http://www.telegraph.co.uk/finance/e...r-running.html
The Treasury and Bank of England must move fast with radical plans to bring the financial crisis to an end, leading economists have said.
Alistair Darling must also beware over-borrowing and leaving the UK with a dangerous legacy of govern-ment debt, according to the academic and independent economists surveyed by The Daily Telegraph.
The growing consensus is that the Government should not waste any time in moving on to measures such as quantitative easing and further bank bail-outs despite the fact that interest rates have yet to hit zero. It follows the Bank of England's insistence earlier this week that "further measures" beyond interest rate cuts are necessary to stop the credit crisis intensifying.
Steve Nickell, a former Bank policymaker, said that the Government may need to set up a guarantee system for bank lending, while Dr Peter Warburton of Economic Perspectives said that among the essential moves is the need to overhaul the accounting rules for banks and also to start under-funding the UK budget deficit. All of those surveyed backed plans to increase the quantity of money in the economy.
Alongside these recommendations, Patrick Minford of Cardiff University warned the Government not to spend further amounts on fiscal stimulus, since doing so could undermine the UK's credit worthiness and drive up interest rates.
Peter Warburton, Economic Perspectives
I don't think rates ought to be cut any further. You don't have to wait for zero before embarking on unconventional measures, there are plenty available.
The six main objectives include:
1 Normalising the inter-bank market by providing as much central bank liquidity as is necessary through as many different channels as is helpful.
2 Suspending inappropriate capital adequacy rules, such as Basel II. Until the rules can be redesigned to work counter-cyclically, my suggestion is that banks' capital requirements revert to and are frozen at their end-June 2007 levels.
3 Restoration of profitability to the banks. The higher the profits, the faster the writedowns can be achieved and the sooner the self-healing properties of markets can take over. Currently the authorities give support to the banks with one hand and seek to punish them with the other. This ambiguity needs to be removed to allow banks to rebuild their profitability.
4 Redirection of banks' lending capacity towards non-financial companies and households.
5 Reversal of the Debt Management Office's over-funding of the budget deficit.
6 Discouragement of flows into National Savings and other tax-free savings vehicles.
I think from start to finish we'll do well to get away with a downturn of less than three years. If we consider that we started April-May last year, then we are hoping to get out of it in early 2011, so clearly we are in for a long haul here, with a major correction of relationships that had become entirely unsustainable. It will take time.
We should probably expect to see two years of minus signs in front of gross domestic product figures. We should be prepared for that.
Stephen Nickell, Nuffield College, Oxford
I'm rather sad I'm no longer on the Monetary Policy Committee at a point like this: it would have been very interesting [he was a member from 2000 to 2006].
I'm rather in favour of quantitative easing. It involves the Government spending money without having debt.
In normal times that's a recipe for inflation, but in circumstances where there is plainly spare capacity, it seems like a reasonable mechanism for funding. My instinct is that until in some sense the credit crunch sorts itself out or is sorted out, then we are going to have a severe recession which could last well beyond this year.
Plainly, either it sorts itself out when trust returns to the system, or is encouraged to come back into the system by some mechanism of guarantees on lending. This is clearly another step which could prove necessary for the Government. If people don't have access to credit they contract their activities. Fundamentally, in order to carry on certain activities you have to have access to capital, and quite a significant proportion of businesses don't have stores of spare cash. The consequence is that they will find it very difficult to expand, and some clearly have got to expand to take up the space left by the exit of some businesses, such as Woolworths.
Likewise, I'm extremely concerned about the housing market. First-time buyers have to have access to credit or else house prices will keep falling. Every year there are a bunch of last-time sellers plus some new-build houses on top of that. First-time buyers have to move in to fulfil that space. There are plenty of potential first-time buyers out there but they are finding it very difficult to get mortgages.
Ray Barrell, NIESR
Fiscal fine tuning is a bad idea. What we need is coarse tuning. In normal times all fiscal policy does is shift spending from the future to the present with no net gain. In a banking crisis some firms are credit constrained and reduce staff or go bankrupt. Fiscal policy – cutting National Insurance for employers in particular – reduces the constraints.
Fiscal policy in a banking crisis raises output by more than the offsetting effect in the future. That is why the IMF recommends it. It will work in the short term, but it cannot be used year-after-year – the Japanese made that mistake in the 1990s.
Quantitative easing means two things: 1 The Bank buys private sector assets (making a market in them where it has failed) and prints money to do so, rather than it being financed by issuing bonds. It's a good idea and could reduce risks in bank portfolios and help reduce borrowing constraints, but it may be pushing on a string. 2 The Bank buys government bonds with cash, with the intention of pushing expected interest rates down. This should cause the pound to fall, but if every government does it, it will be less effective.
If the Bank has to act, it can only cut interest rates or do easing. These are not very effective in a crisis. They are also risky. An economy awash with liquidity raises the risk of a resurgence of inflation when the situation rights itself .
What is needed is significantly more capital inside banks. The Bank cannot provide that. Only the state can do so, and unless
we see US, UK, German and French banks in public
ownership soon with much
more capital than they currently have we are in for trouble.
Call it "foie gras" economics if you will – the banks may not want it but we will enjoy it.
David B Smith, Beacon Forecasting
This is not Armageddon; this is recession. We are behaving in a way that assumes it is Armageddon.
What we're doing now, in terms of rate cuts and fiscal stimulus, will not prevent the current recession, but it will have serious consequences at some point in the future. Given that there are now similar moves taking place across the world I envisage some problems. Even at their current rate, lower interest rates will put a hell of a lot of stimulus back into the economy, and we could easily go back to boom and bust again.
The Keynesian bandwagon has allowed the Government to go on huge spree, and the evidence from the 1990s is that you could easily have a situation where public spending holds up GDP but also induces a collapse in private sector activity which could be equivalent to the Great Depression.
The economy should return to its underlying growth trend with no permanent loss of output beyond that already caused by Gordon Brown's manic interventionism, unless the quack measures now being introduced by politicians make matters worse rather than better.
This happened with Roosevelt's New Deal and is likely to happen in the US, Britain and other modern economies.
We are producing a big package that looks like the kind of thing that got us into trouble in the 1970s. This looks much more like Edward Heath in 1972-74 than the more effective and well-thought out policies the UK carried out in the 1930s.
However, we've never experienced anything like this before. There is no modelling for credit rationing. It's a bit like the Holy Spirit: you can't get a handle on its effects.
The Treasury and Bank of England must move fast with radical plans to bring the financial crisis to an end, leading economists have said.
Alistair Darling must also beware over-borrowing and leaving the UK with a dangerous legacy of govern-ment debt, according to the academic and independent economists surveyed by The Daily Telegraph.
The growing consensus is that the Government should not waste any time in moving on to measures such as quantitative easing and further bank bail-outs despite the fact that interest rates have yet to hit zero. It follows the Bank of England's insistence earlier this week that "further measures" beyond interest rate cuts are necessary to stop the credit crisis intensifying.
Steve Nickell, a former Bank policymaker, said that the Government may need to set up a guarantee system for bank lending, while Dr Peter Warburton of Economic Perspectives said that among the essential moves is the need to overhaul the accounting rules for banks and also to start under-funding the UK budget deficit. All of those surveyed backed plans to increase the quantity of money in the economy.
Alongside these recommendations, Patrick Minford of Cardiff University warned the Government not to spend further amounts on fiscal stimulus, since doing so could undermine the UK's credit worthiness and drive up interest rates.
Peter Warburton, Economic Perspectives
I don't think rates ought to be cut any further. You don't have to wait for zero before embarking on unconventional measures, there are plenty available.
The six main objectives include:
1 Normalising the inter-bank market by providing as much central bank liquidity as is necessary through as many different channels as is helpful.
2 Suspending inappropriate capital adequacy rules, such as Basel II. Until the rules can be redesigned to work counter-cyclically, my suggestion is that banks' capital requirements revert to and are frozen at their end-June 2007 levels.
3 Restoration of profitability to the banks. The higher the profits, the faster the writedowns can be achieved and the sooner the self-healing properties of markets can take over. Currently the authorities give support to the banks with one hand and seek to punish them with the other. This ambiguity needs to be removed to allow banks to rebuild their profitability.
4 Redirection of banks' lending capacity towards non-financial companies and households.
5 Reversal of the Debt Management Office's over-funding of the budget deficit.
6 Discouragement of flows into National Savings and other tax-free savings vehicles.
I think from start to finish we'll do well to get away with a downturn of less than three years. If we consider that we started April-May last year, then we are hoping to get out of it in early 2011, so clearly we are in for a long haul here, with a major correction of relationships that had become entirely unsustainable. It will take time.
We should probably expect to see two years of minus signs in front of gross domestic product figures. We should be prepared for that.
Stephen Nickell, Nuffield College, Oxford
I'm rather sad I'm no longer on the Monetary Policy Committee at a point like this: it would have been very interesting [he was a member from 2000 to 2006].
I'm rather in favour of quantitative easing. It involves the Government spending money without having debt.
In normal times that's a recipe for inflation, but in circumstances where there is plainly spare capacity, it seems like a reasonable mechanism for funding. My instinct is that until in some sense the credit crunch sorts itself out or is sorted out, then we are going to have a severe recession which could last well beyond this year.
Plainly, either it sorts itself out when trust returns to the system, or is encouraged to come back into the system by some mechanism of guarantees on lending. This is clearly another step which could prove necessary for the Government. If people don't have access to credit they contract their activities. Fundamentally, in order to carry on certain activities you have to have access to capital, and quite a significant proportion of businesses don't have stores of spare cash. The consequence is that they will find it very difficult to expand, and some clearly have got to expand to take up the space left by the exit of some businesses, such as Woolworths.
Likewise, I'm extremely concerned about the housing market. First-time buyers have to have access to credit or else house prices will keep falling. Every year there are a bunch of last-time sellers plus some new-build houses on top of that. First-time buyers have to move in to fulfil that space. There are plenty of potential first-time buyers out there but they are finding it very difficult to get mortgages.
Ray Barrell, NIESR
Fiscal fine tuning is a bad idea. What we need is coarse tuning. In normal times all fiscal policy does is shift spending from the future to the present with no net gain. In a banking crisis some firms are credit constrained and reduce staff or go bankrupt. Fiscal policy – cutting National Insurance for employers in particular – reduces the constraints.
Fiscal policy in a banking crisis raises output by more than the offsetting effect in the future. That is why the IMF recommends it. It will work in the short term, but it cannot be used year-after-year – the Japanese made that mistake in the 1990s.
Quantitative easing means two things: 1 The Bank buys private sector assets (making a market in them where it has failed) and prints money to do so, rather than it being financed by issuing bonds. It's a good idea and could reduce risks in bank portfolios and help reduce borrowing constraints, but it may be pushing on a string. 2 The Bank buys government bonds with cash, with the intention of pushing expected interest rates down. This should cause the pound to fall, but if every government does it, it will be less effective.
If the Bank has to act, it can only cut interest rates or do easing. These are not very effective in a crisis. They are also risky. An economy awash with liquidity raises the risk of a resurgence of inflation when the situation rights itself .
What is needed is significantly more capital inside banks. The Bank cannot provide that. Only the state can do so, and unless
we see US, UK, German and French banks in public
ownership soon with much
more capital than they currently have we are in for trouble.
Call it "foie gras" economics if you will – the banks may not want it but we will enjoy it.
David B Smith, Beacon Forecasting
This is not Armageddon; this is recession. We are behaving in a way that assumes it is Armageddon.
What we're doing now, in terms of rate cuts and fiscal stimulus, will not prevent the current recession, but it will have serious consequences at some point in the future. Given that there are now similar moves taking place across the world I envisage some problems. Even at their current rate, lower interest rates will put a hell of a lot of stimulus back into the economy, and we could easily go back to boom and bust again.
The Keynesian bandwagon has allowed the Government to go on huge spree, and the evidence from the 1990s is that you could easily have a situation where public spending holds up GDP but also induces a collapse in private sector activity which could be equivalent to the Great Depression.
The economy should return to its underlying growth trend with no permanent loss of output beyond that already caused by Gordon Brown's manic interventionism, unless the quack measures now being introduced by politicians make matters worse rather than better.
This happened with Roosevelt's New Deal and is likely to happen in the US, Britain and other modern economies.
We are producing a big package that looks like the kind of thing that got us into trouble in the 1970s. This looks much more like Edward Heath in 1972-74 than the more effective and well-thought out policies the UK carried out in the 1930s.
However, we've never experienced anything like this before. There is no modelling for credit rationing. It's a bit like the Holy Spirit: you can't get a handle on its effects.
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