UK economy

I am living in New York at the moment. I find that Americans who are aware other economies exist have one source of comfort: the US is in bad shape, but the UK is worse. Reading the Green Budget from the Institute for Fiscal Studies forces one to agree: the UK is in a mess. Yet it should still be a manageable mess. 

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? 

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. 

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. 

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. 

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. 

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. 

 

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. 

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? 

By Viral V. Acharya

The G7 and Eurozone meetings have raised hopes of expedient recapitalization of several banking sectors with the use of public funds. Such recapitalization is rightly aimed at shoring up equity base of the highly leveraged banks whose capital is essentially eroded, and of better-capitalized banks whose equity base has suffered too due to a spillover from adverse news about the highly leveraged ones. In light of this much-needed response to the global financial crisis, it is important to remember that following the first round of recapitalizations, regulators should and will look for ways to “clean up” the system. To this end, well-capitalized banks and financial institutions need to be given incentives to acquire weak banks sooner rather than later.