TELEGRAPH 6.3.09
The economy is on a wing and a prayer
Telegraph View
Since the near collapse of the banks last autumn, we have been in
uncharted economic waters. Now, a dense fog has descended and rocks
are all around. The Bank of England's decision to cut interest rates
almost to zero and to add as much as £150 billion to the money supply
smacks of desperation. These measures have never been tried in this
country, and there is no clear evidence that they will succeed. We
must hope that they do.
What we do know is that when Japan went into a deflationary spiral in
the early 1990s, the central bank also cut interest rates to zero and
pumped huge sums into the economy, a process known in the jargon as
"quantitative easing". It did not work. Japan endured a decade or
more of economic stagnation. The Bank of England and the Treasury
believe the mistakes made by the Japanese have been learnt in the West.
Principally, the authorities this time have acted more quickly and
with greater conviction. Banks have been recapitalised with
taxpayers' money and insured against losses on bad debts. Almost
every shot in the locker has been deployed, other than income tax
cuts to stimulate demand and reductions in unproductive public
spending. In some shape or form, these must be on the agenda for the
Budget next month.
The decision to create more money overshadowed what would have been a
significant announcement: the reduction of interest rates to 0.5 per
cent. As recently as six months ago they stood at five per cent.
Their precipitate fall confirms that the Bank was too slow in
reducing them beforehand. Yesterday's somewhat pointless cut will
further disadvantage the many millions with savings, who now get
virtually no return for their prudence. Will any of this work? The
truth is that, even among economists, politicians and financial
experts, nobody knows: we are on a wing and a prayer.
It is clear that there will be a deep recession come what may, and
that the action being taken now is to avoid a depression. The big
problem is the same as it was six months ago: the banks are not
lending money and businesses are going bust. Thousands are losing
their jobs or fear they will. Soon, even if banks start lending to
viable companies in desperate need of refinancing, there will be no
demand for those companies' products.
There have already been many measures designed to improve bank
liquidity and none has had the desired effect. The Bank of England
hopes that giving money directly to companies by buying bonds will
ease this deeply worrying state of affairs. [SEE today's other story
"General Motors seizes up!"] In the mordant wit of the City, we have
created zombie banks: they have been brought back from the dead but
they are not functioning properly. It is essential they start to work
again.
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