Wed, May 13, 2009 page9

• Equity boom hardly an occasion to celebrate

  The recent stock market boom has obscured the scale of financial and industrial restructuring needed to sustain an economic recovery

  • By Will Hutton / THE GUARDIAN
  • • 
    • 
    • 

  Baffled? It’s hardly surprising. On the one hand, euphoric stock markets, up more than 20 percent in two months, proclaim the recession is nearly over. On the other, dark stories circulate about the chiefs of the Bank of England worrying that the banking crisis is intensifying. One banker says the banks are back; another that there is no sign of light. One businessman says he can see green shoots; another that recession is deepening. Whom and what to believe?

  The answer is that the situation remains very serious, very fragile, beset by risks. Recovery, when it comes, may not bring much in terms of new jobs and rising production. The threat of a Great Depression may be receding, but this is hardly reassuring — the new prospect being a worldwide Great Recession. After all, in London shares were valued more cheaply two months ago than in October 1940 when there were fears of a German invasion. Now stock markets think the threat has receded, but only to a state of mass unemployment and protracted economic stagnation. Some relief, but hardly an occasion for wild celebration.

  On the plus side, markets have been reassured that governments will underwrite their stricken banking systems, a commitment made at the G20 summit in London. Interbank markets worldwide are less stressed. Some of the sickening drops in production in Japan and elsewhere at the turn of the year were because retailers and distributors around the world were meeting lower demand from their stocks. That period of destocking is coming to a close; orders are beginning to be placed at factories again. That is reflected in less pessimistic surveys of business confidence and reports that the pace of decline is easing.

  

  ILLUSTRATION: MOUNTAIN PEOPLE

  On top of this, as I have written a number of times, it would be very extraordinary if the British economy did not stabilize given the scale of the stimulus it is receiving. Interest rates at 0.5 percent, a deep devaluation of the pound, a budget deficit of 12 percent of GDP, along with the Bank of England printing £75 billion (US$114.4 billion), injecting it into the financial system (called quantitative easing) and announcing plans to print a further £50 billion last week, is about as much as can be done to stimulate an economy in recession. We know from other bad recessions — 1929-1931, 1979-1981 — that after 12 to 15 months the worst of the fall begins to ease. That is likely now.

  But that is about all one can say with any confidence. The scale of the British stimulus is an acknowledgement of the scale of the unprecedented economic catastrophe. I doubt that the Bank of England embarked on its second round of quantitative easing because it thinks a second British banking crisis is imminent, as some reports on Saturday said: There would be storm warnings in the interbank markets if it were. Rather, it is acutely concerned, as it should be, that the British financial system is short of hard cash and lending capacity. The risk is that further problems in US or European banks may bring fresh contagion here.

  The US government is opting for what Nobel Prize-winning economist Paul Krugman dismisses as a policy of “muddling through,” largely because President Barack Obama knows that winning more cash as “welfare” for bankers will be almost impossible to get through Congress. The compromise deal announced last week in Washington over how much money US banks had to raise to stay solvent was the barest minimum. Everybody has to hope it is enough.

  European governments are even more complacent. The German financial markets last week were rife with rumors that undeclared losses of nearly US$1 trillion meant the German banking system is bust. France’s is in no better shape. You might hope that other government were urgently dealing with toxic debts and being as aggressive as the Bank of England in printing money and injecting cash into their systems to reduce the risk of a further round of bank runs and bail-outs. No chance.

  All this is worrying for Britain for two reasons. The first is that any British recovery depends upon world recovery; the more that is at risk from banking crises elsewhere, the greater the chance of a second round of bank runs caused by confidence collapsing overseas and the more protracted our recession. The second is that we allowed our economy to be dependent upon overseas banks for supplies of credit — £700 billion a year by 2007.

  Crippled foreign banks are being forced by their governments to lend in their home countries as a priority. Our banks have to close the gap and they don’t have the capacity. For example, the Financial Times manufacturing barometer last month showed a further decline; lack of credit is freezing the supply chain and procurement process with companies terrified that buyers don’t have the cash to complete purchases. It is a form of bank run, but between manufacturers. Production falls, the worst since records began in 1968, are accelerating.

  What is needed urgently is more bank capacity. We need to create a network of public/private banks to support industrial and infrastructure investment and we need a wholesale transformation in the short-term, risk-averse way in which British banks have treated manufacturing companies for more than a century. Instead, we were treated last week to an ultra-complacent report on UK financial services by Chancellor of the Exchequer Alistair Darling and Sir Win Bischoff, former chairman of Citigroup.

  The City, London’s old financial district, needed more regulation to regain trust, it conceded, but then, as if the last 18 months had not happened, the government’s job was to back the financial services industry as it stands, incapable as it is of supplying credit to British industry. Bischoff even complained about the City having to suffer extra taxes, as the government struggles to close its prospective £175 billion deficit because of the very credit crunch the City has caused.

  This is the heart of the problem. Today’s recession promises to be as severe as that of 1929-1931, as the National Institute of Economic and Social Research warned last week. Recovery then was the result of a determined intervention in the banking system and wider economy that has insufficient echo today. Where is the equivalent of the Bankers’ Industrial Development Corporation that spearheaded support for manufacturing in the 1930s? British banks were cajoled into supporting new industries and restructuring old ones. Former British prime ministers Ramsay MacDonald and Stanley Baldwin would never have put their names to a report like Bischoff’s.

  Nor was that all. The government swung behind key industries even before the war so that between 1931 and 1950 there was an astonishing industrial renaissance. Whatever today’s immediate economic prospects, the prospects for the next decade are sober — a government struggling to get its finances in order against a background of an economy whose consumers, businesses and banks are trying to work off the debts incurred in the heady 2000s.

  We need a mindset more like the 1930s — trying to develop our economy, encouraging innovation and insisting our banks serve business. Britain needs to think like a state committed to economic development. We are a long way from that. Hoping for green shoots because the stock market is recovering obscures the scale of financial and industrial restructuring that is needed. Solving the crisis in the real economy is only just beginning.
• Most Popular

  • 1

    China ship used Taiwan ports for months

  • 2

    Japanese ship makes first solo trip through the Strait

  • 3

    Taiwan mulls stricter citizenship rules

  • 4

    Award winner and singer-songwriter Khalil Fong passes away at age 41

  • 5

    Taiwan to keep advanced chip tech