Friday, January 25, 2013

UK's economic strategy has failed

In a scathing Guardian editorial, Larry Elliott looks at each element of the UK's fiscal and monetary policy and find it unfit for the purpose of getting the UK out of an economic slump that is actually worse than during the Great Depression.

Your humble blogger needs to repeat the point that the economic performance the UK has experienced is actually worse than during the Great Depression.

Why have I repeated this point?

Because how many times have we heard politicians and financial regulators say that their response to the financial crisis that started on August 9, 2007 saved us from a second Great Depression.

The performance of the UK's economy puts to rest the myth that the fiscal and monetary response to the financial crisis saved the UK from a second Great Depression.

I know that a bunch of economists will argue that the UK is not having a second Great Depression because the unemployment rate hasn't reached 25%.  The reason it hasn't reached 25% has to do with the economic stabilizing programs that were put in place by the generation that experienced the Great Depression and has nothing to do with the response to the current financial crisis.

Regular readers know that your humble blogger predicted and explained why the UK's fiscal and monetary policies would be unsuccessful before they were implemented.  I get absolutely zero satisfaction out of having been shown to have been right.

Fortunately, because the UK's economy has performed as I predicted, it strongly suggests that my blueprint for restoring the UK economy to robust health is likely to work.

What is my blueprint?

First, look at Iceland.  What is important to notice about Iceland is that it forced its banks to recognize upfront the losses on the excess public and private debt in the financial system.

The starting place for restoring the UK economy is to make the same requirements of UK banks.  I know that the bankers will complain bitterly about this, but their banks are designed to absorb these losses and continue to support the real economy.

Second, understand that austerity is not a policy prescription for restoring growth to an economy.  What is a policy prescription for restoring growth to an economy is to focus spending on items that benefit UK taxpayers like social programs and infrastructure and not on bailing out banks.

Third, understand that monetary policy can contribute to economic headwinds and end those policies like interest rates below 2% and quantitative easing that create these economic headwinds.  Abandoning these policies will actually stimulate demand as savers can spend what they are currently setting aside to offset the lack of earnings on their savings.

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