Fannie Mae and Freddie Mac, the two most important institutions for the US mortgage market, are to be effectively nationalised at an initial cost to US taxpayers of up to $200bn, with responsibility being assumed for most of losses currently running at $14bn per annum.
The incredible scale of this intervention underlies that this is not a moment in the world economy for half measures. The UK government has signally failed to rise to the challenge of current circumstances. Gordon Brown is so trapped by his own tale that he managed the economy perfectly and for the long-term that his administration has been pathologically incapable of responding to the considerable economic ructions of the past year. A brief list of failures includes:
- An inability to modify the Tripartite system despite its total failure in the case of Northern Rock (failure of the banking regulation regime)
- An unwillingness either to enforce the inflation target or adapt it, resulting in its destruction (failure of the monetary policy regime)
- A failure to employ fiscal policy (failure of the fiscal policy rules)
- Tinkering with public spending without decisive action in either direction (failure of the "comprehensive spending review" process)
- Collapse of the capital taxation regime (capital gains tax and non-doms treatment)
Unemployment may reach 2m on the broad definition this year. It may rise a further 600,000 next year. The government is not rising to this challenge - it is fiddling, tinkering, without imagination, without a goal, rushing headlong to electoral oblivion and unnecessary economic hardship. Sometimes it is at least arguable that an economy needs a recession - inflation gets far too high, working practices become far too inefficient, patterns of trade fail to keep pace with events in the world, and significant and painful restructuring becomes necessary and can, perhaps, only be achieved with recession. If there is ever such a time, this is not it. The British economy has weaknesses, to be sure, but prolonged recession is not required.
As far as I can see, the government is either just planning to accept recession - to accept a million people losing their jobs - as "one of those things", or it is completely out of ideas as to how to try to limit this. I accept that slowdown was necessary - that we had to slow to 1% growth, say, for a couple of years. But that slowdown seems to be turning into recession I lay at the door of inadequate, unimaginative, and politically paralyzed policymaking.
This can't go on. I was wrong about Brown. I thought he would be a tough opponent. But he's not. He's not up to it. Labour Party: Please! Do something! Bring in Miliband; bring back Tony Blair; for goodness' sake, give Harriet Harman a go if that's what it takes! You can't seriously believe you came into politics to twiddle your thumbs whilst a million people became unemployed. Modern macroeconomic theory and practise provides many tools to help in these situations. Brown is not using them. Get in someone who will - for everyone's sake. And do it soon.
