Is the Economy Stupid?

Posted on Thu 20 November 2008 in misc

The economy has been very much at the top of the news agenda (modulo dancing hysteria). I've recently added TV superstar Robert Peston to my feeds and I do find his articles very enlightening.

There seems to be a growing furor over the banks reluctance to start lending again. What I don't understand is how we've come to the conclusion that the correct remedy for a credit crunch bought about by ten years of cheap money is to increase the availability of cheap money? One would hope the banks have learnt their lesson about lending more money than they have to potentially bad risks. If they continue behaving as they did last year we would be heading towards an even greater fall further down the road.

There are problems with companies that are over extended with their lines of credit. However as Peston points out most small businesses are actually well prepared for the downturn. Their problems are not with the banks but with the larger companies that are starting to delay payments because they have over extended. The raw capitalist solution to this is for a frenzy of bloodletting as these unprepared companies undergo rapid contractions or takeovers by people who have a better idea how to run them. However this is not politically acceptable. It seems the politicians would like to solve the problem by pouring taxpayers money into the banks hoping we the consumer will ignore the current conditions and keep spending on our credit cards. Much like that "last pint" the end result is likely to be an even longer hangover where we ask ourselves what were we thinking.

A lot of energy seems to expended on getting the housing market moving again. This seems to fly in direct contradiction with the stated aim of making housing more available to first time buyers. I admit I have a vested interest here but surely what the housing market needs is a readjustment where house prices can realign with earnings. It seems to me like another case of trying to re-inflate a slowly bursting bubble.

Of course I'm no economist so what do I know?