Black Thursday + 81

This day…..81 years ago was dubbed “Black Thursday” – generally regarded as the start of the Great Crash of 1929. During the 1920’s, US share prices had gone mad, as investors piled in – many of them buying shares for just a few dollars down and borrowing the rest of the price.

It was all fine so long as stocks kept climbing, but in September 1929, they began to stall. Thursday, 24 October was the first real day of panic, with a record 12.9 million shares traded. As the market began to fall, banks and investment companies piled in, buying huge blocks of shares to try to hold the line.

But even they did not have the money to stave off the inevitable. October 28, “Black Monday”, saw the market fall by 12%, and it was followed by a similar fall on “Black Tuesday.” Politicians fell over each other in the rush to proclaim that there was no problem, but this was actually the beginning of the Great Depression, which overhung the world’s economy for a decade, and blighted millions of lives.

Last week, the governor of the Bank of England, Mervyn King, warned that Britain faces a grim decade was we try to recover from the banking crisis.

Panic on the streets of London

So I got it slightly wrong in my blog of February 23 – the Bank of England must have thought twice about cutting interest rates to minus 2.5%. Instead they just brought them down to 0.5%. In other words, suppose you lend someone £100, taking the risk you don’t get it back. For taking that risk of losing your money, you stand to earn yourself....50p! Interest rates have been slashed by 90 per cent since October, and Labour and the bank are astonished that nobody wants to lend.

Still, the bank’s governor Mervyn King gave a wholehearted defence of the policy. He said: "Nothing in life is ever certain, but these measures we think will work in the long-term." I feel better already! Who was it who said “in the long-term we are all dead”? Oh yes, it was the great economist John Maynard Keynes. Anyway, let me tell Mr King one thing that is certain – those who depend on interest from their savings – like pensioners, for example – are being hastened towards destitution, and they will do exactly the opposite of what the economy needs – they will stop spending.

Yesterday’s decision was another triumph of hope over evidence. Have the previous five interest rate cuts in five months got the banks lending? No. Why should this one? What effect have each of the previous five cuts had on the economy? Nobody knows, because nobody bothered to find out before making the next panic reduction.

All Labour’s economic policies – including the Mugabe option of printing money – are based on doing something, anything to get the banks lending, like the bizarre decision for you and me to take £325 billion of worthless assets off RBS’s hands so it would lend £25 billion (see my blog of Feb 27). It would have been cheaper, more effective, and more socially just for Labour to have simply given us the £25 billion.

There’s no point in basing an economic policy on prayers – prayers that the banks will lend money. Here’s what Labour should do instead – hand out an immediate tax cut or benefit increase to everyone receiving, say, twice average earnings or less. The pay-out should be on a sliding scale, with those earning most getting least, and the poorest getting most. This would stimulate the economy, as people who are less well off are much more likely to spend their money – and to spend it on local goods and services.

If Labour wish to be financially responsible (which I would advocate) the funds could be raised by an emergency tax levy on those earning more than, say, £100,000 a year. These people have benefited from huge tax cuts and pay increases over the last two decades, and are well equipped to help those less fortunate than themselves in what Mr King seems to be painting as the worst economic problems we have faced in the Bank of England’s 315 year history.