Thursday, 27 November 2008

Not tonight Darling, I've got a(nother) headache...

I'm trying to get a handle on this economic situation, but as has probably been painfully obvious to you dear reader, I'm struggling to work out what's going on. I'm recounting what has happened over the last year - that I can remember anyway (with the help of the BBC):
  • First (arguably) it was Northern Rock, whose collapse led the Chancellor Alistair Darling to bail it out to the tune of £25BN.

  • Then Bradford & Bingley post losses of over £25m for the the six months to June 2008.

  • Fast forward to August and Darling wakes up to the crisis - openly stating that the UK is in its "worst economic crisis in 60 years." To help out - and try to stimulate the housing market - the Treasury raises the threshold for stamp duty to £175,000. But the help barely registers. Bank of England holds interest rates at 5% in September.

  • Then HBOS takes a nosedive, and, despite this BBC report from September, continues to negotiate a solution.

  • Bradford and Bingley is taken under the government wing and nationalised in late September, with part of its operation sold to Santander.

  • The PM - rather than the Chancellor - announces that a guarantee on savings will be raised to £50,000.

  • Darling & Brown then announce a £37BN bailout for three UK banks - RBS, Lloyds TSB & HBOS. Stabilises RBS share price which had fallen dramatically.

  • Unemployment rises to 1.79 million in October 2008, while the Bank of England cuts interest rates from 4.5% to 3% in early November.

  • Which takes us up to this week, and the Chancellor's decision to cut VAT by 2.5%. Oh yeah, and now Woolworths have gone into administration, with MFI likely to join them shortly.
Now I know that none of this has happened in a vacuum, and that the global economy has gone, for want of a better phrase, tits up. And I'm not an economist so I don't fully understand the whole situation. But here's how it appears to me.

The government has acted when it feels like it has been forced - the bank bailout(s), the interest rate cut (which is technically independent, but probably lent on slightly by the PM and Chancellor), the savings guarantee and the VAT cut.

That action, it seems to me, is reluctant. I think they want the market to sort itself out. But the problem is, it doesn't seem to be doing so. Or, it does, but not in a way that helps the economy get out of a recession.

The problem, I think, is a lack of trust. The consumer doesn't trust the government not to raise taxes again, so they save instead of spend. The government doesn't trust the market to fix itself so it is interfering. And the banks, well, they don't trust anyone - let alone other banks - and so have dramatically cut their lending.

Seems like if we can learn to trust again, we can learn to love again... no wait, I've stumbled into a boy band single or something. Think the point is, trust matters. And I'm not convinced that I trust chancellor to be doing what is right just now

And I think a lot of people think the same way.


Stuart Winton 27 November 2008 at 18:41  

I think you're broadly right, Malc, but the problem is perhaps better characterised as a lack of confidence rather than trust.

Economic confidence ebbs and flows, thus boom and bust, and the trick is to minimise the ups and downs as much as possible.

Confidence will return and the eoonomy will recover; the big question mark is over the length and breadth of the downturn.

However, lack of trust in politicians is hardly new, and there's little to suggest that anything will improve that. This mistrust will be around long after the recession is history, but on the other hand it is a factor in the current lack of confidence, as you say.

And if you think the market won't sort itself out and the Govt is only intervening reluctantly, then since the Tories seem to want to interfere even less then you presumably agree that it could be worse.

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