Economic Priorities

A casual observer may have been led into thinking that the recent credit crunch and recession were caused by profligate governments, with Governments spending and borrowing too much. Much attention has been focused on the need for fiscal austerity and less on ways to maintain recovery and help reduce unemployment.

Governments are not entirely blameless, during the boom years, for example, the UK allowed  debt to GDP to moderately increase rather than taking opportunity to tackle structural deficit. (approx. rose from 30% to 36% of GDP 2002-2007). Many western economies do have structural problems with long term trends creating a pension time  bomb. But, you can’t solve long term structural problems by ignoring pressing short term issues.

But, to blame all our problems on government borrowing is to ignore the real problem. See: Causes of economic crisis

The credit crisis was driven by failings in the free market. It was caused by banks lending money they didn’t have. It was caused by rating agencies failing to assess risk. It was caused by market sentiment getting carried away with the concept of never ending growth. It was all these factors that caused a credit and asset boom and bust. By and large government debt has risen as a result of this bust and collapse in tax revenues. If the government had not taken some of the strain in falling demand, the situation would have been much worse.

You can blame the government for failing to regulate the private sector. But, the idea that the recent recession were caused by government borrowing is false. – Not all countries had large debts at the start of the crisis. A country like Spain had very low debt, it was only when the recession hit that government borrowing rose rapidly.

If only European governments could show as much energy for regulating private finance, and reforming labour markets as they have shown in introducing austerity to Government debt.

Interestingly the IMF are calling for a strict levy on banks of £6bn to help insulate against future banking crisis. (link Guardian) The IMF are hardly, ideological opponents of the free market. Generally, it makes sense what they are suggesting. Will western governments take these ideas on board?

Fears over Double Dip Recession

There is a growing fear of a global slowdown and possible double dip recession. Certainly the policies of the ECB are not helping.

3 thoughts on “Economic Priorities

  1. I don’t think the IMF’s proposed levy gets at the root cause of the problem, which was the ballooning of the private sector credit creation process (i.e. commercial bank created money).

    The obvious counter to the latter problem is to bar or curtail money creation by the commercial bank sector: that is ban fractional reserve banking and go for full reserve banking. Milton Freidman favoured this in a paper in the American Economic Review in 1948.

  2. I think you have a point here. The problem now is that the recession will cause governments to try spending more to get out of the problem. This can only cause the problem to get worse.

Leave a Reply

Your e-mail address will not be published. Required fields are marked *