we seem to be doing at the moment, is throwing money at the gfinancial system and encouraging it to carry on as normal. We can't do that, because what was once 'normal' has failed. We've got to do something very different...
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McCain has been looking like an also-ran for weeks now, scuppered by the unfortunate timing of the global financial crisis rather than anything he's particularly said or done. Its hard luck for him.
Sarah Palin initially looked like a useful Vice President, but the news about the abuse of power in Alaska has killed her credibility. America doesn't need another Richard Nixon.
So the vote seems largely academic. America will soon have its first black president. I wonder what that's going to mean for the rest of the world?
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the crisis is not financial anymore but a psychological collapse among a small group of bankers. Can firms needing to refinance their loans now wait weeks/ months before banks may or may not lend to them when they have been given every guarantee such loans will be safe?
there needs to be a wholesale clear out of the psychologically defeated bankers unable to adapt to what now must be a national effort to stop the high st from falling just because banks were to slow to get their act together.
some on banking boards are not even bankers. no wonder they are psychologically unable to know what to do?
is it not amazing the current mindset of such a small group of bankers can potentially and unnecessarily wreck the economy and millions of lives? Heads need to be knocked together?
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I think we can let Victor off the hook.
Slipping on the "never say never" banana-skin is small beer in the overall scheme of things these days. Show me a politician, or even a business consultant, who hasn't fallen foul of that one. Its certainly caught me out once or twice...
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Re 11:
An interesting comment. You suggest a psychological problem, over-caution rather than a systems problem.
I'm sure there's an element of what you suggest, but its not a good enough reason to justify letting things continue as they were.
There's no harm looking at the systems carefully. They do seem to have allowed the undesirable crisis situation to develop and that clearly cannot be allowed to happen again.
Over-confidence is a much of a psychological problem as over-caution. Its just that the US-led world has evolved to see brash, aggressive, extrovert, in-yer-face, "I'm something big in the City and drive a Lamborghini" confidence as a good thing. It isn't.
We now need something in-between. We need the Financial system to be controlled by, (long-pause here, while I think of somebody unnoticeable), well the dull, grey, John Major types. Provided he's not being handbagged by Maggie behind the scenes...
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Andrew:
I hope there is a plan b!
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Reading the blog and listening to politicians and others on TV and radio, there are so many different views on the banking crisis that it's difficult to see the wood for the trees. The one area of general agreement seems to be that irresponsible, reckless lending and borrowing was the cause of the problem. And now banks have had such a fright that they've virtually stopped lending altogether.
The widely hailed 'Gordon Brown' solution appears to be to pump money into the banking system to 'oil the wheels' of lending/borrowing, restore confidence to the bankers that all will be well via government guarantees, and generally get the system moving again.
Maybe it will work, but there might be a risk of giving the bankers so much confidence that they return to their old, reckless ways. The trick would appear to be for the banks to attract savers by offering decent returns and to lend cautiously to low risk borrowers at rates sufficiently high to allow them to keep savers happy.
It looks like being a long job get everything back on an even keel and deal with the ill-defined mass of outstanding debts - good and bad.
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the thing that really frightens me is that gordon brown really believes he is leading the world.Down on the ground it is feeling very unsafe where to put your savings, where is all this money coming from,are decisions being made in haste.If the crisis is so serious why is Brown not using cross party help perhaps the country is more important than party politics.
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Well done, Andrew! You are correct. Very few world leaders, including Brown, have the first idea how to handle the present economic crisis. In any event, what was so good about Vince Cable. He did all right comparing Brown to Mr Bean. He could have gone further and compaired Alistair Darling to Captain Darling in 'Blackadder Goes Forth'.
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this is the perfect time to open a bank.
it will have no dodgy debt and so will attract huge investment. It will have the freedom to lend, depositors will feel safe and will have a huge earning [profit] potential as it takes up the business the current banks refuse. its a win win situation.
maybe branson could do it?
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Is their a plan B? Yeah......... put on a pair of brown trousers
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Not only will interest rate cuts not have much effect, as Andrew Neil says, but such cuts are not even the appropriate tool! Dozens of bloggers in recent days, myself included, have pointed out the obvious, namely that interest rates encourage borrowing and excessive borrowing is the root cause of the problem!!!!
So what to do? It's easy: have government run an unfunded budget deficit. I.e. government spends without recouping an equivalent amount from tax and borrowing. I.e. print money.
Obviously this should not be done Robert Mugabwe style. On the other hand it is undeniable that as economies grow, decade on decade, an expanded money supply is required. Of course with inflation at 5% it is arguable that the economy should not be boosted at all. But if a boost is desirable, then a controlled expansion of the monetary base ( or "high powered mone") is the appropriate tool just at the moment.
And if this proves inflationary in a year or two, then control the problem with stricter bank regulation (which is coming anyway), or banning 100% mortgages, or increased interest rates. etc etc.
Anyone interested in an article by Willem Buiter (ex Monetary Policy Committee) saying something roughly similar to the above, see http://blogs.ft.com/maverecon/2008/03/when-is-increasing-liquidity-or-the-monetary-base-not-inflationary/
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