Billions have been tipped into a black hole, yet still lending is stalled. The economy needs urgent intravenous demand
While the French revolution brewed, Marie Antoinette's courtiers squabbled over who should take precedence in her bedchamber. Likewise, as the world economy disintegrates, Gordon Brown and other world leaders jostle outside the door of the Oval Office, eager to be first into the imperial presence.
To what end? Even Barack Obama's Nobel-winning guru, Paul Krugman, yesterday despaired: "We got into this mess and we're still looking for an exit."
Why not try the one policy as yet untried? Instead of pouring money into the banking system, use that money to reflate demand. How can a Labour government ignore every lesson taught it by Keynes? How can policy remain dominated by one single maxim, that no bank should be allowed to fail and yet none should be properly nationalised?
Let us repeat after Keynes. In a recession you boost demand. You do not suck spending power from consumers in taxation and use it to pay off bad debts. You do not withdraw money from high-street shops, driving people out of work and suppliers into bankruptcy just to blow it on dud mortgages.
When a very rich person tells a politician he needs help, the politician appears to quake at the knees. It was true of Montagu Norman and his bankers before the Great Depression. It is true today of the impermeable membrane of bankers and ex-bankers clustered inside Downing Street. Aides such as Lord Myners and Lady Vadera are not trying to stave off recession. They are trying to save banks. Like chateau generals contemplating disaster on the Somme, they worry about the fate of their regiments rather than the war.
The banks are bankrupt. Their predicament was best illustrated in the Guardian in January with a chart assessing global indebtedness. It showed the notional value of "shadow" banking derivatives worldwide was $62tn. This was on top of a gross debt held by banks of $39tn. There is no way such sums, once they are at risk, can be covered by any amount of public spending. Yet western governments have already tipped $1.9tn into this black hole in the world's finances.
Sooner or later these colossal sums must be written off, unless someone wants to print banknotes, Mugabe-style. The banking system must implode and revert to its essential and local retail base, storing money and lending against houses and business plans. The rest, for the time being, reverts to government.
There was a point at the start of the crisis when it still made sense to prop up an ailing bank to maintain confidence in its security and in the interbank lending on which that security relied. This was why Northern Rock was rescued in 2007. When last summer Lehman Brothers was allowed to fail, the entire structure of confidence collapsed. Every bank's long-term security was called into question. Insurance policies were activated and borrowing ceased.
From that moment banks were no longer part of an interlocking network of credit and liquidity. They ceased to be central pillars of the economy and became mere bankrupt businesses, scurrying around for money to pay their debts. Their sole claim on public aid was that they held deposits and mortgages, and were still in a position to lend.
Had the government seized them on day one, it could have secured those deposits and ring-fenced lending to businesses and individuals. This is what the Treasury did in a matter of days in 1939 at the start of the second world war. At the same time it could have isolated so-called toxic debt, by statute if need be, into what amounted to "administration". Above all it would have had control over the massive sums it was about to spend.
Ministers would not have found themselves uttering idiotic "hopes" that bank directors would use their giant subsidies to lend to businesses and thus "kick-start recovery" - as opposed to merely underpinning their balance sheets. With nationalisation the government would have had power to implement its declared policy. The £100bn of public money was supposedly for lending. It has not been lent.
It is still not being lent. How dumb can ministers be? If you give a chronic gambler money, he does not pass it over to his wife for housekeeping, he gives it to his bookie. The government has borne all the costs of nationalisation and gained none of the advantages. The Conservative opposition has meekly and pathetically agreed.
Let us return to the high street. Mine has seen six shops close in the last month. Spending has dried up. Nobody is buying. Staff are being sacked. Suppliers are starving. Six months ago the street was a normal working retail economy. This is ludicrous.
By what conceivable logic is such a collapse considered preferable by the cabinet to leaving banks to go bankrupt and have the government pick up the pieces? What was the point of giving all that money to the banks when they were never going to lend it to businesses? Now they would be mad to do so, because the government has rendered those businesses potential bad debts.
What the economy needs is not rescued banks but raw spending power. It needs people to pour into shops and showrooms, estate agents and restaurants, hotels and DIY stores. Even were banks lending it would be no substitute for spending to recharge the economy. Only spending power, from the bottom up, will eventually refloat the banking system, not public subsidy.
Government can do this by employing people on public projects and services. But even this takes time to feed into the economy. What is needed is instant intravenous demand. Dole it out to those most likely to spend it at once and not save it, those on social benefits and low pay. Declare short-term tax cuts and VAT holidays. Have the post office hand out time-limited cash vouchers. Give instant grants for everything from DIY to eating out.
Money simply must flow through the economic bloodstream again. That is the way to reopen shops, re-establish cash flow, re-employ staff, make it worthwhile to borrow from banks and banks to lend. Much of this money will be wasted but in a good cause, that of rebuilding demand. At present roughly £2,000 for every man, woman and child in Britain is being wasted for a far worse cause: not to pay Sir Fred Goodwin's pension but to pay his gambling debts.
Copyright Speakers Corner 2017