Free Money!!!

The Bank Of England announced yesterday that it will consider 'other measures' when its monetary policy committee meets next week. This is code for printing money. "Quantitive Easing" is a kind of fiscal laxative which allows governments to feel bright and bubbly without having to cut back on the carbs and fat. But right now, in the world outside Zimbabwe, it is exactly what we need.

A Brief History Of The Economy

A nasty recession at the beggining of the eighties and the complete meltdown of an American initiative to support local banking at the end of that decade along with the abject failure of socialism internationally convinced everyone, at least everyone who spoke English as a first language and devised policy for a living, that governments were not best placed to decide which bits of an economy should thrive and which should fail. However, governments were uniquely placed to decide how fast the economy grew. The whole tricky business of managing economic policy could be delegated to an independant unelected body who were simply told to make money expensive when there was too much around and cheap when there was too little.

The measure of too much and too little was taken to be retail price inflation and, in America, unemployment figures. It all seemed to be going rather well. Banks put together people that wanted to earn interest on their excess money with people that wanted to borrow money for things that they couldn't afford today. They found new and interesting ways of seperating the risk that their borrowers would default from the lenders who didn't want that risk. A debt insurance industry took on this risk supported by speculating savers who wanted to keep open the possibility of above average returns.

The challenge for any bank in this situation was, then, to generate as many sales as possible. In the name of doing so they took on some risks themselves. The sales people were good at their jobs and well paid for it. The lenders were delighted with their unearned income and the borrowers empowered by property, possessions and services that their borrowings funded. A virtuous cycle meant the more you worked, the more you could borrow and the more you could pay other people to work. Uninteresting work was farmed out to poor people in China, India and elsewhere. Their people were happy to leave subsistance farming in return for the prospect of bourgeoisification.

There were a couple of wrinkles. The safest thing to lend money against, hence the easiest thing to borrow money for, is a capital asset like property. If you can't pay the interest or repay the loan the lender can repossess the thing you bought.

The problem occurs when the number of people defaulting grows to a large enough number to push the price of property downward. This discourages people from borrowing, discourages banks from lending, reduces the amount of useful work to be done, reduces the value of the properties people live in, discourages people from borrowing...

At this point the banks all thought they were fine. They had seen this coming and instead of having to repossess their customers' houses they could sell the debt, albeit at a loss, to someone that was willing to take on the increased risk that the borrower would default. In a rapidly self-reinforcing cycle the value of mortage debt fell to under thirty cents in the dollar. The "credit crunch" happened when it became clear that no one wanted to sell their customers debts at the price that anyone else was willing to pay for them. The wholesale lending market ceased to operate.

From here things get tricky. If there is to be rising unemployment the sensible thing for each of us to pay down debt and rack up savings. If we are to avoid a self reinforcing cycle of increased unemployment the sensible thing is for all of us to at least spend as much of our earnings as we did last year.

The personal is the political.

All this has been true for about a year now. There is a palliative. The government prints money to buy some of the excess debt that has been issued by the banks. The inflationary damage of adding this free money is that a lender who would not have been repaid is, but the risk that the lender then repeats the mistake of lending to an indigent borrower is pretty slim just now. Once this 'fake' money appears in the economy we can mop it up with higher interest rates to repay those savers who are earning no interest just now to keep the rest of us afloat.

House prices must be allowed to fall to just below their long term trend value (about four times annual salary in the UK) as quickly as possible, so that there is some, limited, point in buying a house. People who have been working every hour God sends buying houses, changing the decor and selling them on must find something more socially useful to do or at least be remunerated in line with a house painter. Banks must reduce the number of intermediaries involved in joining a borrower to a lender and those intermediaries must also find something more useful to do.

This is the easy stuff. The hard stuff is that recessions are always an expression of the pain of change. The mid seventies recession was about finding out that energy supply was the key to ever increasing standards of living. The early eighties recession was Britain finding out that it was service economy not a manufacturing one. The nineties one was about finding out that the internet wasn't the cure to all ills. This one is about finding out that nothing is "ever increasing" economic growth doesn't last forever and there are times when our efforts need to be devoted to maintaining the world we have rather than building a brave new one.