Tuesday, 28 October 2008

Brown's Bust and Boom

There is something dangerous about having your ego puffed up, especially if you are a politician. The American failure of the $700 billion toxic assets buy out was followed by the (supposed) Brown plan, copied in the United States and in Europe, which was the recapitalisation of banks. In other words, they can get capital liquidity and can rely on it being returned when lending to other banks. The problem now is that Gordon Brown thinks he can shape the economy by expanding public spending in this coming recession.

There is a logic to this. It is this: that the banks, presumably ready to lend, then see businesses undergoing a lack of demand for their products and services. The readiness to lend, already to be curtailed to normal times (unlike the stupidity of offering anyone easy credit as before) is further curtailed by the actual recession.

Reduced lending to business, is then further curtailed by recent experience. Recapitalising the banks does not simply mean banks lend. So on top lending being more realistic, and actual signs of recession, banks are indeed curtailing some loans to industry that make regular interest payments and still have reasonable order books. In the latter case, pulling in loans forces businesses to close that are healthy enough. These marginally add to the recession, but in economics everything works on the margin, and in chaos theory margins lead on to tipping points. Where is the last decision that causes the change in behaviour? Presumably when enough of a pattern is started that causes the fall.

One solution to this is to nationalise the banks more fully, and to see them as service industries to productivity, or at the least to create an Industry Bank (State owned if necessary) that lends to businesses and innovators who can repay interest from profits.

On the demand side is the logic of the State initiating business activity. This is what Brown is thinking about. Value adding projects can be set up by the State that gives people jobs, does add to productivity, and gets a cycle of service industries busy again. This is much the better prospect than tax cuts to those who bung the money in the bank to be saved. However, it is true that tax cuts to the poor (or benefit increases - why not?) are more instant that big projects, but too easily private spending can go on imports or the basics of necessity that survive in recessions anyway.

However, the problem was debt, and consumer and State spending that did not reflect actual production (value-adding) or relative productivity. American and British real wages fell, but the spending carried on, and the era of cheap money went via all these multiplying derivatives into too many houses bought and therefore a value given to housing far outstripping wage levels and an ability to pay. In other words, if you keep credit going, the fat ends up in the house values that sit there until the prices crash. It is the public face of the illusion of wealth.

Now just as the solution to too much private liquidity seems to be State liquidity, the solution to people spending too much that they didn't have (in real production terms) seems to be the State spending what it does not have. It is like a drug addict being given drugs to soften the blow of their effects.

This is the problem. Suppose the banks had been left to crash. No doubt, millions of jobs would go and businesses would fail as ordinary loans to functioning businesses were pulled in. The financial economy would wreck the real economy. Property prices would crash, along with shares and the rest. In other words, the money supply would go from its inflated state to a deflated state. Zero interest rates would be obvious, not to help liquidity but simply because the economy was flat on its back.

Yet the infrastructure and facilities that we do have, and the fact that each person is a unit of demand as well as a unit of labour supply, would get the economy moving again, and on an even keel, perhaps after two nasty years. There would be high unemployment, but employment would be efficient and slowly recover. This is always what is needed if possible (as much as possible).

Yet cold turkey like this, that clears out and cleans the system, is incredibly painful, especially from a point of such bloated consumerism. It is full of victims, and not the ones to blame.

The problem with the Brown solution to borrow and spend is this. The drug addict will feel less crap in the immediate years, but the body will not have been freed of drugs. And as soon as the economy moves forward again, it will be on the basis of spending again rather than producing. The same signs will be taken as proof of success - housing recovery, people spending in the shops, people employed in service industries. The Brown spending will be part of that acceleration and he could find himself going from bust to boom again. Welcome relief maybe, and his ego puffed up for (he hopes) the next election, but the public debt will be massive beyond belief and the same crash would be just around the corner.

What he should do is repair and build houses for council housing and build transport that is subsidised and why not aim for every house have solar panels put on? Then build a new railway up the Midlands and into Scotland with spurs off and reopen all those goods lines into passenger lines again? There must be a bigger concept of the social and public good. Then never let house prices be a measure of economic success again.

Meanwhile the current United States Presidential election campaign has such an air of unreality about it. Barack Obama is raising expectations he cannot possibly meet. He is talking about policies to make American society more equitable - and gosh are they not needed! Yet his policies do not reflect the sheer debt left by the worst presidency in memory, an idiot in power who can go to war and expand the military and yet not pay for it. The American economy is itself going through a post-industrial phase where the added value it needs is too easily confused with the debt based products and services that never added value (OK a new building here and there is an addition, if it renews stock).

Still, if American racism is deeper that we think, and the voting system is fiddled again, and the fundamentalism in the country is so far reaching that one fears for basic rationality, then the old guy and his loopy choice for Vice President could still win - and, if so, the sheer demolition of expectations among so many groups (the young, different ethnic groups; health service users, college attenders) will lead probably to riots and despair - which could seriously add to economic recession. McCain would leave the desperate more desperate. I cannot understand how anyone thinks John McCain would be a sure footed President: he might be more benign than the present one, but he strikes me as erratic, and his running mate is like someone from a horror film and whose hold on politics is flaky and dodgy. McCain though may be helped by Bush having a few more sorties into Syria and other places: I wouldn't put this past the idiot in the White House.

I would have preferred Hillary Clinton to be the candidate, though when she had clearly lost the Democratic nomination she took too long to move aside. Her approval of Obama and the sheer state of the economy has healed the rift made. There is no doubt that Barack Obama has one quality of being President, which is to inspire, and he suggests stability. However, when he starts in January, assuming he does, he will just see the state of the books. And what he can do will be quite limited. He may just go the Brown route and spend on projects, but in the end he will be playing with a massive debt. One thing he probably will have to do, in revitalising the home economy, is to slash the military, so that under him the days of the American empire will be over.

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