Millennium’s Credit Crunch Diary… September: Party Games

Well, the recession is nearly over just in time for the economy to become the BATTLEFIELD for the forthcoming General Election. So we’ve had the Party Conference season now, and we’ve seen the three large Westminster Parties draw up their battle-lines.

What is INTERESTING is how each of the three has a very different DIAGNOSIS of the cause of the credit crunch, and that very much decides what their POLICIES are going to be.

So, if I might rather dramatically summarise, what the three economic spokespersons had to say (presented in the order that they said it) was:

Mr Dr Vince “The Power” Cable:

“the recession was caused by unregulated, greedy bankers out for a short-term profit from lending too much money too carelessly, and then slamming on the brakes when everything went Pete Tong.”

Mr Chancellor Sooty (aka Prime Monster Mr Frown’s glove-puppet):

“the recession was caused by someone else, World Events, probably Americans, certainly not us!”

And Master Gideon Oboe:

“the recession was caused by too much Government!”

You don’t have to be a SUPER-BRAIN economist like Mr John Milton-Keynes or Mr Milton Southern Friedman Chicken to work out that two of these are VERY, VERY WRONG.

Mr Frown is clearly in TOTAL DENIAL.

This means that, since they “did nothing wrong”, Hard Labour policy is to do more of the same. And that would be a DISASTER!

Although it is TRUE that the credit bubble grew largely on the back of the American “sub-prime” mortgage market (largely, but not entirely – our own Northern Rock was doing some of that business, remember), the idea that Great Britain’s banks weren’t in it up to their Armani epaulettes is beyond SILLY and into FIBBING.

The British Government contributed to the uncontrolled lending spiral by its FAILURE to regulate or even properly know what the banks were doing; by its implicit ENCOURAGEMENT of people to take out loans they didn’t necessarily need for houses that were also inflating out of control; and most of all by borrowing STAGGERING sums of money itself, not just to cover its day-to-day spending but also “off balance sheet” “Enron accounting” style PFI borrowing to build stuff paid for on the never-never.

So in spite of all this, the Prime Monster came to his Conference with a SHOPPING LIST of spending commitments, all pre-election special offers: an “innovation fund” for industry (or nationalising “Dragons’ Den”) a commitment to putting 0.7% of GDP into international aid (or keeping your Millennium commitment ten years late) and a promise of special housing for single parents (or a return to the Poor House – VERY Victorian values, there Mr Frown!), plus unfunded promises that the minimum wage, the child tax credit and child benefit will all go up every year forever!

Has it somehow ELUDED him that the economy keeled over and DIED on his watch? Has no one dared to TELL him?

These are all ongoing, open-ended, “current account” spending commitments.

There is a difference between capital expenditure and current account expenditure or, more roughly, the things that we BUY (which will then be useful) and RUNNING COSTS.

Even some Liberal Democrats can get a bit MUDDLED about this: BIG but ONE-OFF projects like the Trident Replacement or an aircraft carrier or the I.D.iot card database or the NHS database (although to be fair, these also have ongoing costs of maintenance and support) are CAPITAL projects. Cancelling them only saves the money ONCE.

Controlling current spending saves the money every year going forwards. Letting it grow out of control – which is what Mr Frown did and is still doing – creates a problem that goes on forever!

A policy like a public sector pay freeze – suggested by Mr Dr Vince and copied by Master Gideon – and reducing the pensions that future top civil servants will get DOES help with the current account problem.

(Of course, as famous Roman orator Mr Cicero points out, good management – giving power back to local managers – requires that you freeze the OVERALL budget, as Mr Vince suggests, not each and every individual salary, as Master Oboe would, from his Whitehall bunker, command.)

Anyway, speaking of the Conservatory Copycat, Master Gideon – who does not have TERRIBLY much experience as an economist or indeed experience in ANY sort of proper job (there is a SLIGHT disagreement between the Conservatory party website that lists him as having been a “freelance journalist” and the Wackypedia, which says he “miss[ed] out on a position with a national newspaper”) – Master Gideon has manage to grasp almost entirely the WRONG END of almost entirely the WRONG STICK.

Because UNRESTRAINED Government spending has driven the excessive Government borrowing, he has deduced that the problem is with “Government spending” rather than with “unrestrained”.

Which means that Conservatory policy is to stop absolutely everything that the Government is doing.

So, while Mr Balloon is promising us the sunlit uplands (but not telling us ANY of the details about what we have to do to get there), Mr Oboe is saying we are all DOOMED.

But again, although it is TRUE that the Government is running a ghastly deficit (that is to say, spending more than it earns) that really ISN’T the main issue facing the economy at the moment.

The Government is running a HUGE deficit for TWO reasons.

That the Government is spending more than it earns EVEN in the good times is only the LESSER reason.

But the BIG reason is that the economy has taken a great big whack. Income (i.e. tax) has gone DOWN while spending (i.e. unemployment benefit, back to work programmes, golden parachutes for doomed ministers, er…) has gone up, up, up!

The ONLY way to fix that deficit is to repair the economy so that growth brings back the income to pay for the running costs. Concentrating on cutting your way to close the deficit is very much BACKWARDS.

It’s a bit like saying that your engine is using too much petrol even as your car careers towards a cliff at the quarry. Long term, you probably want to fix that, but really… there’s a TIME and a PLACE.

The Conservatories are, of course, ONLY talking about CUTS because it’s the ONLY policy that they’ve GOT!

They COULD talk about closing the deficit with TAX RISES too, I suppose, but that goes a bit drastically against their message, even though everyone KNOWS that they’ll put the VAT rate up to 20% – that’s just what incoming Conservatory administrations DO!

Not that it’s a good idea. Sales taxes are ANNOYING because you can’t win when you lower them and you definitely lose when you raise them.

If you lower the VAT rate, the benefit is very quickly absorbed by retailers. How many of those “VAT cut” prices from last December lasted long into the New Year? That’s not all bad: a bit of extra margin for the shops can help to keep a few more workers in jobs; but it’s no help to the person actually paying for the stuff.

And if you raise the VAT rate it will go straight onto prices. In fact because people tend to round prices up to the nearest pounds or ten pounds and because – you’ll be shocked – some retailers use the excuse of a VAT rise to hike their prices on top of that, prices jump even more. That’s a nasty bite of inflation just at a time when you are calling on a large number of people to take a pay freeze.

So, both Hard Labour and the Conservatories are basing their policies on FALSE premises.

What is even more interesting is that their solutions (Hard Labour: more Government spending; Conservatories: big cuts) fit so perfectly with their pre-existing ideologies that you might almost think that they started with the answers that they wanted and worked backwards!

In contrast, the Liberal Democrats start from the RIGHT analysis of the problem: cheap credit fuelled a housing boom; rising house prices convinced bankers to keep funding the cheap credit; it looked like a virtuous circle until the bubble burst.

The Government COULD have taken measures before then to prepare – and Liberal Democrats made suggestions for how: controlling Whitehall’s excessive spending, trying to reverse the huge rise in personal debt, tackling the housing shortage – but it’s too late for that now. No matter what Mr Frown says, you can’t end the economic cycle, you can’t stop boom and bust. And now we’re BUST.

That’s why Liberal Democrat policy NOW is to try and EASE the OVER-CORRECTION of the banks by:

(a) restoring the amount of money being spent by shifting tax relief from a small number of high earners who are likely to save to a large number of low to middle-income earners who are more likely to spend (this has the added benefit of making the tax system SIMPLER and FAIRER too AND increases people’s spending power without them having to increase their personal borrowing)

(b) replacing the support of lost bank lending by investing in industries and projects key to rebuilding a sustainable green economy (this has the added benefit of keeping people IN work)

(c) tackling the problem directly by making use of our controlling interest in the banks that had to be rescued to MAKE them un-crunch their lending policies, while in the long term looking to break up the super-banks before returning them to the private sector so that they are no longer “too big to fail” (this has the added benefit of raising money to pay off the government’s debts, but not selling up at the bottom of the market!).

My recommendation for the month: Post now for Christmas!

But also, a word of WARNING: don’t crack open the champagne just yet; this recovery ISN’T quite as REASSURING as everyone seems to be thinking.

The meeja are merrily reporting that the stock market has rebounded and that house prices are back to 2008 levels where they were before the bubble burst AS THOUGH this is GOOD news.

But just think about that: “before the bubble burst”. If house prices are re-inflating more quickly than the rest of the economy AGAIN, then this is plainly, obviously just ANOTHER BUBBLE.

The Government has injected a HUGE amount of liquid cash into the system by “quantitative easing”, but if it all gets sucked up by spiralling house prices then it’s NOT going to help the small, medium, even large businesses that are STILL starved of cash because of the Credit Crunch. And if bankers are letting people invest in OVERPRICED houses again then they are making EXACTLY the same mistake as last time.

But look: the Liberal Democrats’ policies can ALSO help for the LONGER TERM:

(a) investing in GREEN ENERGY makes our energy supplies more SECURE, less dependent on the fluctuating international prices for importing gas (or uranium!);

(b) building more affordable housing eases the pressure of demand on the housing market and makes another housing bubble less likely;

(c) breaking up the banks increases competition AND reduces the taxpayers’ overall risk, driving down bank charges, keeping down interest rates, and making the economy stronger.

Mr Balloon only makes EMPTY promises for a bright future; we need to let him know: the future’s bright, the future’s ORANGE.

There IS hope, there IS a choice – let people know it’s the Liberal Democrats.

Luv From Millennium

(Now, read my diary!)

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7 Comments

  • Millennium for Chancellor !!

    Dr Vince for Chief Secretary.

  • Spooky. I too was going to suggest a Vince Cable/Millenium Elephant top jobs dream team for 2010.

  • fdp100 – thanks for the analysis, very useful and helpful. A couple of questions:

    – how was China able to “cheat” with regards to its exchange rate?
    – what sanctions are available to stop it, if they won’t play ball?

    Also, what effect did the recycling of petro-dollars have? (Western payments for oil to the gulf; gulf loans back to the west)

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