Friday 6 March 2009

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.

2 comments:

  1. Having been even more desperate for money a year ago, I recklessly applied on-line for a loan from my bank which is Lloyds, which met with an instantaneous rejection. I even managed to get a personal contact at my branch, so I fixed up a meeting with a nice chap with a view to getting a business overdraft. After looking at my fairly unspectacular trading record, the nice young man, on noticing a couple of unauthorised account discrepancies said his hands were tied, really, because the computer was actually saying No. Saying Go Away, in fact. Which I did.
    Now the shit's hit the fan, imagine my surprise and pleasure upon receiving an offer from the very same bank yesterday for a loan for up to £2000! over up to 4 years! For me! And for the measly, almost invisible interest rate of, oh, what does it say? Oh yes, twenty-one percent, Yes, you heard me, twenty-one sodding percent.

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  2. Your experience illustrates one of the basic errors of Labour's policies. For some reason, they believe the banks are the ones to get us out the mess created by....the banks! The banks do not want to lend. Having burned billions of their customers' hard earned pounds on worthless securities, they now need every penny they can lay their hands on to rebuild their shredded balance sheets.

    Labour is right that the economy despearately needs lending to businesses, but its remedy of handing billions to the banks and praying they will lend it, is doomed to failure. The government needs to stop giving the banks money, and instead start lending directly itself. It could do this by turning, say, Northern Rock or the Post Office bank into the kind of boring traditional bank that used to borrow money from some of its customers and lend it to others, or it could set up a new bank to do the same job. Fat chance.

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