It has long become clear that the financial crisis has been on a scale deeper and larger than many people have suspected. It has also been exacerbated by muddled policy responses from all Governments and policy makers. Whilst the need to control debt is not in doubt, capital expenditure projects should be pursued and tighter bank regulations need introducing (with much clearer splits between retail and investment banks); all economies are still struggling.
Step one: better Quantitative Easing
Quantitative Easing (QE) – effectively the printing of money to buy up Government debt, and shore up the banking sector, helping banks’ balance sheets. It has not really got money flowing through the economy. A bolder step, which Australia tried in 2009 (and helped it avoid recession), is to direct QE, not at the banks, but directly at the taxpayer. This can be in the form of temporary tax cuts or even just a cheque from the Government. This BBC article explains the concept in more detail.
There are inflationary risks, and we can’t print our way out of trouble (although by definition you’d be against QE in general then), but in an economic downturn, the inflationary risks are low. There is also the problem that this doesn’t solve the global problem.
Step two: the international community must work together
So another necessary step is for the entire world to do this at the same time – globally coordinated action. Effectively the recession is a global crisis and to solve this it requires a global solution.
At the moment most Governments are cutting back on public spending, this is taking demand out of the economy as private investors are not filling the void. Beggar thy neighbour tactics are appearing with more protectionism and greater focus on “national” interests, understandable in the current climate, but economically futile.
Instead the international community must work together. As Franklin Roosevelt said at the opening of the Bretton Woods summit in 1944:
The economic health of every country is a proper matter of concern to all its neighbours, near and far.
But what do I mean? Obviously coordinated attempts have been attempted before in trying to save financial markets and individual country credit ratings with loan guarantees. These have generally not worked as they are designed purely to appease the lending markets. Instead, we need these three steps:
- If there is to be QE, all countries should do it at the same time, in the same way and the same proportion so that relative to each country, there is impact on currency values, or inflation. The markets will be less likely to threaten one country than another.
- Common sharing of risk is needed to tackle the markets so a “Euro bond” or even a “World bond” should be introduced. This will mean one interest rate on debt, so the UK will have the same interest rate as Iceland or Germany and Greece on its borrowing. Without the sharing of risk, I struggle to see how countries can stand up to market forces (countries get picked off as we have seen in the Eurozone).
- Accelerated regulation and approval of new (and green) technology. We all know that the world is changing environmentally, that fossil fuels are harder to find, there is no lack of rhetoric but the lack of action is depressing. There should be international agreement on areas such as air emissions, carbon capture technology, renewable energy targets enforced, environmental standards brought in for construction, focus on sustainable farming; support in all these areas for developing countries. All this backed up with regulation and firm investment commitment. If a world standard is set, enforced and developing countries supported, all countries will be better off in the short run (increased investment, new industries started) and in the long run (environmentally and lower cost of intervention).
The EU, UN, IMF, World Bank and, more importantly, individual Governments must act decisively and together to get the world economy back to full health. It means taking unorthodox measures, but extraordinary times require an extraordinary response. John Maynard Keynes understood this in the 1930s and 40s and we need today’s policy makers to have the same vision.