Comments on: Economy Tanks, BBC says, “It’s probably a good thing”

By: Hubberts Peak

Hubberts Peak — Fri, 25 Jun 2010 08:38:43 +0000

I don’t believe that peak oil is accurate and that we are now past the point of peak oil. I think many of the current events have to do with this downturn and it won’t be long before the main stream media and population wake up and understand what is going on. For me and my family, we are preparing for the life after the crash.

By: Geoffrey Payne

Geoffrey Payne — Fri, 03 Jul 2009 20:38:29 +0000

The economy crashed because economic growth was fuelled by unsustainable debt over a number of years. Up until the crash many economic liberals like Gordan Brown thought that the economic problem had been solved, no more boom and bust, and that he could afford for the government to go into debt and rely on the private sector to generate the wealth to paper over the cracks.
The fact that this government has been forced to introduce an economic stimulus at a time when the country was already heavily in debt has got nothing to do with Keynesianism. Whatever economic theory you subscribe to, this is the worst time to introduce it. Respectable economists like Vince Cable point out that the economic growth bubble was generated by a failure of regulation to prevent irresponsible lending. Of course libertarians are ideologically opposed to regulation, so if they were in power it would have much worse, as Vince points out in his book The Storm.
If you want to know what Keynesist economists think these days, I suggest you read them. Joseph Stiglitz, Paul Krugman for exmple. They do not anticipate a new dawn. In fact the question they ask is this; if the growth we had recently was based on unsustainable debt, and without it there would have been much less growth, then what would be the motor for growth from now on? They are honest and say that they don’t know, and noone else seems to either.
In fact why should we take for granted that there will always, on average, be economic growth?
Economic power is shifting from west to east, and China has never followed the advice of economic liberals from the west. Yet it is not Chinese banks that are failing.
The task of political leadership of the west today is to successfully manage their relative economic decline in the most painless way possible. That is what our economic theories should be based on today.

By: Anton Howes

Anton Howes — Thu, 02 Jul 2009 00:26:39 +0000

Regarding Tom’s comment,

With 2), there’s an assumption that banks could only have survived with the bailout.

However, governments could have facilitated debt-for-equity swaps (yes, bondholders would have been unhappy, but it’s still a better result for them than their debtors going bankrupt, or having interest payments delayed with a balloon sum at the end). Depositors would have been unaffected, no (or less) public money would have been used, and shareholders would have been punished.

Governments could also have delayed interest payments when they happened to be creditors, as well as negotiating agreements between creditors and banks so that debt repayments could be rescheduled.

They could even have provided a full guarantee of deposits – that’s a guarantee to the depositors however, not the banks themselves.

The first two examples are nowhere near the scale of the bailouts we saw. In fact, they are generally about allowing action and facilitating the banks’ own action as opposed to government getting their hands dirty with oodles of public money.

In terms of a full guarantee – again, it may be intervention, but it’s still on a much smaller, but still very effective scale than the bailouts, particularly if it had been done immediately.

As another solution, I’m not sure that all of the good-bank, bad-bank proposals would have involved gigantic sums of public money either. Intervention, perhaps – but on a much, much smaller scale, and one that banks may have voluntarily carried out if they had not been offered (/expectant of) public money as an easy way out instead.

By: Charlotte Gore

Charlotte Gore — Wed, 01 Jul 2009 21:26:40 +0000

Hmm. Okay, on 1. Yes, that level of Government debt will have a crippling effect – the interest payments are set to cost £58 billion a year, more than we spend on education, and it’s going to take decades to pay off. This money will be coming from taxpayers and, in effect, going on absolutely nothing. We’re going to have to put up taxes (very bad), cut public spending (fine by me) or both.

Look at the experience of Japan, in whose footsteps we’re currently following – they did what we’re doing now and suffered a decade of no growth whatsoever while their citizens and companies attempted to pay back the debt acquired from their Keynesian spending.

The evidence on this isn’t good. The hoped for growth will not outweight the cost.

2) The entire financial system collapsing would be bad, but the debt is not exclusively bank related. Remember we’re borrowing £500 million a day.

3) There are obviously certain automatic corrections in a recession – the Government is, however, choosing to increase spending in the hope they can push back ‘recessionary forces.’

By: Tom James

Tom James — Wed, 01 Jul 2009 21:14:27 +0000

So your argument is that the long-term negative effects of government debt will undermine future growth in the economy to a greater extent than the recession and credit crunch combined, had there been no state-backed bailout.

You are making a handful of assumptions:

1) That government debt will necessarily have a crippling effect on the economy for decades to come, and that this will obvious to all.

2) That the fallout from the entire financial system collapsing would not have caused more long-term problems.

3) That government has a *choice* over what it spends during a recession. People out of work need benefits and tax receipts fall, hence the government has to borrow more.

I am not persuaded by any of these.

By: Charlotte Gore

Charlotte Gore — Wed, 01 Jul 2009 20:51:22 +0000

I’m saying that the debt we’re going to be crushed by for the next few decades is turning out to be a waste of time and money – you cannot prevent the correction of the economy – it will happen regardless – the question is how much money you waste trying to fight it.

By: Tom James

Tom James — Wed, 01 Jul 2009 19:22:36 +0000

So what exactly are you claiming here: that if the government hadn’t increased spending the recession would be less severe?

By: Joe Otten

Joe Otten — Wed, 01 Jul 2009 08:37:39 +0000

Analogue exclusion. Brilliant.

By: Tristan

Tristan — Wed, 01 Jul 2009 08:32:15 +0000

Keynesianism or a broader problem?

I call broader problem – the fatal conceit of politicians – that they can somehow manage the economy to bring about optimal (whatever that means) outcomes and to save us all.

Keynesianism is but one manifestation of this.