The 2008 crash: Recovery.

Two precedents.
Crisis, 2008-9.
Quantitative easing, UK, 2009.
UK banks, 2009-10.
Housing market, USA, 2009-11.
Executive pay, 2009-2011.
Global imbalances, 2010-11.
Debts and deficits, Europe, 2010-11
Unilateral action, 2010-11.
Budget debate, USA, 2011.
Predictions, 2011-12.
UK banks, 2011-13.
Low growth, 2014-15.
Austerity, 2015-16.
Brexit, 2016.
Rearrangements, 2016-17.
Loose money, 2017.

Two precedents.

1. Carter Dougherty, New York Times, September 22, 2008.
Stopping a financial crisis the Swedish way.

Financial deregulation in the 1980s fed a frenzy of real estate lending by Sweden’s banks . . . The bubble deflated fast in 1991 and 1992. . . The Swedish economy contracted for two consecutive years after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years. . . By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. . . The government still owns 19.9 percent of Nordea, a Stockholm bank that was fully nationalized and is now a highly regarded giant in Scandinavia and the Baltic Sea region.

2. Justin McCurry, The Guardian, 1 October 2008.

. . . it took Japan’s government several years to rescue its stricken financial institutions . . . after the real estate bubble burst almost two decades ago. . . . the Nikkei stock average fell 63% during the 1990s . . . the initial reaction was to do nothing while the banks creaked under the weight of irrecoverable loans.

. . . interest rates… the Bank of Japan didn’t get them below 0.5% until the mid-1990s. By the time the government injected millions of yen in public funds . . . the world’s second-largest economy was mired in a slump known as the “lost decade”.

The government recouped much of its outlay by reselling collateral, mainly real estate, but the process took some 10 years, and full recovery remains elusive. The Nikkei average is 70% off its 1989 peak and property prices are about 40% of 1990 values.

Crisis, 2008-9.

1. Martin Wolf, Financial Times, 29 October 2008.
Preventing a global slump should be the priority.

. . . Alan Greenspan’s confession last week . . . “I made a mistake in presuming that the self-interest of organisations . . . was such that they were best capable of protecting their own shareholders.”

. . . back in 1900, US banks had four times as much capital, relative to assets, as they do today. Similarly, the liquidity of the assets held by UK banks has collapsed over the past half-century. Implicit and explicit guarantees from governments have indeed made the financial system more dangerous than before. The combination of such guarantees with deregulation has proved lethal.

2. Vince Cable, MP for Twickenham and Lib Dem Treasury Spokesman.
The Mail on Sunday, 28 December 2008.

. . . A generation has grown up expecting a predictable future . . . Yet within a few months, the world has turned upside down.

The people I meet are worried, frightened, cross and, above all, confused . . . Should we all spend more to keep the economy going . . . or should we stop spending and save more to reduce personal debt?

Should the Government be spending on our behalf to keep people in work . . . Is the top priority to help people in debt and those facing home repossession, or should we help those who have seen their private pensions and interest on their savings disappearing?

. . . The honest answer is that even the most clever and public-spirited people are divided on these issues.

. . . The absolutely central task for the New Year is restoring normal bank lending . . . Banks . . . are given contradictory signals by government: lend more to small companies and house buyers; lend less and build up reserves; cut your lending rates; repay taxpayers’ loans as quickly as possible.

3. The undeniable shift to Keynes.
Chris Giles, Ralph Atkins and Krishna Guha, Financial Times, 30 December 2008.

The essential idea of John Maynard Keynes’s “The General Theory of Employment, Interest and Money” is that modern economies can suffer from a persistent lack of demand, consigning millions to . . . unnecessary unemployment and misery. . . It is . . . better for governments to stimulate economies suffering from a lack of demand by stepping in with cheap money and deficit-financed tax cuts or public expenditure increases.

. . . More than three decades have passed since Richard Nixon, the Republican US president, declared: “We are all Keynesians now.”

The phrase rings truer today than at any time since, as governments seize on John Maynard Keynes’ idea . . . The sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades, which held that efforts to use fiscal policy to maintain the economy and mitigate downturns were doomed to failure.

. . . But not all policymakers have been so keen to jump on board what they see as a dangerous journey, not back to the theory Keynes laid out to combat a deep and protracted economic slump but to the failed fiscal fine-tuning of the 1970s, in which governments tried to maintain full employment at all times.

. . . The contrasting rhetoric is more exaggerated than the reality of the differing positions. In gung-ho Britain and France, for example, the planned fiscal stimulus is no bigger than in reluctant Germany. And in all three countries, reduced tax payments and higher welfare state payments will contribute the vast majority of prospective higher budget deficits, not the discretionary measures introduced in recent months. The US stimulus package appears to dwarf the European efforts. But any fiscal stimulus has to be larger in the US to have a similar effect because more generous European social safety nets guarantee higher payments to the unemployed. Mr Trichet argues that these “automatic stabilisers . . . have perhaps twice as much influence . . . as a percentage of GDP in the euro area as compared with the US”.

But it is clear a worldwide shift towards Keynesian deficit financing has occurred this year. . . This trend was evident almost a year ago in January, when . . . Mr Summers . . . remarked: “This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face.”

4. Martin Wolf, Financial Times, 11 February 2009.

. . . The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn . . . up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects.

Quantitative easing, UK, 2009.

1. George Kerevan, The Scotsman, 4 March 2009.

Tomorrow the Bank of England’s monetary policy committee is likely to give the go-ahead for quantitative easing, otherwise known as printing money.

The argument in favour . . . is simple: nothing else has worked. To date, normal monetary and fiscal measures . . . have failed spectacularly.

. . . We know from the collapse of previous debt bubbles – in Scandinavia in the 1980s and Japan in the 1990s – that it takes years for the debt mountain to disappear and consumption to return to “normal”.

. . . Quantitative easing means the Bank of England will simply invent deposits and use this electronic money to buy existing financial and corporate bonds, putting that new, instantly spendable cash into circulation. This might sound dangerous, but . . . all the paper pound notes in our collective wallet originally come from the Bank of England printing press – all £52 billion of them as I write.

No-one knows how much extra electronic money the Bank plans to pump into the UK economy . . . Too much could, in theory, cause a Zimbabwe-style hyper-inflation, but that is hardly on the cards. . . the crisis is too serious to use half measures.

2. Chris Giles, Financial Times, 6 March 2009.

The Bank of England’s departure from normal monetary policy . . . and concerns that Britain was following the policy of Zimbabwe into bankruptcy and hyperinflation . . . prompted Mervyn King, Bank governor, to give a series of rare interviews. There are few good comparisons for the bank’s policy move, with only Japan and the US having previously reached the lower limit of normal monetary policy. . . Mr. King . . . conceded . . . it is very unlikely interest rates can go any lower.

3. BBC Parliament, Treasury Select Committee, Inflation Report, 24 March 2009.
Mervyn King, Governor of the Bank of England:

Monetary policy should bear the brunt of dealing with the ups and downs of the economy, and we have put in an enormous amount of stimulus. We’ve cut interest rates . . . in a few months by four and a half percentage points, . . . we’ve now moved to unconventional operations in order to try to expand the money supply. These are quite dramatic policies . . . The fact that the world economy is in the middle this quarter of a very sharp downturn, is not evidence that . . . this policy stimulus injected in only the last few months, won’t come through in the future.

4. George Soros, Financial Times, 15 December 2009.
Do not ignore the need for financial reform.

. . . The financial system is far from equilibrium. The short-term needs are the opposite of what is needed in the long term. First you must replace the credit that has evaporated by using the only source that remains credible – the state. That means increasing national debt and extending the monetary base.

UK banks, 2009-2010.

1. The Daily Telegraph, 8 August 2009.

Stephen Hester, the Royal Bank of Scotland boss . . . wants to wean the RBS off the money markets, balancing the amount of customer loans it makes with the deposits it takes.

. . . Mr. Hester reckons it will take 5 years to reduce RBS’s loan-to-deposit ratio to 100% from the current 144% – in other words have £1 of customer deposits for every £1 lent instead of the current 70p of deposits for every £1 lent.

. . . RBS is also being split into a core bank and a non-core bank. “We have to fix the risk that nearly toppled us over – that’s the job of the non-core division,” Mr. Hester said. “The core bank will be the engine that rebuilds value and gets the taxpayer back to realising a profit.”

. . . Mr. Hester described himself as an optimist. Not on an immediate recovery in the economy, he clarified, but on RBS recovering to stand-alone strength by 2013. “I will be disappointed if the taxpayer doesn’t have the opportunity to sell out profitably in the next 5 years.”

Taxpayer’s bail-out of banks ‘justified’, says NAO
4 December 2009.

The Treasury was “justified” in using taxpayers’ money to bail out banks to protect the wider financial system, according to an official report.

The National Audit Office (NAO) review said the UK public so far provided help totalling £850bn. “It is difficult to imagine the scale of the consequences for the economy and society if major banks had been allowed to collapse,” the NAO said.

. . . The Treasury estimated in April that there may be a loss to the taxpayer of between £20bn and £50bn, but the final cost would not be known for “a number of years”. The total losses will depend on the price at which the government sells its holdings in RBS and Lloyds – which could yet yield a profit for the government – and what the assets in the insurance scheme are eventually sold for.

. . . Northern Rock’s . . . loan . . . remains at about £14.5bn, the bank said last month. . . The European Union recently approved plans for Northern Rock to be split into a “good” and “bad” bank – paving the way for a partial sale.

In addition to the support given to Northern Rock, the Treasury has:

-purchased £37bn of shares in RBS and Lloyds Banking Group and, in November 2009, agreed to purchase up to an additional £39bn of shares in both banks
-protected the Bank of England against losses by providing over £200bn of liquidity support
-agreed to guarantee up to £250bn of borrowing by banks
-provided approximately £40bn of loans and other funding to Bradford & Bingley – those assets not sold to Spain’s Santander – and the Financial Services Compensation Scheme
-agreed in principle to provide insurance for over £600bn of bank assets, reduced to just over £280bn in November 2009.

3. Philip Aldrick, Daily Telegraph, 9 December 2009.
UK financial industry generates £61 bn tax revenues.

Britain’s financial services industry paid £61.4 bn in taxes in the year to March 2009 – accounting for more then a tenth of total UK tax receipts – despite the banking-led recession.

The total paid has fallen by £6.4 bn compared with two years earlier . . .

4. Katherine Griffiths, The Times, 27 February 2010.

Lloyds Banking Group . . . will not fulfil its pledge to extend £11 billion of credit to businesses because of the high level of customer repayments and the bank’s desire not to lend to risky clients.

Attempting to dampen anger among the small business community . . . the head of Lloyds’ wholesale bank . . . said “ I understand people’s frustration, but there are customers who are overleveraged and surviving because of the low interest rate environment. They would like to borrow more but we shouldn’t lend to them.”

Housing market, USA, 2009-2011.

1. Can’t pay or won’t pay?
The Economist, 21 February 2009.

No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmes have been ineffectual, and private efforts not much better.

. . . Some 5m homes have entered foreclosure in the past three years. Credit Suisse estimates that over 9m more will enter the process in the next four years. (In normal times, new foreclosures run at fewer than 1m a year.)

. . . Is it that homeowners cannot afford to pay; or is it that they are declining to do so, because their homes are now worth less than their mortgages, the phenomenon known as negative equity?

Both factors play a part, but economists are divided on their relative importance. One school thinks that, even in cases of negative equity, most homeowners will not default if they can afford the payments – not least because defaulting will wreck their credit records. A second school believes that once the home is worth less than the mortgage, homeowners have a significant incentive to walk away even if they can make the payment, since in many states lenders cannot then pursue them for the shortfall.

. . . a Federal Reserve Bank of Boston study that found that when home prices fell 23% in Massachusetts between 1988 and 1993, only 6.4% of borrowers with negative equity ended up in foreclosure. . . Edward Pinto, an independent financial industry consultant, estimates that 20% of borrowers with negative equity went to foreclosure in the past three years, in part because they started out much less creditworthy than their counterparts in Massachusetts two decades ago.

. . . Aggregate negative housing equity is thought to top $500 billion.

2. Financial Times, 7 November 2011.
Shahien Nasiripour, Michael Mackenzie, and Nicole Bullock.

A crucial sector of the world’s biggest economy remains resistant to attempts to revive it, intensifying concern about the country’s struggling recovery.

. . . Nearly one-quarter of homeowners with a mortgage, or about 11m borrowers, owe more on that debt than their homes are worth . . . according to CoreLogic.

. . . Laurie Goodman of US-based broker-dealer Amherst Securities forecasts that another 10.4m borrowers, or one in every five, is likely to default in the coming years . . .

3. Financial Times, 10 November 2011.
Sharlene Goff and Shahien Nasiripour.

HSBC . . . almost three years after it began to wind down its US consumer finance business . . . is facing another severe bout of losses . . . Loan impairments at its US consumer division more than doubled in the third quarter of the year . . . large numbers of borrowers have simply stopped paying their mortgages. HSBC said some of its US customers had decided to skip their monthly repayment after a “foreclosure moratorium” made it difficult for the bank to repossess homes.

. . . property values have slid nationally by almost a third from their 2006 peak.

. . . Like HSBC, many large lenders face continued difficulties seizing the homes of delinquent borrowers.

Executive pay, 2009-2011.

1. Global banks discussed pay curbs ahead of PBR.
Daily Telegraph, 9 December 2009.
Tracy Corrigan and Philip Aldrick.

Senior UK bank executives discussed ways of curbing this year’s expected bonus frenzy with peers in France, Germany and the US in the run-up to today’s pre-Budget report.

John Varley, chief executive of Barclays, and Stephen Green, chairman of HSBC, are believed to have been involved in conversations in the last few weeks. The two men are said to hold similar views on the need for restraint.

However talks between bank bosses failed to find common ground and they are reluctant to act unilaterally for fear of losing talent.

. . . UK lenders have already signed up to the G20 and Financial Services Authority guidelines, under which bonuses are paid mostly in stock and deferred over three years with claw back provisions.

. . . One obstacle to a global agreement on remuneration is believed to have been the potential for legal contest on competition grounds.

. . . After last year’s adverse market conditions, bank profits have since been boosted by the very low short-term interest rates set by central banks in an effort to stimulate their economies. Bankers acknowledge privately that the bulk of the extra profits made . . . this year have been, as described by hedge fund manager George Soros, a “hidden gift” from the taxpayer.

In the UK, there has been public outrage at the prospect of hefty bonus payments in the wake of the £850 bn of taxpayer support provided to the banks, as calculated by the National Audit Office.

2. Bonus storm as losses hit £7bn at Royal Bank of Scotland.
Iain Dey, The Sunday Times, 7 February 2010.

Royal Bank of Scotland is about to announce losses of more than £7 billion for 2009 but will still hand out enormous bonuses to its investment bankers. . . The Treasury is expected to approve a total bonus pool of about £1.3 billion despite the expected losses. . . RBS is 84%-owned by the state thanks to huge injections of government funds. It is also being supported by a government-backed insurance scheme, which has helped to restore market confidence in the bank.

. . . Huge losses have been suffered on loans to businesses, on property deals and on complex derivatives. . . The only part of the bank expected to do well is its controversial investment-banking arm, which is on track to make billions of pounds in profits.

The profits are one of the key factors that will allow the bank eventually to be returned to the private sector, say analysts.

The return of bonuses across the City in recent months . . . has heaped pressure on RBS to make big payouts to its investment bankers to stop them being poached by rivals.

RBS has lost more than 1,000 of its top performers to rivals in the past year. It has also sacked hundreds more associated with the worst of the record losses of £28 billion the bank racked up in 2008.

Stephen Hester, chief executive, has said he will pay investment bankers “the minimum we can get away with”. Hester’s own pay package is under review by shareholders . . .

A number of banks, including Barclays Capital, UBS and Morgan Stanley, have raised salaries by as much as 100% for some staff in exchange for reduced bonuses.

Hester has told UKFI, the body that handles the government’s investment in banks, it should stop comparing the level of bonuses RBS pays out with rivals. He wants it to compare total pay levels instead.

RBS is expected to pay about 30% of its investment-banking revenues to staff, compared with 36% at Goldman Sachs and 50% at many other banks.

3. Dominic O’Connell, Sunday Times, 30 Oct 2011.
Executive pay.

The credit crunch and recession sparked calls for curbs on executive pay, and not just at banks. Those calls have gone unheeded.

Figures from Income Data Services last week showed that rewards for executive directors of FTSE 100 companies have continued on a merry upward path, thanks largely to convoluted long-term schemes that pay out in shares – schemes that were introduced in response to complaints about high levels of basic salary.

These pay plans have rendered remuneration reports – the crucial pages of a company’s annual report where directors explain how they have arrived at the big numbers for the chief executive – almost unintelligible.

Global imbalances, 2010-2011.

1. Ashley Seager, The Guardian, Wednesday 20 January 2010.
Beware global economic imbalances, Mervyn King warns.

The British economy faces “a long period of healing” as it recovers from the recession and the government needs to ensure it reduces the budget deficit sharply, Bank of England governor Mervyn King warned last night.

. . . King said national output fell by 5% last year – the biggest drop since 1931 – and by 10% compared to where it would have been had the recession not happened. Recovery was starting but it was gradual. . . He felt the £200bn of asset purchases the Bank of England has carried out over the past year had averted a “potentially disastrous monetary squeeze.”

. . . “The origins of the crisis lay in our inability to cope with the consequences of the entry into the world trading system of countries such as China, India, and the former Soviet empire – in a word, globalisation. The benefits in terms of trade were visible; the costs of the implied capital flows were not.”

King has long warned about the need to address the fact that some countries such as . . . America and Britain have run huge trade deficits for years while China and Japan, among others, ran big surpluses. The capital flows from reinvestment of the surpluses in western markets led to the excessive risk-taking by banks that threatened the global financial system. . .

2. Ambrose Evans-Pritchard, 03 Jan 2011.

This bear is not for turning. . .

. . . The East-West trade and capital imbalances that lay behind the Great Recession are as toxic as ever. Surplus states are still exporting excess capacity with rigged currencies — the yuan-dollar peg for China and, more subtly, the D-Mark-Latin peg within EMU for Germany.

Dangerously high budget deficits . . . in countries with dangerously high public debts . . . may have prevented an acute depression, but they have not prevented the weakest rebound since World War Two, and they cannot continue, whatever the assurances of New Keynesians and pied pipers of debt.

. . . China and India are over-heating, faced with a 1970s choice between choking credit or the onset of stagflation.

. . . Europe . . . makes things that world wants to buy. Its external accounts are in balance. Fiscal policy is more responsible than in Japan, America, or Britain, yet the whole is less than the parts. A dysfunctional currency union engenders chronic crisis at a lower threshold of aggregate debt. . . It will become clear that Europe’s scorched-earth rescues cannot work because they offer no means by which victims can clear debt and claw their way back to health.

Debts and deficits, Europe, 2010-2011.

1. Could the national debt sink Britain?
The Week, 27 March 2010.

The national or public debt – the total amount of money the British government owes its creditors – is about £857bn, equating to 60% of annual output (GDP) . . . It has already doubled over the decade, but it is set to get far, far bigger . . . owing mainly to an accumulation of soaring annual budget deficits.

. . . the budget deficit . . . the gap between what the government brings in annually and what it spends. . . In December’s Pre-Budget Report, the Chancellor predicted that this year it would be £178bn or 13% of GDP . . . Since then . . . slightly less daunting predictions . . . down to . . . £157bn . . .

How did we get into this mess? It wasn’t just down to bankers. The cost of bank nationalisations, around £37bn, is negligible in the general scheme of things. Ditto the cost of Britain’s . . . fiscal stimulus scheme, that amounted to little more than a temporary VAT cut and the “cash-for-clunkers” scheme. The main factor feeding the huge deficit was the recession triggered by the banking collapse, during which Britain’s output plummeted; but . . . the budget hasn’t been in surplus since 2001 . . . In 2002, the deficit was £10bn; by 2008, just before the banks caved in, it had risen to £43bn.

. . . Britain has never defaulted on its debt payments . . . and our overall national debt is low compared with other G7 economies. . . Plenty of nations have recovered from equally acute situations . . . Periodic debt crises, as Brittan notes, are a feature of our history and have usually been resolved through the forces of growth and inflation.

2. David Prosser, The Independent, 27 April 2011.

. . . data published yesterday by Eurostat, the European Union’s statistics agency . . . in third place in the league of shame, sits Britain, with a deficit of 10.4 per cent of GDP for 2010. Only in Ireland, at 32.4 per cent, and Greece, at 10.4 per cent, did spending . . . get more out of hand last year. . . Even Spain, which could be next for a sovereign debt crisis, had a smaller deficit . . . at 9.2 per cent.

. . . But . . . budget deficit figures tell you only what happened last year. . . On total Government debt as a proportion of GDP, the UK is only the ninth worst performer in Europe. Our debts totalled 80 per cent of GDP by the end of last year, compared to 143 per cent, 96 per cent and 93 per cent for Greece, Ireland and Portugal respectively. In Italy . . . 119 per cent . . . France . . . 82 per cent. Even that model of fiscal rectitude, Germany, was worse than us . . . at 83 per cent.

. . . this second comparison . . . is part of the explanation of why the UK continues to enjoy a AAA rating from the credit rating agencies . . . and our borrowing costs are not much higher than the Germans’. Other factors are . . . the UK has emerged from recession . . . and . . . our debts are due to be refinanced over a longer period than those of many neighbours.

3. Martin Wolf, Financial Times, 7 December 2011.

. . . look at the average fiscal deficits of 12 significant . . . eurozone members from 1999 to 2007, inclusive.

Every country, except Greece, fell below the famous limit of 3 per cent of gross domestic product.

. . . Now consider public debt . . . Estonia, Ireland and Spain had vastly better public debt positions than Germany.

. . . Now consider average current account deficits over 1999-2007. On this measure, the most vulnerable countries were Estonia, Portugal, Greece, Spain, Ireland and Italy. So we have a useful indicator, at last. This then is a balance of payments crisis.

. . . the ECB might paper over the cracks. In the short run, such intervention is even indispensable. . . Ultimately, however, external adjustment . . . is far more important than fiscal austerity.

In the absence of external adjustment, the fiscal cuts imposed on fragile members will just cause prolonged and deep recessions.

4. Definitions,

Balance of payments: A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year.

Current account: Net flow of goods, services, and unilateral transactions (gifts) between countries.

Deficit: a deficit occurs when a government, company, or individual spends more than he/she/it receives in a given period of time, usually a year.

Fiscal: relating to government finances, esp tax revenues.

Public debt: Issues of debt by governments to compensate for a lack of tax revenues.

Unilateral action, 2010-2011.

1. David Pilling and Christian Oliver, Financial Times, 29 October 2010.
Lee optimistic G20 will agree measures on trade imbalances.

Lee Myung-bak, South Korea’s president . . . said the G20’s broad rules to prevent currency and trade conflict did not mean that nations should be denied leeway to act unilaterally on controlling capital flows.

Seeking to avert a potential conflict over currency levels, G20 finance ministers . . . last weekend agreed to consider “indicative guidelines” for reining in current account imbalances.

. . . Mr Lee conceded the Seoul summit would probably be marked by “lots of dissent”, but he predicted that Germany and China would co-operate in crafting stronger rules.

. . . South Korea’s central bank this week floated the possibility of introducing restrictions aimed at cooling what it sees as destabilising investment flows. But Mr. Lee said these should not be seen as “capital controls”. They should be called “macroprudential policies” under the umbrella of the G20, he said . . .

Brazil, Indonesia and Thailand have sought to limit the disruptive effect of inflows, but Mr Lee suggested their attempts to tweak regulations fell within the scope of acceptable unilateral action. “I won’t define any country’s measures as capital controls,” he said.

“I do not envisage any country taking actions that can be regarded as being blatantly and obviously out of line with international co-operation principles.”

Mr Lee declined to define what the limits to unilateral action might be.

2. George Kerevan, The Scotsman, 25 November 2011.

Lost amid the gloom and doom was the news that . . . one of the big, bad US credit rating agencies . . . has lifted its . . . view of Iceland’s credit status and economic growth prospects.

. . . in 2008 Iceland’s three big banks – Landsbanki, Kaupthing and Glitnir – defaulted on $85 billion of debts, plunging the island economy into crisis. A similar fate befell Ireland, whose banks had funded an insane property bubble.

. . . This year . . . Iceland’s export surplus is growing . . . and unemployment is actually below Britain’s. . . the cost of insuring against an Icelandic default is now lower than the average for the eurozone.

. . . Independence is no . . . guarantee that a small economy will prosper – as Iceland and Ireland prove. In both countries, governments . . . connived with their banks to create an unsustainable credit bubble. . . the British government . . . did precisely the same. . . the “arc of stupidity” . . . contained big countries as well as little ones.

. . . Iceland and other small nations in coping with the aftermath of 2008 . . . are independent, nimble and willing to experiment . . . the Icelandic government put the banks into administration. Foreign bondholders were forced to convert loans into shares. . . while Iceland did borrow from the IMF and raise taxes, it avoided crippling austerity and . . . has managed to reboot economic growth.

Because Iceland’s banks were not bailed out, UK savers . . . into Icesave . . . did not get their money back . . . The British government did reimburse these savers . . . in September, the administrators . . . said that improving economic circumstances means there should be cash to repay the UK Treasury.

. . . the Icelandic . . . politicians and bankers . . . were not let off to enjoy their pensions and undeserved bonuses. . . a special prosecutor . . . has 200 . . . suspects in his sights.

. . . The final part of the Icelandic plan was to devalue the currency. The krona was cut by 50 per cent against the euro, boosting exports of Iceland’s two staples, aluminium and fish. This was allied with capital controls. Foreign investors were prevented from withdrawing funds from the country – vital to maintaining confidence and growth.

. . . the . . . islanders have bucked international authority and lived to tell the tale. They have ignored . . . demands from the bond markets and ratings agencies to make the taxpayer honour the debts of profligate banks and accept onerous, growth-destroying austerity. Yet this week, it was ultra orthodox Germany that the fickle bond markets turned on.

Budget debate, USA, 2011.

1. Gary Younge, The Guardian, 18 July 2011.

. . . unless Obama reaches a deal with Congress by 2 August to raise the country’s debt ceiling, effectively extending its credit limit so it can borrow more money . . . the US government will effectively run out of money. . . it would go into default not because it can’t pay its bills – like Greece – but because it won’t.

. . . Democrats want to reduce the budget deficit by cutting spending a lot and raising taxes a little. Republicans insist that only spending cuts are acceptable.

. . . Some liberals have criticised Republicans for playing Russian roulette with the fragile economy. Raising the debt ceiling is a routine part of the way government works. It happened 17 times under Ronald Reagan and seven times under George W Bush. The Republican stand-off, they say, irresponsibly places partisan political goals above the national interest.

2. John Higginson, Metro, 1 August 2011.

The president is seeking to raise the $14.2 trillion (£8.8 trillion) debt limit to tide it over until after the 2012 election.

. . . The Republicans believe raising it by £600 billion and cutting benefits is the way. Democrats want a £1.7 trillion rise and cuts in defence.

. . . Some £1.8 trillion is owed to Asian investors, while the credit crunch added £430 billion to the total debt in one fell swoop following a bank bail-out. Years of voter-friendly spending rises and tax cuts have also contributed.

7 August 2011.

. . . The White House, Democrats and Republicans battled for months, until the country was on the brink of default, before they finally agreed on Tuesday to a deal to raise the nation’s debt ceiling and slash the deficit.

. . . The plan finally agreed on Tuesday calls for US$917 billion in cuts over 10 years, but also mandates an as-yet-unnamed congressional panel to come up with another US$1.5 trillion in cuts by the end of those 10 years.

That fell short of what Standard and Poors has been saying would merit retaining the AAA rating. The agency wanted US$4 trillion in deficit reduction over 10 years, to include spending cuts and revenue increases, which Republicans refused to accept.

The ratings agencies were sharply criticised after the financial crisis in 2008 for not warning investors about the risks of subprime mortgages. Those mortgages were packaged as securities and sold to investors who lost billions when the loans went bad.

Japan had its ratings cut a decade ago to AA, and it didn’t have much lasting impact. The credit ratings of both Canada and Australia have also been downgraded over time, without much lasting damage.

Predictions, 2011-2012.

1. Ambrose Evans-Pritchard, 03 Jan 2011.

. . . the Atlanta Fed’s law is that every year of debt-based boom is roughly offset by equal years of debt-purge bust . . .

2. Bill Jamieson, Scotland on Sunday, 29 January 2012

. . . it now appears we are mired in a recession/recovery aftermath longer even than the 1930s Great Depression. . . a better comparison may be with an earlier great depression which stretched from 1873 to 1896. . . a general, long-lasting economic malaise similar to what we are now experiencing.

3. Martin Wolf, Financial Times, 2 May 2012.

Before the crisis . . . central bankers became priests of a monetary policy aimed at low and stable inflation. . . Central banks have not abandoned the religion of price stability, though some economists have muttered heretical thoughts about the need for higher inflation. Nevertheless, central banking has been transformed, in practice and theory.

. . . Central banks found themselves forced into historically unprecedented monetary easing, not just via extremely low interest rates but also via huge expansions in their balance sheets. . . Those who live on income from savings are enraged by the low interest rates. Almost everybody is angry about the bailout of the banks. The fact that the central bankers saved the world from a second great depression is disregarded. Nobody gains credit for eliminating a hypothetical event. It is perhaps surprising that central banks have not been even more discredited.

. . . The list of the assumptions that turned out to be false is lengthy: that the financial system would be self-stabilising, that managers of banks would prove competent, that financial innovation would improve risk management, that low and stable inflation would guarantee economic stability. We have witnessed a bonfire of the verities.

. . . as and when private lending recovers, the central banks will reverse course, selling assets into the market and reducing their credit to banks. But this will be a lengthy and fragile recovery.

. . . if they manage the exit successfully, which we will probably not know until the 2020s, central banks will confront a new world. They will need to balance their old roles as formulators of monetary policy with new roles as guardians of financial stability. . . the world of macro-prudential policy will also generate cross-border overlaps. Banks operating in one jurisdiction have the capacity to generate large negative spillovers on to other jurisdictions.

UK banks, 2011-2013.

1. Terry Murden, The Scotsman, 7 October 2011.

. . . The decision to pump an extra £75 billion into the economy confirmed that the Bank of England felt the need to act ahead of the third quarter GDP figures . . .

. . . There is already talk that this is a mere downpayment and that the level of support could rise to as much as £500 bn . . . It indicates that the crisis is deteriorating and is deeper and more chronic than anyone hitherto imagined . . .

. . . The MPC is gambling on its electronic asset purchase programme stimulating growth and not simply disappearing into bank balance sheets which is, more or less, what happened to a big chunk of the £200 bn already issued.

. . . the Bank of England . . . was faced with few alternatives, short of pointlessly cutting the base rate to 0.25 per cent. The governor Sir Mervyn King has also rejected the idea of lending directly to companies, leaving this to the Treasury and Chancellor George Osborne who will support the Bank’s move with a “credit easing” programme that will provide support for the private sector . . . It does suggest he’s lost faith in the banks to do the job.

2. James Lyons, 7 May 2013.

Lawrence Tomlinson, entrepreneur in residence at the Dept for Business . . . blamed the crippled economy on banks’ refusal to lend . . . “We need growth not greed ” . . . Mr Tomlinson’s outburst came the day after RBS chief Stephen Hester claimed the bailed-out bank had £20 billion it was “desperate” to lend out, but could not find any takers.

The RBS boss . . . added: “The only way for us to lend more would be for someone to say we didn’t have to operate by any commercial standard – that . . . we did not have to make a profit.”

The British Bankers Association claimed this was true across the industry because of the weak economy. . . It said lenders were approving eight out of 10 applications from borrowers.

3. Martin Flanagan, The Scotsman, 13 November 2013.

. . . rumours were rife in the City and Whitehall that relations between the former RBS boss and Chancellor George Osborne had frayed beyond repair because Hester was not making the bank the linch-pin of the UK recovery as quickly as Osborne wished.

. . . In terms of actual procedure and timeline, perhaps it did go exactly as RBS has said, with the Board being the final arbiter of Hester’s departure after five years of pretty successfully turning the inherited banking basket case around.

But if as a chief executive you know that your 81 percent shareholder wants you to go . . . only the most brass-necked and tin-eared boss would not take the hint.

4. Cheryl Latham, Metro, 3 December 2013.

Small businesses are still struggling to obtain finance under the Bank of England’s funding for lending (FLS) scheme.

. . . Last week, the household element of the FLS was scrapped in an attempt to slow the surging property market, leaving the scheme’s focus on SMEs (small and medium enterprises).

. . . Banks have drawn down £23.1 billion of cheap funds since the scheme started.

Low growth, 2014-5.

1. Ambrose Evans-Pritchard, 3 February 2014.

Factory orders in the US suffered their steepest fall for 33 years in January and also slowed further in China, raising fresh concerns about the strength of the world’s two biggest economies.

The shock figures set off a renewed flight to safety in New York . . . The Japanese yen rallied as funds unwound “carry trade” positions in Asia to reduce risk. Emerging market currencies slumped to a five-year low.

. . . Stephen Roach, from Yale University . . . said American households had not yet finished the epic purge needed to bring borrowing levels back to historic levels. The debt-to-income ratio has dropped from 135pc to 109pc since the . . . bubble burst in 2007 but still has another 35 percentage points to go, implying powerful headwinds for the US economy for years to come.

. . . Morgan Stanley has cut its growth forecast for China . . . There are widespread concerns over an estimated $1.1 trillion foreign currency debt owed by Chinese banks and companies, mostly borrowed through Hong Kong and Macau.

The US Federal Reserve insists that America’s growth has reached “escape velocity” as the housing market recovers and the shale gas boom revives large sectors of industry. Yet the picture is murky. The labour participation rate is still at a 50-year low of 62.8pc, evidence of a jobless recovery.

All key measures of the US money supply have been slowing for months. . . Tim Congdon, from International Monetary Research, said the Fed’s bond purchases kept the money supply afloat last year as the economy wrestled with deleveraging, leaving it unclear what will happen as the Fed withdraws support.

2. Alistair Osborne, The Times, 29 May 2015.

. . . the chancellor’s dream of a rebalanced economy, rippling with export muscle, is as elusive as ever. A key brake on GDP expansion was negative net trade, taking 0.9 of a percentage point off last quarter growth as a 2.3 per cent jump in imports of oil, machinery and transport kit outstripped exports. Hit by sterling’s strength against the euro, they fell 0.3 per cent.

. . . the 1.7 per cent bounce in business investment, defying predictions of a pre-election pause, is a small step in the right direction. But growth looks as dependent as ever on consumer spending.

3. Sebastian Burnside, The Scotsman, 7 August 2015.

The economy has grown for ten straight quarters, for only the third time in the past 60 years.

. . . Slowly lifting interest rates may seem logical but its not that simple.

. . . Fourteen of the 20 central banks in OECD countries have raised rates since 2009 . . . to fend off the threat of inflation . . . Every single one . . . has reversed those rate hikes. New Zealand . . . has tried on two separate occasions to get rates back up towards normal levels and it’s in the middle of unwinding its latest attempt right now. . . Recent history is littered with the junked forecasts of experts.

Austerity, 2015-2016.

1. Martyn Brown, Daily Express, 26 January 2015.

Greece delivered a defiant message to the EU last night after radical Left-wing party Syriza claimed victory in the country’s general election. . . Syriza wants to renegotiate Greek debt and end the EU’s austerity measures.

. . . Success for Syriza in renegotiating would represent another turning point for Europe after last week’s announcement by the European Central Bank of a massive injection of cash into the bloc’s flagging economy after years of trying to clamp down on budgets.

2. Conservatives must help everyone, not just the rich.
Iain Duncan Smith, The Times, 18 April 2016.

Since the 1980s there has been a tendency on the right to focus on building up the strong and securing the entrepreneurial culture.

. . . But . . . are we . . . as worried about the marginal tax rates that trap people in unemployment as those that disincentivise higher rate taxpayers? . . . Are we devising . . . policies that encourage employment of local people rather than ones which encourage corporates to turn to cheap, imported labour as a first resort?

. . . most tax cuts do not meet Arthur Laffer’s objective of paying for themselves . . . The US writer Reihan Salam . . . argues that those earning more than $250,000 should receive no tax cuts until surpluses have returned.

3. Jon Stone, 27 May 2016

Neoliberalism – the dominant economic ideology since the 1980s – tends to advocate a free market approach to policymaking: promoting measures such as privatisation, public spending cuts, and deregulation.

The ideology was initially championed by Margaret Thatcher and Ronald Reagan in Britain and America, but was ultimately also adopted by centre-left parties worldwide, under “third way” figures like Tony Blair.

. . . The International Monetary Fund . . . has long been regarded as one of the key international proponents driving neoliberalism in the developing world, often only giving financial assistance and loans on the condition that neoliberal reforms would be implemented in the target country.

Now . . . senior IMF economists . . . Jonathan Ostry . . . Prakash Loungani . . . and Davide Furceri . . . focusing specifically on austerity and the freedom of capital to move across borders . . . say that . . . “some policies that are an important part of the neoliberal agenda . . . have not delivered as expected.”

Brexit, 2016.

1. 24 June 2016, Independent (i).

Britain votes to leave EU in stunning blow to Europe. Sterling suffers sharpest fall since 2008 financial crisis.

2. Don’t assume all of Europe is united against Britain.
Stephen Booth, Daily Telegraph, 29 June 2016.

. . . there are three broad groups. The first . . . comprises the European Commission, European Parliament and the Eurozone-south led by France. They are pushing for a speedy British exit. At the other end of the spectrum are the Central and Eastern states where . . . the prospect of losing the EU’s most committed Nato state is a sobering experience.

The third group is Germany, the Netherlands and the Scandinavians, which . . . share Britain’s liberal trading instincts . . . and are wary of Brexit being used as a pretext for greater centralisation, which could further fuel domestic Eurosceptic sentiment.

3. Colin Hines, The Guardian, 4 July 2016.

Gordon Brown is wrong in thinking that economic globalisation . . . can ever “be made to work for all”. Its European manifestation of . . . free movement of people, goods, capital and services has ensured that people across the EU have been forced to compete with each other to their own personal detriment, but to the benefit of big business and finance. . . those disadvantaged by this process . . . when given an opportunity not available in a general election . . . leaped at the chance of using the referendum to say no.

4. Matt Ridley, The Times, 4 July 2016.

. . . despite the entreaties of virtually every authority . . . the government . . . Goldman Sachs . . . President Obama . . . Bob Geldof, more people voted for Brexit than for anything else in the history of British democracy.

5. Katie Allen, The Guardian, 4 July 2016.

With Westminster in chaos, it fell to the Bank of England governor to calm markets, households and businesses in the wake of the Brexit vote. Mark Carney . . . in his latest intervention . . . said . . . the central bank would do what it could . . . but . . . there are limits to what the Bank of England can do.

. . . firms and households will want more clarity on what comes next . . . the government must rebalance Britain away from reliance on debt-fuelled consumer spending.

6. Alison Marshall, 6 July 2016.

The EU is too big. If all the world became grouped into a few mega-states, there wouldn’t be enough independent experiments looking for better ways of doing things. Cooperation need not be imposed from the top down. See “Imperfection and Cooperation”, in “Evolution of Communication in Perfect and Imperfect Worlds”, .

7. Ed Conway, The Times, 22 July 2016.

Brexit is Britain’s great gift to the world: a giant . . . excuse for absolutely everything . . . when the single currency finally implodes or the broader European project disintegrates . . . as the ship goes down, one curse will be audible . . . Brexit.

Those problems the world economy is facing have been baked into the system for some time . . . productivity rates are falling pretty much everywhere, interest rates are below zero in many parts of the world and there is a distinct lack of demand. No one quite understands why, so . . . easier to blame it on the Brexit.

8. Jenni Russell, The Times, 10 November 2016.

For 40 years . . . people . . . have been sold the promise that free trade deals and the flows of people and capital around the world will bring them prosperity.

. . . Brexit times ten was what Trump promised . . . as in Britain this is a vote to reject an economy that prioritises turmoil and profits over the human need for stability, meaning, community and hope.

. . . Trump owns the whole train set now. He has the presidency, the House, Senate and Supreme Court.

Rearrangements, 2016-7.

1. Paul Marshall, Financial Times, 29 February 2016.

Even shortly after . . . the 2008 financial crisis . . . there was widespread agreement among regulators and central banks about its origins: an overleveraged US property market and overleveraged banks.

. . . Anglo-Saxon regulators focused quickly on the root of the problem. The US introduced the Volcker rule to constrain proprietary trading activity; Britain adopted the Vickers proposals to create a firewall between investment and retail banking. The Federal Reserve introduced bank stress tests as early as May 2009, and over the next six years US bank leverage fell substantially.

Not so the EU. . . while European bank leverage has come down from the heights of 2007-8, it is still on average higher than in the US, roughly 18 times bank equity capital versus 12. Some European banks . . . are still on leverage ratios of 25-30 times, enough to put fear about their stability at the heart of the recent market sell-off.

2. Callum Jones, The Times, 13 March 2017.

Iceland will lift capital controls on businesses, pension funds and households tomorrow.

The controls were put in place after the collapse of the country’s largest banks in 2008. Its finance ministry said yesterday that the decision, taken almost a decade ago, had “prevented a widespread economic crash, shielding the economy from severe depreciation.”

. . . The finance ministry said that the lifting of controls was an “incremental, measured process that focused on protecting the currency, addressing a balance of payments problem and tempering shocks to the Icelandic economy”.

3. Alistair Osborne, The Times, 18 May 2017.

What a day for Lloyds Banking Group. . . At last it’s got the chancellor off its back.

. . . in October 2008, the Treasury set about investing £20.3 billion of our money in Lloyds . . . We became . . . owners of a 43 per cent stake.

. . . not any more. The taxpayer is finally out, leaving Mr Hammond and Lloyds to crow about a stunning £894 million profit.

. . . no chancellor could have let Britain’s banking system keel over. But the government’s maths . . . excludes the cost of the money – and what else it might have done with it. As Hargreaves Lansdown calculates, had it stuck the cash into a bog-standard FTSE tracker fund and reinvested the dividends, it would now be sitting on £46 billion, more than twice as much.

Loose money, 2017.

1. Warning lights flashing as debt ratios rise and Fed lifts interest rates.
Ambrose Evans-Pritchard, The Daily Telegraph, 26 June 2017.

Contrary to the widespread belief that the financial crisis of 2008 was a once-in-a-century event caused by speculators . . . the venerable Swiss-based Bank for International Settlements . . . has warned . . . the current . . . financial cycle . . . could finish in much the same explosive way.

. . . The deflationary forces of technology and a globalised labour force mean that trouble can creep up . . . before inflation emits the usual warning signals. . . The entry of two billion people into the global economy from China and Eastern Europe has dampened wage growth. . . Excess stimulus by central banks goes into asset bubbles instead.

. . . a decade of ultra-loose money . . . that washed across international finance when the US Federal Reserve slashed rates . . . and launched quantitative easing. . . kept the lid on debt service costs and masked risk.

. . . Policy normalisation presents unprecedented challenges. . . any rise in US borrowing costs is transmitted rapidly through the global system. . . The “great unwinding” of central bank largesse comes as early warning indicators for financial crises are already flashing red in China and Canada, and are approaching storm levels across large swathes of emerging Asia. . . A strategy of gradualism is no panacea, as it may encourage further risk-taking.

2. Gabriel Wildau, Financial Times, 20 October 2017.
Central bank governor warns of “Minsky moment”.

. . . A Minsky moment, named after the late US economist Hyman Minsky, occurs when hidden risks in an economy suddenly manifest themselves and asset prices slump, leading to defaults. Minsky believed that financial markets were inherently unstable as periods of prosperity lead to excess optimism and irresponsible debt-funded investment.

. . . the governor of the People’s Bank of China . . . said corporate debt in China was “very high” and that household debt, while still low, was rising quickly . . . Mr Zhou urged his country to ease controls on cross-border capital movements and allow exchange-rate flexibility

. . . Economists have warned that China’s extraordinary debt build-up since the 2008 financial crisis has created severe risks for the economy

3. Gabriel Wildau and Tom Hancock, Financial Times, 20 October 2017.

A senior Chinese legislator recently warned in unusually blunt terms that the economy has been “kidnapped” by property.

. . . Chinese savers have few options for investing their money. The stock market is volatile, returns on bank deposits are meagre and foreign exchange controls largely prevent households from buying foreign assets. Housing is the least bad option for many investors.

4. The Times, 3 November 2017.

The Bank of England’s decision yesterday to raise interest rates is historic, being the first such increase since 2007 . . . it cannot be interpreted as a sign of strength in the economy. Rather, the Bank is taking an opportunity to ameliorate some of the costs of a decade of unorthodox monetary policy. . . The spike in inflation arises from the depreciation in sterling after the Brexit vote. . . The collapse of the western banking system and consequent bitter recession still cast a very long shadow over Britain’s economic performance.

. . . The cost of borrowing remains extraordinarily low. . . The Bank of England cut rates dramatically to 0.5 percent in 2009, after the failure of Lehman Brothers panicked financial markets. Rates stayed at 0.5 per cent until the unexpected vote for Brexit last year prompted the Bank to cut again.

. . . The low cost of credit has probably encouraged a misallocation of scarce resources, keeping inefficient companies afloat. . . Yesterday’s rise in rates offers the prospect of slightly more normal and less distorting policies.

Further reading:

The crash of 2008: causes and re-regulation.

Inflation, interest, money supply: currencies and targets.
Money-printing, currencies and trade, sectoral balances, Brexit.
Inflation targeting, deflation, alternative targets.


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