This week is yet another week of horror for the British economy. Monday’s banking rescue package contained several useful ideas – including the “Asset Protection Scheme” (the insurance scheme for “toxic” assets) and the “Asset Purchase Scheme” in which the Bank of England will buy corporate bonds, initially with Treasury Bills, though probably, before long, by pressing a few keys on a computer (“quantitative easing”). Indeed one could argue that this second rescue package was necessary - such are the problems with credit availability. But the potential costs of this new bail-out, along with RBS’s mammoth losses, spooked the markets and sterling fell like a stone.
I have already written about my concerns for the public finances – indeed I have been writing about them obsessively since Gordon Brown foolishly turned on the spending taps at the beginning of the decade – but it is now quite clear that chickens are coming home to roost, bringing all their avian friends with them. And the markets are beginning to worry about the long-term ability of the British Government to service its debt. Today’s public sector finances data (for the month of December) were simply dreadful. Making allowance for the “financial sector interventions”, including the recapitalisationsof RBS and the Lloyds Banking Group, public sector net debt as a percentage of GDP reached 47.5%, the highest since 1978 – two years after the humiliating IMF bailout.
Today’s labour market data were also shocking. The claimant count alone was up 78 thousand in December and it is quite clear that unemployment, on the wider ILO measure, will reach at least 3 million during this recession. The preliminary estimate for fourth quarter GDP is due on Friday and is expected to show a drop of around 1½%, thus officially confirming the British economy is in recession. The economic news is unremittingly appalling.
Now it is true that even the most pessimistic of us (and I was on the pessimistic side of “consensus”) simply did not expect the severity of the recession in which we now are. This is a chastening experience for all of us. But perhaps we are in good company. As Nils Bohr, Nobel laureate in physics, is alleged to have said, “prediction is very difficult, especially if it’s about the future.”
And economic forecasting during this recession is especially problematic because most economic models (and hence forecasts) have an inbuilt assumption that the banking sector functions effectively and efficiently, lubricating the economy with the necessary credit. In the current recession, this crucial assumption has been spectacularly and uniquely (certainly post World War Two) violated. The British banking system is malfunctioning and such malfunctioning is especially difficult to quantify.
Indeed a chastening experience – but one man seems untouched by humility as the economy slides and people lose their jobs. I am of course talking about the man who had put an end to “boom and bust”, whilst presiding over the mother and father of all “booms” – in the housing market, in easy credit, in an unsustainable explosion of personal sector indebtedness and in British banks’ increasing dependency on borrowing, much from abroad. These were all potentially dangerous developments which are now bursting spectacularly. Someone, surely, in the Treasury was pointing out to the then-Chancellor that these were dangerous developments. But, as the greatest Chancellor the country had ever seen, he knew better.
Even now Gordon Brown does not offer a smidgeon of apology. I suppose he cannot. Even now he blames the world for our problems that are uniquely the consequences of his disastrous stewardship of the economy. I’m aware that the following quotation is already doing the rounds in political circles, but I cannot resist it. Back in 1992 after the pound’s welcome departure from the ERM, he said “a weak currency arises from a weak economy which in turn is the result of a weak Government.” There is simply no better way to encapsulate our current economic woes.
