How much debt is too much? Nobody knows. But the governments of highly indebted high-income economies – such as the US and UK – think they know the answer: more than today. They want even more credit to flow to their struggling private sectors. Is that an attainable ambition and, if so, how might it be achieved? Continue reading "Why dealing with the huge debt overhang is so hard"

In tough times, politicians squabble. Out of this heat, light should emerge. Alas, it is not doing so, at least in the UK. The utterances of leading Labour and Conservative politicians do not explain how the UK economy is to emerge from its current quagmire. Continue reading "Political game of blind man’s bluff"

Nobody would want to start from here, least of all the bankers. A dearth of capital, worsening loan books and a lack of funding are a horrible combination. It is little wonder they are now as desperate not to lend as they were so recently to lend. Unfortunately, if banks stopped lending, they would create a depression from which everybody, including banks, would suffer. The economy cannot go “cold turkey”. A flow of net lending must be sustained.The starting point for any analysis must be with some harsh realities.

The first is that banks enjoy a state-supported licence to create money. No strictly private business can make a credible promise to do that. Banking is a utility in which taxpayers bear much risk. Regulators have to represent the interests of these risk-bearers of last resort.

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By Martin Wolf

Is the UK on the road to disaster? Those who believe it is insist that it is mad to tackle a calamity caused by excessive borrowing with still more borrowing, this time by the government as borrower and lender of last resort. These criticisms are wrong and right: wrong, if the government remains creditworthy; right, if it does not.

Continue reading “How Britain flirts with disaster”

By Nariman Behravesh

The full fury of the two shocks that have hit the world economy - the financial crisis and record oil prices - is beginning to dissipate. Unfortunately, the full impact of these shocks on the real economy has yet to be felt. Continue reading "A deep recession but a strong recovery"

By Martin Wolf

Stuff happens. Stuff has certainly happened to both the UK economy and the government’s fiscal position. What Alistair Darling, UK chancellor, delivered on Monday was not a pre-Budget report, but a crisis budget.

Continue reading “Darling takes a gamble on huge deficits”

Is this the time for the British to swallow their pride, admit they made a mistake and beg to enter the eurozone? A growing number of people argue it is. They are wrong.

The reason for having a floating exchange rate is that it should float. In an uncertain world, an economy needs mechanisms of adjustment. The exchange rate is the most powerful such mechanism. Only exceptionally flexible or exceptionally open economies cope well with big shocks without any exchange rate flexibility.

The UK is now suffering relatively severely (and so “asymmetrically”) from six large negative shocks.

 The remainder of the article can be read here. Discussion from our forum members and contributors appears below.

Will the UK government’s scheme for rescuing the financial system work? The answer to this question depends on the meaning of the word “work”. I can identify three issues: will the scheme rescue banking? Will it cost too much? Will it prevent a recession?

First, though, what is the scheme?

The eight eligible UK banks are to raise £48bn in new capital, of which £12bn will be in preference shares paying a dividend of 12 per cent. The government is making capital investments in Royal Bank of Scotland and, upon merger, HBOS and Lloyds TSB, totalling £37bn.

The guarantee on new debt for maturities of up to three years will carry a fee of 50 basis points, plus the median credit default swap rates, over the year to October 7 2008. So charges will end up at 110-150 basis points.

The remainder of this column can be read here. Discussion from our forum member and contributors appears below.