Bank and Treasury's plan A-plus for UK
- 15 June 2012
- From the section Business
There's no point getting panicked into Plan B before you've given Plan A everything you've got. That is what the UK's chancellor and central bank governor told us at the Mansion House yesterday, as they unveiled their plan A-plus.
As I predicted, they have come up with these schemes because they want the UK's super-loose monetary policy to have more of an impact on the real economy.
In effect, the authorities are having another go at persuading banks to lend - and companies and households to borrow.
Will they succeed? The BBC's business editor, Robert Peston, has pointed out one key problem from the bankers' perspective - that the risks of any new private lending would still be borne by the banks themselves.
This is indeed a crucial point. The fact that the Bank seems to have agreed to expose itself to some private credit risk is significant. But it will be important to establish how much.
However, many economists would say the devil's not in the detail, but in the basic idea.
Imaginative though the new plans are, they are based on the belief that you can persuade the private sector to borrow and spend more in the current environment, even when everyone's natural instinct -including, apparently, Mr Osborne's - is to conserve cash and get control of their debts.
This is precisely the assumption that critics of the government's strategy - such as Jonathan Portes at the NIESR or Paul Krugman - reject.
These critics say that a private sector-led recovery would be the first choice, but it is not available today. Because, in the wake of a major financial crisis, households, companies and banks are all battening down the hatches.
If you want further evidence, these critics would say, look at the balance sheets of Britain's biggest companies, many of whom are sitting on a mountain of idle cash. It is lack of confidence in the recovery that is keeping their investment plans on hold - not over-cautious banks.
You need growth to revive confidence, and the only tool capable of producing growth in this climate, the critics would argue, is fiscal policy - a lot more government spending.
Who is right? I leave that for you to judge. But even the critics would probably say that the new schemes are unlikely to do any harm.
It's worth remembering that determined efforts by the Bank of England to bring down the real cost of borrowing did turn the economy around after 1932, when the UK confronted a similar double dip recession - in the wake of another major European crisis, centred around banks.
We often forget that the 1930s were much less awful for the UK than the US. From 1933 onwards, the Bank managed to deliver a decent recovery, led by private investment - even as UK Treasury was busily ignoring Keynes' advice, trying to balance the budget.
The economic historian, Nick Crafts, has written a fascinating paper on the 1930s recovery in the UK, and it's lessons for today. It turns out that the private investment that made the difference was in housing.
The private sector built 293,000 houses in Britain in 12 months in 1934-1935. Needless to say, planning restrictions were a lot weaker than they are now.
For all Mr Osborne's efforts to reform planning, I can't see a mountain of private housebuilding on the horizon. Quite the opposite.
But, arguably, the longer that companies pull in their horns and put off investing - the greater the opportunities will be, when they finally decide to put their mountain of spare cash to work. After such a long period of stagnation, the pipeline of delayed projects must already be very long.
The question at the heart of it all is whether monetary policy, even the brainiest kind, has the capacity to encourage firms to seize those opportunities at such a scary time.
For all his gloom about the global situation, yesterday Sir Mervyn King said the answer to that question was yes.
He insisted that more quantitative easing could still make a difference to the economy - and so, hopefully would these new, direct efforts to boost lending.
Many in the city think it's worth a shot, at least. But something tells me this won't be the last time this year that those clever officials at the Bank and the Treasury are asked to come up with something new.