I’ve restrained from posting on World Depression II so far, rather feeling that I’d covered most of the main points in my earlier series of posts on the Northern Rock fiasco. But now thankfully the US Congress has agreed to George Bush’s plan to save capitalism by sending every US citizen a very large tax bill. There will be many who will be thinking that at least he’s good for something, but I’m afraid that I’m not among them.
The one thing on which everyone is agreed is that far too many financial institutions have made far too many reckless loans (on which there are likely to be defaults), and that this is the cause of the problem. Certainly savers with the Bradford & Bingley will feel they’ve had a narrow escape now they’ve realised that their money was being advanced on mortgages where the bank wasn’t even taking the basic step of confirming the applicants incomes.
What worries me is that there is still a failure by the politicians on both sides of the Atlantic to grasp quite how our economies have become dependent on this false credit. Indeed the argument being put forward goes something like this: If we don’t let people carry on using their credit cards, sales will slump. That is of course quite right, but they forget the other side of the coin: If we let people carry on using their credit cards they’re going to owe even more money that they haven’t a hope in hell of repaying.
Excessive credit (of which there has been far too much for the last twenty-five years) overheats an economy and produces a false illusion of wealth. In this country it has manifested itself particularly in sustained property price inflation, with all the negative effects on society that entails. Our Government (and for that matter the one that preceded it) is quite as guilty as that of the US for presiding over an economy financed to such an extent on false credit, and for claiming the economic credit for doing so. Economies are pretty much like credit cards in that sooner or later the bill arrives, and you can only put off paying it for so long. We've had the boom, we've reached the bust, and now it's time to pay. The economic price is recession, and painful as it will be we will need to go through it if we are to emerge with a restructured economy fit for the 21st Century.
As individuals and as a country we have been living far beyond our means and we are going to have to learn to do otherwise.
The most interesting commentary on this crisis can be found on the ever reliable John Redwood’s blog (far too many posts to link individually). He is now struggling to maintain his normal ideological consistency, but I suspect that he was always in something approaching a minority of one with his conviction that much of our current problems have been caused by excessive banking regulation.