I hate to say it, but those words spilled from the lips of my lunching companion, the brilliant Stephen Lewis from Monument securities, and frankly I agree.
America is in a depression, and so is the UK.
I hate to say it, but those words spilled from the lips of my lunching companion, the brilliant Stephen Lewis from Monument securities, and frankly I agree. This is what he had to say:
“Depression is a prolonged period of sub-optimal economic activity in which policy measures are ineffective in improving performance on a substantial basis and based on this, then the USA is in depression”
Well in the light of the awful double-digit US unemployment figure that came recently, this idea is not so inconceivable.
So what does this mean for America?
Well it would mean that for the next year or two, it will not feel like much for a recovery but more of a recession. Moreover, there is no doubting that unemployment still has a long way to go before peaking. I am guessing that it might hit 12%.
So, the hard grind of this depression still hasn’t elapsed, and the tender but reassuring “ green shoots” in the real economy, might only take hold for real by August 2010. Even then, it will take a few good years before things can ever go back to “normal”.
So why were the policy measures and the huge fiscal stimulus not adequate enough to stop the unemployment haemorrhage?
Well, in blunt terms, the fiscal stimulus was not big enough. Something that the Nobel Prize winning economist, Paul Krugman, said a while back. More money was needed to be thrown at the economy, to get people back in employment, and support the jobless.
Moreover, and more crucially, the design of the bailout strategy put the interest of an elite core of bankers before that of the taxpayer. Hence, it was really a stimulus and bailout package aimed at saving the banks.
That goal has been achieved in spectacular style. So in this sense, it has been overwhelmingly successful. But for the average Joe it has been a botched and irresponsible disaster.
Geithner and co., at the time of designing their strategy, had argued that by giving money to the banks, this would allow them to start lending to the economy, i.e. the good old “ trickle” down effect would take hold. But that's something I argued vehemently against in my column in June. The “ trickle down” effect is a defunct economic theory.
The reason why the banks were in no way going to start lending to us again was plain and obvious to us all. They were insolvent, and should have been totally killed off or nationalised.
Geithner and co, conveniently in my opinion, argued that the banks were facing a liquidity rather than a solvency crisis. A liquidity crisis means that the banks, are just facing a credit shortage. So, the argument goes, that as soon as they get some cash their way, they would start lending to the wider community, i.e. to us!
That was the excuse I believe they used to justify their banking bailout strategy.
A solvency crisis, however, means that the assets of many banks are worth less than their debt, which meant that whatever money you threw at them would in no way “ trickle” down to us. This is because banks would use it to plug the huge holes in their balance sheets. i.e. no money would come the way of the taxpayer in the shape of increased lending. And that’s exactly what the situation is right now - banks haven’t started lending again, and they will not in the near future.
The British and American administrations refused to accept that their banks were insolvent, because admitting that would have meant that they would have needed to nationalise the banks.
The banks and the banking lobby wouldn’t have allowed that to happen. Hence, the governments wouldn’t have allowed it to happen.
As Roger Bootle, my guest on this week’s show, said, “our leaders are in the pockets of the banks”. Amazing words to be uttered by a man who has made a career and a brilliant reputation of coming at his economics from the right. Odd how it is that left leaning and right leaning economists seem to agree over this banking fiasco and their abuse of power.
Nationalising the banks would have been better for the taxpayer. As nationalised, or “public”, banks, the government could have steered these banks to serve the public and the public interest, by providing credit to taxpayers, at low interests rate. They would have served our interest, and this would also have applied to remunerations (so no obscene bonuses again rewarding excessive risk taking). It’s that simple.
Moreover, this would have meant that this would have been the start of us making the financial sector the servant, and not the master, of the economy. We could have harnessed its power to serve the needs of industry, and in particular green technologies that would create jobs and reduce toxic emissions all at once.
Instead, the Obama administration, and that of Great Britain, favoured a bailing out strategy that favoured the banks. And hence, here we are with a rising unemployment rate in America, the highest in almost 27 years. It could have been prevented.
The crucial thing is that we can stop this unemployment haemorrhage. A bigger stimulus package, and breaking up the “too big to fail banks” would do it.
That, though, requires political will that is non-existent on either side of the Atlantic, as it would entail taking on the banks and their power. And I think this is not likely. It is only likely if this depression deepens, and the taxpayer himself and herself takes it upon themselves to change the status quo.
Nothing short of a revolution will change this. I hate to say it, but right now that might be only way to stop this sorry state of affairs.
