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Three levers pulled. Will they work?

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Paul Mason | 16:09 UK time, Friday, 6 March 2009

Bank of England

So today the Bank of England starts using the money it has effectively printed to start buying up government debt. Will it work? In actual fact quantitative easing has already begun to work: the interest rate on a ten year IOU from the government (known as a "10-year gilt") has fallen to 2.95% - the lowest it's been for 40 years. It was just above 4% a couple of weeks ago.

When it was first tried out in America, on the advice of JM Keynes, QE worked within a month, and that was when buyers and sellers of government debt had to physically collect the paperwork. Gilt yields (aka interest rates) fell; the stock market bottomed. So if today's action continues to depress yields this is one of the first, tangible, positive signs that government policy is working.

The theory is that by driving interest rates on government debt down, this will drag down the cost of borrowing for companies - which at the risky end of the market has rocketed to 31%. But here's where the uncertainty creeps in.

Today, for example, Wrekin Construction - a business with £50m of orders reportedly on its books - went into administration. It told the press that RBS had refused to extend an overdraft: it needed £3m. Now 600 civil engineering and railway construction jobs are at risk - and we're supposed to be in the middle of a government-driven civil engineering boom.

This raises obvious questions about another part of the government's rescue policy, namely the bank bailouts: we'll come to that in a minute. But for now consider the risk events like this pose to the policy of QE. Construction firms can default on their debts: governments rarely do. So the risk of default has to be factored into the price of company borrowing. The danger is, as the economy worsens, this high risk of default keeps the cost of company borrowing high while the government's interest rates come down. This will defeat the purpose of quantitative easing.

For it to work it has to be joined up with other policies. Yet the central policy - the bank bailout plan - has a major question mark over it. It is one thing to expose the taxpayer to £625bn of potential bad debt. But to refuse at the same time to seize control of the banks is seen by many in the finance sector as inconsistent. It is not a question of nationalisation or otherwise: there is an obvious touchiness among Labour politicians about being seen to nationalise the banks. It is a question of control.

Publicly listed companies are run by managers for the benefit of shareholders. If shareholders dont like what managers are doing they get rid of them. Thus, in theory, the shareholders "control" the bank. As we know they did this badly, losing most of their own money in the process. If the government is the major shareholder - with 90% of RBS and 65% of HBOS - why does it not begin to exert control? The private sector shareholders exercised this function badly and now, reduced to a rump, are in no position to do so properly at all.

The government's opposition to nationalisation is always stated thus: "We have no desire to control a major bank; that's best done by the private sector". And the remit of UK Financial Investments, which holds the taxpayer shares, has been written to make this clear: they are to act purely as a commercial shareholder, one suspects - reading between the lines - the type of shareholder who turns up to the AGM, asks a few questions, and goes away for another year.

However real shareholding institutions exercise close and continuous supervision over major listed companies: their analysts are in and out of the finance department; they are actively engaged with the board. It is a legitimate question: if the major shareholder is not doing this, who is?

And here's why it matters. The government could have ordered RBS to bail out Wrekin Construction. It could even have bought some of Wrekin's debt on its own account, bypassing the banks completely, using the Bank of England's new powers. Quite simply, leaving all the ideological considerations aside, there is the danger that the refusal to actively manage the state-owned banks - relying instead on "agreements" to boost total lending in general and on normal commercial terms - starts to undermine the impact of quantitative easing.

If banks don't start pro-actively pumping money into companies that, on normal commerical terms, would not get the money, then the whole point of QE is lost.

One city bond trader last week suggested to me that the government could simply take operational control of the "fixed income" (ie bond) departments inside RBS and Lloyds and place, say, £50bn of the newly printed money at their disposal. He, like many in the City, was totally unsentimental about nationalising the banks. If you are stunned by that, don't be: high finance in a crisis is a game without a playbook. Only highly creative and audacious moves, which prompt people to say "I didn't know you could do that!" have a chance of putting things right.

And we are not talking here about some arcane side issue: Quantitative Easing and the nationalisation of bad banking debt are the last throw of the dice. They're both designed to pump spending power into the economy. They have to work - because the global economy is declining much faster and much further than anyone expected.

Two days ago IMF boss Dominique Strauss-Kahn labelled this the "Great Recession": the worst of our lifetimes. The IMF predicts world GDP growth will now shink to zero. In January the Fund's economists ran an modelling exercise showing Japan at high risk of deflation, closely followed by the USA, Taiwan, most of Europe and most of South East Asia at medium risk. Veteran UBS economist George Magnus warns that we are on the cusp of a deflationary spiral and even a depression, and that "even unorthodox monetary and fiscal policies" may not be enough to save us given the deep structural indebtedness of households, and the essentially bust situation of the banks.

This brings us to the third lever: fiscal stimulus. You will hear a lot in the run up to the G20 about "co-ordinated fiscal stimulus". Fiscal stimulus means cutting taxes or spending more taxpayers money to stimulate the economy. In Britain we've had one fiscal stimulus, in the form of the £12bn VAT cut, with a few billion more of public projects brought forward. The IMF poo-poohed this at the time but some close to government believe, though small, it is working: that we've had £12bn worth of bang for our bucks, pro-rata.

The point in the UK however is that there is very little room for a further fiscal stimulus. The government had to breach its own 40% ceiling, taking predicted debt towards 60% of GDP without factoring in what happens if much of that £600bn we have absorbed from RBS and Lloyds/HBOS goes bad. To launch a further fiscal stimulus in next month's budget would mean increasing the structural debt of the British government to unimagined levels.

There are two alternatives: one, as outlined by David Blanchflower of the MPC would involve injecting a further £90bn, Obama style, to create about 750,000 jobs. This would dwarf the fiscal stimulus of November and necessitate a rapid rewrite of the debt projections. Given this would saddle the next government - nay the next generation - with a massive tax burden, ripping up the present pattern of public spending for several decades, I cannot see how it can be done without either a) bipartisan support b) an early election.

The second alternative is to renounce fiscal stimulus and soldier on with the bank bailout plus quantitative easing. Until we hear otherwise we have to assume that's the default option. Which makes it vital that the policies - once opted for - are executed boldly, assertively and decisively. Hit the comments button as always.

Comments

  • Comment number 1.

    Paul,

    As ever, an excellent blog and surprising that there are still no comments several days later.

    [A voice crying in the wilderness? Just remember to shave regularly and go easy on the wild locusts and honey.]

    The case of Wrekin Construction highlights one of the inherent weaknesses of the Government bail-out plan.

    On one hand the Government appear to be reluctant to intervene (whether it may be because they are liable to accusations of "state aid"), on the other hand these are the kind of businesses that ought to be helped by virtue of "trickle down", but clearly are not - left to their own devices the banks are putting their own needs ahead of passing on the benefits through to the wider economy.

    It raises a wider question - for whose benefit is such a large amount of taxpayers' money being "given" to the banks?

    Without interference in the running of the banks, or even bringing in an appropriate regulatory regime in the light of previous failures, where is the oversight to ensure that the bail-out bears fruit in helping the very individuals and small businesses that are the bellweathers of a recovering economy?

    The sideshow of banking bonuses and Sir Fred's pension obscures the fact that the Government has bestowed the largesse of the taxpayer with very little accountability on behalf of the recipient. As your piece makes clear, the Government has more than enough powers to do so, but strangely appears to have chosen not to.

    Even the IMF would require more stringent controls in return for funding.

    There is something sinister in this. The unapologetic Prime Minister may talk of "lessons learned", but where is the evidence? Laxity has given way to laxity, latitude to latitude, unaccountability to unaccountability.

    We are living through the greatest stealth tax the former "stealth chancellor" has ever imposed, the transfer of wealth from the small to the great. For once, if we ask the right questions, we can see evidence of an agenda hidden by the subterfuge of lack of foresight and incompetence.

    Cui bono?

  • Comment number 2.

    This policy makes me nervous but then life can be a pain betimes; biological solids happen!

    Having got that out of the way, if something such as QE is needed, then you are quite right, it is best done as directly as possible.

    I do feel that the authorities have been slow in their responses to events and this has allowed matters to get worse.

    Somehow I feel that the economy is being treated as an academic exercise rather than a living, breathing organism made up by countless human beings each one concerned as to their next meal, their home, their family, their job and their future.

  • Comment number 3.

    It is interesting to note the apathy of Anglo-Saxon communities worldwide. Here they are, being fleeced by their Governments on behalf of big business accomplices, and the people sit and do nothing. They are invaded en masse by immigrants and they sit and do nothing. They are discriminated against in more and more walks of life, and they sit and do nothing. I could go on for pages about this, but the above examples should be sufficient.

    It is almost as if the Anglo-Saxon peoples are worn out, as though centuries of Empire building has left them exhausted and unable to function anymore. This attitude of listlessness, depression, and capitulation when faced with even the smallest challenge, pervades everything they do. It is in their music, which appears to consists of whining voices and miserable defeatism. It can be seen in their inability to form political organisations that deliver any value. It is manifest in their TV where the most popular programmes are re-runs from previous generations.

    What a sad end to a once great colonising race.

  • Comment number 4.

    The art of business is to book orders from customers and then turn those orders into positive cashflow.

    If this Wrekin Construction has £50m of orders on its books, how do we know these orders can be turned into a positive cashflow? The fact the company needs an overdraft suggests the business is unprofitable and its cashflow is unviable.

    The economy will only "work" if businesses generate profits and positive cash flow. Short term financing is beneficial, as long as the debt is repaid quickly.

    During the artificial boom of 2001 to 2007, we got too far away from basic principles and the damage done to the economy is largely irreversible. Now we face hard times ahead, as the economy tries to get back to a fundamental equilibrium. This adjustment will be very painful, but the economy should never have been allowed to get into such a mess to start with.

    In Britain we face the following situation:

    Consumer price inflation
    Falling asset prices
    High unemployment
    Falling wages
    Low demand for goods and services
    Low tax receipts
    High government borrowing
    High levels of household and business debt
    Low levels of savings and reserves
    Weak currency
    Large trade deficit

    This is a difficult situation to escape from. The world economy has already fallen too fast and too far. We'll have to work our way out of the mess over a period of many years.

    QE and low interest rates only attempt to treat the symptoms.

    The government must spend its fiscal stimulus wisely. We need to secure our supply of necessities. For example, we need to be more self-sufficient in food and energy production, and use modern technology to ensure its low cost of production - think about tidal power and woodland farming techniques. We need to get back to basic stability, and sustainability. We should have been working on this during the good times, rather than leaving it until the hard times.

  • Comment number 5.

    Actually the date on this blog is wrong. It's a glitch in the system. I wrote it this morning, 11.03.2009.

  • Comment number 6.


    Now I know why my companies share price dropped over 50% today, Wrekin is one of our major clients..we also have debt and we also bank with RBS (and lloyds as it happens) whom provide the company I work for their banking facility up to 100M.

    My company issued a warning we may be at risk of breaching our banking covenants a few weeks ago. Response from the banks to re-negotiations the terms are 'positive' we were told.

    We are running at 91M of our 100M facility at the moment in a shrinking market.......we bought a lot of companies...some of them in Ireland...

    Needless to say your post today is closer to my heart, my livelihood indeed, than probably anybody else who will post here today.

    I can not afford to lose my job. I have a wife and 2 young children both still at primary school, a descent wage and lifestyle but too young to have significant savings. I have always found work in my specialist engineering careers even in previous recessions both here and abroad, no problem, I am highly skilled and trained.

    This is different, even though I know I am very good at my job I will struggle to get another one if I lose this one. If I do it will pay much less and I may have to move away from my family to get it.

    I never planned for that. I planned for the mid part of my life to be one of stability and hard work to bring up my kids in a well balanced environment, to give them the same chances I have had, to give them the same stability early in life that helped make me strong also.

    The shift from 55k a year to JSA is something I simply can not comprehend or ever hope to manage.

    So how do I feel about the knights of the realm in the boardrooms of the banks?

    How do I feel about their pensions?

    How do I feel about the government who cut a deal with the banks elite...light regulation in return for big tax receipts which can be used for big government...

    How do I feel about the bailout of the banks costing ..potentially..my childrens future..forget about putting a number to it.. pointless now with QE.

    How do I feel about a government owned bank letting a company go into administration with a 50M order book for the sake of 4M? Why don't we apply the same principle to RBS and its leadership that will apply to those of Wrekin Construction? What have they done to deserve such privaledged protection, what can they do to build abetter world for us?

    How do I feel about the potential loss of skills from companies like Wrekin, skills we will need to build a sustainable future in terms of infrastructure and energy.

    How do I feel that Wrekins are left to go down for peanuts, less than 25% of the cost of Sir Goodwins pension pot, yet they will be the companies to physically rebuild the country while SIR goodwin (and many others) are drinking margahritas in mexico...

    How do I feel knowing that government is so obese from gorging on the excess of the City and the beurocracy so intense that even if a stimulus package to build the tidal barrages, nuclear power, wind and wave farms, sustainable transport for our children was announced tomorrow it would take years before a spade struck the ground. Years and years tied up in planning and commities to be compiliant with EU and national laws. In the meantime starved of work, more and more of the skills will be lost that we need to build a proper future for our kids.

    How do I feel knowing that the Labour party, the so called 'party for hard working families like mine are complicit in creating this situation?

    How do I feel when the 'party for hard working families' do not have the humility to admit the mistake, wipe the slate clean and do what is best for the country not for their careers?

    How do I feel when I see there is no voice for me out there..who do I vote for?


    I will not tell you how I feel, sometimes things are best left to the imagination. I will offer one word though.

    Betrayed.

    I would appreciate it Paul if you would lessen my burden slightly and present this post to some politicians and people involved in high finance. I would like to be able to look into their eyes after they have read it.

    I would like to think they would have the moral courage to do that. if they dont they should not be in the houses of parliament, they should not have knighthoods or lordships, those things were designed to mean somethin and to be bestowed upon those whom have earned it.

    That would be a starting point at least.

    Jericoa






  • Comment number 7.

    Paul,
    Could I make a suggestion.Can you put your blogg link onto the BBC Business website page so that we dont miss your comments.

    I tell you what concerns me. The BoE says that the proceeds of its gilt purchases will trickle straight to the wider economy, not the banks.They say the objective is to support the CPI target of 2%. Insurance companies, pension funds and Overseas investors are some of the biggest gilt investors. They have long positions to cover. If BoE liquidates their positions in the secondary gilts market is it really likely those institutions will : put the money in the bank ; invest in riskier assets in the uk private sector - wont they prefer to buy new gilt issuance to cover their strategies or take their profits home? If so, isnt this just a liquidity boost for the 146billion new gilt issuance needed for 2009 HMG debt management? If banks sell their gilt stock would this not be selling their Tier One capital in exchange for central bank cash - just a conversion.

    Or is it being suggested that the yields on medium / long gilts will be driven so low it will drive these gilt investors into other assets? Genuinely, could you or your posters help me with this?

    The main line Gordon Brown was pushing yesterday on the banks was the lending capacity gap left by foreign lenders and non bank financials exiting the market. Since 2007 he says the gap has built up to 100billion and that only now his controlled banks are committing to bridge some, not all, of the gap. Is he right?Are they still undercapitalised to bridge the gap, whatever it is?

  • Comment number 8.

    #4, MrTweedy

    I think your analysis of the position of Wrekin may be an over-simplification; I am personally facing a similar situation, although thankfully on a much smaller scale.

    I have run my business for the last 2 and a half years without having to resort to borrowing from the bank; I have (at least in my own opinion) been sensible and prudent, paying myself a living wage, and no more than that; I'm now in a position where I must make a choice between borrowing from the bank to tide the business over for what will hopefully be a couple of months or letting the business fold (due to non-payment for some orders; I am hopeful that I will yet collect some of the monies owing but of course in the current climate there's no guarantee of it).

    The point being that a business may be perfectly viable in a normal environment, and even in a "normal" recession (whatever that is), but in the current climate even a decent, viable business that has traditionally been cash rich and able to avoid borrowing may simply have no choice.

    I can't find anything to argue with in your other points though...

    Jericoa - an excellent post, and it pretty much sums up my feelings as well. Like you, I have young children, a family; I have not struggled to find a job before due to required technical skills but expect to struggle mightily if I have to look now.

    My own personal backup plan is to look at the Graduate Teacher Programme; fortunately my degree is in maths, but then it seems the government is doing their best to make it easy for "the best in the city" to get those jobs more quickly than the grunts like me.

    Quite what evidence they have that these people can even add up properly I'm not sure...

  • Comment number 9.

    Afew illustrative quotes below demonstrating the utter failure of reason or organisation in the government and the banks.

    The quotes come from the director of wrekin and other interested industry commentators on their demise.

    Peter Greenwood, joint managing director, has already made himself something of a folk hero with his quote that “someone should be shot” for allowing Wrekin to go to the wall despite having a huge forward orderbook.

    “For example, we had RBS people at a recent meeting in Birmingham and not one had any appetite for decision making. It was like a game of pass the parcel. I wouldn’t have let one of them so much as wash my car never mind run a bank.

    If Wrekin’s people still had jobs that would be £400,000 PAYE of incoming income for the government, but that’s now lost. Instead, there will be £2.5m for government to pay out by way of redundancies. Then there’s going to be the dole on top of that. It makes no sense.

    “This is going to cost taxpayers £10m over the next two years, all in all, yet it would only cost £2m to fix and even that would only be £2m borrowed – we’d not be stealing the £2m as we’d eventually have paid it back.”

    We have heard from several contractors who have struggled to get the help they need since the Small Business Finance Scheme was first put forward in November 2008.

    “The scheme – which eventually became the Enterprise Finance Guarantee Scheme, the Working Capital Guarantee Scheme and the Capital Enterprise Fund in January – is not only confusing, it has also failed to provide effective support. ''

    ''The plight of Wrekin Construction – by no means a small contractor or a failing business – highlights the possibility that government support for business is failing to help real industry''

    End of quotes.

    Time to nationalise the banks.


    Jericoa





  • Comment number 10.

    #4 meltonmark

    I would suggest that the real reason for the apathy is not that anglo-saxon people are worn out and exhausted but, rather, because most are still living rather comfortably, especially compared to most of the rest of the world's population.

    As politicians understand very well, populations do not tend to revolt unless they are truly poor and have little or nothing left to lose. Few anglo-saxons fall into that category, despite the economic gloom.

    All the while most can still watch undemanding tv programmes, read/hear about 'celebs', eat 'fast food' without having to bother with preparing and cooking it, and drink themselves stupid, I think there is little risk of any serious rioting.

  • Comment number 11.

    ... and of the companies that DO come out of this, how many will have so thoroughly entrenched bottom-of-the barrel wages and conditions into a terrified workforce that it will take decade upon decade to reverse?

  • Comment number 12.

    #10

    I agree but there is an opportunity for the modern equivalent of a riot.

    The apathetic anglo saxons would not even have to go out into the cold, they could create a modern riot simply by going onto the net.

    How?

    Co-ordinated shifting of bank accounts to ethically run banks to force the governments hand for example.

    At the moment the goovernment is happy to be a majority shareholder but not to take any moral leadership of them on behalf of the people.

    Not acceptable and we can change it without taking to the streets.

    Sir paul judge is also setting up a web based political party which will hold primaries for candidates on the net (not like the insider driven incumbent parties prospective MP selection).

    It is called the jury party and he has clearly invested a lot of his time and money in this.

    Riots on the street no, a riot in cyberspace YES.

    It could be equally effective and be done in the comfort of your own home.

    stop complaining about our lazyness, there is something you can do, just do it.

    Jericoa


  • Comment number 13.

    #12 Jericoa

    I wasn't complaining about lazyness, just letting meltonmark know that I disagreed with his analysis of the reason for, what he calls anglo saxons, apparent apathy. Of course, there is no such thing as anglo saxons but I chose not to write a long message explaining that, too:)

    I moved my current and savings accounts to ethical banks and building societies long ago.

    Thanks for the heads up about the jury party, which I hadn't heard of. I'll check it out and see if it has a manifesto that I'd be happy to support. Just changing the way candidates are selected won't, on it's own, solve anything, IMO.

  • Comment number 14.

    No. 8. Elethiomel

    I think that is the greatest scandal - that those businesses and households who did act prudently will now have to pay for the bad debts of others.

    Customers who do not pay their bills will blow a hole in the balance sheets of healthy companies.

    Many businesses took on too much debt, and this now makes them extremely vulnerable in the recession. If these indebted companies then fail to pay their suppliers, they will spread their disease to otherwise healthy businesses.

    These big borrowers should have focused more on cash creation during the good times, but instead they levered their way to quick profit, ultimately at the expense of their creditors. They existed on a constant diet of debt, without trying to repay it. Now they can't repay the debt, and they can't pay their suppliers - and they expect us to feel sorry for them.

    The bad debts within the economy threaten to take us all down, as the innocent are forced to pay for the bad business decisions and profligacy of others.

    You have my sympathy, and I sincerely wish you and your business the very best. I hope your customers pay you, and you manage to weather the storm.

    The BoE trying to inject liquidity into the economy may help the situation, but this only treats the symptoms because the root cause is too difficult to address.

  • Comment number 15.

    As ever government is attempting to work by top down policies - they simply do not deliver where it matters - with real businesses and jobs.

    It is ok having an insurance scheme to underwrite past loans - it should also extend to underwriting future loans to business.

    RBS obviously consider Wrekin Construction to be a bad risk - how many more businesses are going to fall into this category as the crisis rolls on.? Suppliers and subcontractors to Wrekin must now be at greater risk of themselves going bust by the action of RBS.

  • Comment number 16.

    Some good discussion here.

    What it boils down to is this - we have a Government that seem prepared to extort whatever they think fit in the way of imposing additional tax burdens on the prudent (and their children), for the purpose of "saving" a few select banks, with very little regulation or accountability on those banks.

    When the mafia, sorry Government, come along to extort more money from us, do we have any say in the matter, where or how it is being used, or even on the rules that should be imposed on the beneficiaries?

    What if those taxes were being extracted to fund some kind of new global elite rather than "stimulate the economy"? Would we know any difference?

    Oh yes, we will probably get an election some time next year, by which time "our" money has disappeared - and we'll have a simple "choice" between two alternatives basically committed to more of the same.

    What can we do about enforced extraction? Roll over, leave it to our "political masters"?

    This happens to us precisely because we are largely peaceful, law-abiding citizens, trying to provide for ourselves and our families.

  • Comment number 17.

    #12 wontbedruv

    Sorry, it was not meant to come accross as having ago at you, more to re-inforce what you were saying and add some suggestions concerning what can be done.

    I wrote it in a hurry while trying to get the kids to eat their cereal etc following a speed read of the posts.

    Such is life trying to start a peaceful revolution and bring up a family at the same time!

    Jericoa

  • Comment number 18.

    #17 Jericoa

    No problem and I hope your kids ate up their breakfasts:)

    I had a look at the Jury Team website. Difficult to find fault with the 12 proposals. However, having done just done some reading up on Paul Judge's past (eg at http://en.wikipedia.org/wiki/Paul_Judge), I'm afraid I am not very hopeful. He looks to me like a typical establishment figure; more likely part of the problem than of any new, sustainable, future.

    Still, I hope I'm wrong and will watch to see how this 'party' develops.

  • Comment number 19.

    Screw peaceful means Mr Jericoa.

    As somebody who is in (fairly) similar position to you I must ask why it is that the 'masters' should be politely asked to leave ?

    This democracy freezone that we currently inhabit so why is it that we (the slaves) should continue with the rules that were imposed upon us.

    I want to see those who caused this problem swinging from the lamp posts as a warning to any future set of vultures.

    Then I can get back to my apathy.

  • Comment number 20.

    Have only just read the comments on here....

    I caught a bit of Paul Judge on Andrew Marr's Sunday am and he wants a government of independents without the 2 party adversarial system which we're all so sick of, so I wish him well. Apparently the MPs didn't have parties when The House of Commons first started and it served us well like that for a couple of centuries.

    Jericoa you have my sympathy for what it's worth. The time has come for a massive re-think so that we're not all at the mercy of employers who may or may not be very good but they too are at the mercy of outside forces beyond their control.

    I have a PhD in Biochemistry but ended up as a childminder amongst other things just to keep a roof above mine and my childrens' heads and to be available to them. I tried a variety of jobs but it was literally to keep the wolf from the door but my heart was in the home. Now they are grown I have downsized twice and no longer have a mortgage or a job, nor a pension but I have my life back.

    If I travel on a train it's because I want to not because of a job. If I don't want to get up at 7am to go to work I don't have to. My bills are the lowest they can be and I don't waste my money. If I do have a job again, I won't earn above the personal allowance for each year as I don't want to give anything to the government to waste on my behalf. That and my meagre savings will be enough.

    I would advise anyone to be as independent as they can be so pay off debts as soon as you possibly can; cut expenditure to the bone; become as self-sufficient as possible in everything. I would like to be able to grow my own food and generate my own electricity etc etc. Don't worry about status. Family and friends are the only important things in life.

    Time is more precious than money and a life worth living free from worry. Sometimes when people are made bankrupt and companies go to the wall it is a blessed relief. The worst has happened and it forces you to think laterally. There is always a way out.

  • Comment number 21.

    #20

    Well said, janchild. My experiences have been similar to yours and I have never been happier than I am now.

    I'm tired of hearing politicians and others saying that banks should be lending (more) to businesses and home buyers.

    I have owned and run small businesses in the past (as well as having had spells of employment by others). When I wanted (not 'needed') to borrow money, I requested a loan but I never assumed I had a right to it, however strong I might feel my forward order book was.

    Now, I live on a small income and my modest savings are in an old fashioned building society. Even if they were in a bank, I would still expect them to use it cautiously and pay me a modest but fair rate of interest. If I wanted to take big risks, in the hope of making big gains, I could buy shares or bet on the horses, instead!

    As a taxpayer, I find I am now, effectively, an unwilling shareholder in some of our banks. I wish those banks to be more cautious, not less.

    I'm really very sorry that means some people losing their jobs but it is clear to me that there has long been overcapacity in many types of business. There is no sense in trying to return to where we were before this recession because it was not, and never will be, sustainable.

    I think we (in the so-called developed nations) all need to learn to live with less. As janchild so eloquently explained, that doesn't have to mean less happiness.

  • Comment number 22.

    #18 and 20

    I saw his background too to paul Judge which put me off immediately also, but if you take it at face value he is just the facilitator. I doubt he would get elected under his own parties rules i.e. a primary type system.

    The idea is good, the guy who is backing it has a ? over him, he obviously knows that yet is doing this anyway..which is interesting in itself, i saw no mention he was putting himself forward for any leadership position for example.

    All I am saying is lets not throw the baby out with the bathwater but it would be much better if someone else was facilitating it credibility wise.

    #19

    Crikey, surprised that got past the moderators. One of my posts got pulled for merely pointing out that Robert Peston is a supporter of the rather contentious organisation called the ' common purpose group' (as reported by BBC 5 live for goodness sake) even the name of the organisation sounds sinister to me, yet you get away with incitement to string up people! Is there a cover up?

    I share your anger and I am trying to control it.

    Jericoa

  • Comment number 23.

    20 &21

    I am in broad agreement with both of you on this. we will be forced in that direction sooner or later, i would prefer it to be in amanaged way than as aresult of a very large systemic correction like awar or a pandemic and the like.

    The elephant in the room is the unsustainable nature of economic growth in itself as a means of creating prosperity, and what is prosperity? i buy into your vision of it more than the current economic model.

    This crash is asking us these questions.

    For arguments sake lets say we now only need to expend about 8% of human labour in feeding ourselves, lets say 15% to include energy needs and lets up that to a huge 50% to include clothes and general infrastructure ( water, sewage, transport, education, defense, justice, healthcare etc).

    The remaining 50% (say) of human labour is largely involved with producing things we do not really need for our day to day survival and comfort, often at the expense of the environment.

    On top of that, all the time we are producing the things we dont need and the stuff we do need ever more efficiently on a continual basis. The current economic model demands that in order to generate profits / plough some of it back into innovation /more efficiencies etc

    Here is the rub.

    The planet does not have enough resources to keep on producing 'non essential stuff' exponentially in order to keep everybody in work to balance the continued improvements and efficiencies the current economic model demands.

    The job of the current economic model has been completed. It created innovation and efficiency by harnessing the power of human greed. The point has now been reached when human greed has taken over the system to keep it functioning and the system is breaking down because of it and has become horribly imbalanced.

    We have, as human beings, become too efficient and automated for the existing economic model to ever work long term to keep everybody employed.

    This is increasingly being expressed as an ever volatile underclass on subsistance benefits (the people who used to plough the fields) and an upper class who, for example, own a farm capable of producing enough food to feed 1,000 people but only employs 20.

    It does not work.

    It is not balanced.

    For example.

    The guy who owns the farm is incredibly rich.

    His 20 employees are relatively wealthy.

    The 979 people his farm feeds live a subsitence existence.

    The efficiencies in production are ever more generating wealth for a 'super rich elite' but that does not generate work for grass roots people to do, sidelined to live a subsistence life on benefits with eyes fixed on the super rich, a position they can, by the very nature of an ever efficient system, never obtain.

    In the future, increasingly, everybody will have to do less. In years gone by it took up almost all human labour just to feed ourselves, now it is a tiny proportion of our activities.

    Providing some cross cultural and religious consensus is reached to control global population we should all be able to work less, enjoy our families and friends more and the things that really matter in a sustainable way..sounds quite nice.

    The worlds is not built to function that way at the moment. There will have to be a global consensus accross nations and a desire to make the world a sustainable place for all to live.

    That will need religious compromise (population control) and political and cultural compromise such that there is a general acceptance that we all need to find a way to be happy with less ' stuff' and in return we will all have more time with our friends and families.

    The grand opportunity before us is to invest the last of the existing global economic models power to create that world. We have to engage with the faults of the system a little while longer as we 'run it down' and eventually put it out of service.

    That means huge investment in sustainable energy production, food and basic needs (sustainable transport, clean water, functioning sewage systems) and education ( particularly basic hygene and population control) on a global scale. Everybody needs to sign up to this.

    The current economic model has created the efficiencies and the technology and the knowledge such that there is no longer any reason to fight for resources or see children starving to death or drinking filthy water or adults murdering each other.

    That does not have to mean we will live in a bland world either, prosperity and recognition should be measured in terms of creativity resting on an understanding of what we are and how the world works. money should never be ameasure of success in itself.

    The wealthy should be those who create something of real value. I have no problem with Bill Gates wealth, I have a big problem with Richard F Fuld jnrs wealth.

    Money was created to oil the wheels of a mechanism to enable us to become more efficient and create a world where all our basic needs can be met. That job of work is done, now it only feeds that which has an unending appetite. Human greed.

    This crash was ineviatable. You could even argue it is fortunate it has occured as soon as it has.

    The sooner the world understands its root causes and starts to make decisions accordingly the better.

    We need to actively preserve our core science and engineering skills at all levels through this turmoil to do it

    I agree, let the banks go.. save the real skills, not banks.



    Jericoa

  • Comment number 24.

    #23 Jericoa

    Bravo - you can have my vote!

    Only one, relatively small, point I would disagree with you about. I don't think we should assume that we can continue feeding ourselves with the current amount of labour.

    Modern farming/growing techniques are heavily dependent on cheap oil and energy. Cheap non-renewable resources of energy have underpinned everything; the agrochemicals, the fertilisers, the tractors, the planes that fly food from African countries (which can ill afford the water used to grow the food we eat), even down to the oil that drives the cars that take us six miles on average now to the supermarket to get the cheaper food.

    We have an entirely oil based food economy. But oil is running out and it will gradually become too expensive to ffed ourselves the way we do now.

    That almost certainly means we will need to use more labour for food production, though I don't consider that a bad thing. Indeed, community food growing schemes, for example, have already proved themselves to be a catalyst for re-building a sense of community, in places where they have become set up by and for local people. Also, in my experience, there are few things more satisfying than eating food that one has played a part in producing and sharing it with loved ones.

    There is a catch here, though. Most land suitable for food production is owned by a relatively small number of people, so it is very difficult for ordinary people to get access to land on which to grow their own food, whether on their own or in community schemes.

    For example, most modern homes have tiny gardens and flats usually have none, of course. Waiting lists for allotments get longer by the day. Many allotment sites have been sold off for housing development, in past years, when fewer people wanted to grow their own food.

    Farmers and land owners will not sell agricultual land that is close to existing communities, because they know they can probably obtain planning permission for it, sooner or later, and then sell it at fantastically higher prices.

    How the global consensus you describe can be achieved, I know not, I'm afraid. That US and UK govts are now at least talking about investing in new green research/technologies gives some small cause to be hopeful, perhaps.

    Meanwhile, tomorrow, I'll get back to sowing my seeds:)

  • Comment number 25.

    #24

    Yes good point on the reliance on petrochemicals, i see the flaw in that aspect now, but like you go on to say, not necesarily a bad thing for more people to be in touch with nature.

    To quote my wife during one of my moments of despair (best imagined said in a thick brazillian accent)

    'The world is nice and beautiful, it is the people, they are crazy'.

    Jericoa.

  • Comment number 26.

    Well, a fiscal stimulus is affordable in the long run if, for example:

    * The ID cards/database scheme is scrapped
    * Armed forces are withdrawn from Afghanistan as well as Iraq and Trident is cancelled
    * The network of UK tax havens is shut down
    * The government ends corporate subsidies through PFI and the "public services industry"
    * Cuts in corporation tax are reversed and brought up to the 45% level proposed for high-earners

    Such policy changes would be popular amongst people who vote for Labour, the Liberals, the Greens, and the Scottish and Welsh nationalists - these parties may even see the necessity of forming a progressive rainbow coalition in the aftermath of any sudden general election...

  • Comment number 27.

    Someone needs to remind Blanchflower, and you, that 750 000 jobs would be about 700 000 jobs for Eastern Europeans and Indians under our present international commitments.

    Some fiscal stimulus!

    Oops - dont we ever mention that?

  • Comment number 28.

    Jericoa #23 - I agree with much of what you say. I have said for a number for years that the improvements in living standards which the government likes to take credit for is a con. It was based on a higher and higher percentage of the population working increasingly harder (and, as it transpires, re-inforced by a credit bubble) all to the detriment of our lifestyle. In this crazy world we work longer hours to buy the time saving devices and fast food which we need to allow us to work longer hours!

    Unfortunately, I am not optimistic about the future. As the blogger at 24 points out, the world economy (including food production) is heavily dependent on cheap oil, a finite resource. Add in other factors such as climate change, top soil erosion, acidification of the seas and all I can see ahead are famines, international crisis, resource wars. The population of the world has grown over the past 100 years or so on the back of cheap energy and the world cannot sustain the current population without it.

  • Comment number 29.

    I am (wrong maybe!) under the impression that when an individual or a company folds, that a new book is written to match assets against liabilities.
    As such if 100K is owed to creditors and only 10K exist as saleable assets, then the creditors get 10p in the pound back of their investment.

    It seems to be a standard of corporate law with a few variations for individuals.

    So, my bank is technically bankrupt. It owes 3 trillion quids and its asset base as at the last time it was valued was 1.5 trillion squids. This 1.5 trillion is derived from deposits, loans and invested assets.

    On a personal level I have a mortgage on my house. The bank and I both thought it was worth 200K when I brought it with 180K of its' money and 20K (10%) my own.
    Now it turns out my house wasn't worth 200K at all. The last time I had it valued it was only worth 155K. I now owe a little less than 180K on somthing worth significantly less.

    So instead of my bank going bust, and my debt to it being reset as I go off and source my funds from elsewhere, my government gives the bank shovel fulls of my past and future taxes to keep me in the very same position I am. In other words, it has paid the difference to the bank on what my house is worth and what I owe on it just to keep the bank viable.

    Had it let the bank fold under the weight of all its dodgy deals over the last 5 years as punishment for being inprudent, I could have renegotiated my mortgage with another (viable) lender and my banks adminstrators would probably have been pleased to receive 75p in the pound on my debt (a good result by any insolvency process).

    That would have reset my mortgage to the value of my house.

    So as it is I am covering the risks of my bank twice over. Once because I have to make up the difference between value and purchase price, and secondly by repaying the government debt used to cover the banks loss on this same difference.

    Is it me, or is it time to riot or revolt against a government so hell bent on inequity that my human rights are worthy of less consideration than my banks?

 

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