Yes the real problem is one of demand (businesses not even applying for loans as there is no point expanding) rather than supply of loans. Like you say many businesses especially small ones have no track record or collateral which is the market failure, the bank doesn't have enough information on them to make an accurate assessment. There is a scheme called Enterprise Finance Guarantee that small businesses can apply to where the government guarantees 75% of the loan to the bank in the event of default, so its still the bank that makes the decision on whether the business is viable, but it takes away some of the risk so the ones that are at the margin where the bank thinks they look like they have a good plan but feels its a bit of a risk, will get loans. There are limits as to the overall amount of cover any bank gets from the government though, so they can't just use this to guarantee all their loans.

the likes of lloyds are refusing to even read business plans or look through the books of businesses in certain sectors e.g anything property or construction related. liquidity is the life blood of any economy and the banking sectors refusal to release funds to viable companies strangles off growth and jepordises the viability of these businesses so the circle continues. The failure to lend on the basis that the economy is weak is a self fulfilling prophecy. The govt owning a section of the banking sector gives them a way of breaking this circle but its one the condems refuse to use

This why we need to do what I believe Cruddas is looking at in Labour's policy review. It is setting up regional investment banks based on the German model who's job it is to lend to businesses and take along term view. The idea may well be to not de-nationalise RBS but instead turn it into this kind of entity divided up into separate regional banks with this task in mind.

Any hint of that happening and you can bet your life this bunch of shysters will have it flogged off to their mates, no matter what the cost to the taxpayer

Which is why the government needs to start spending more in the economy to stimulate demand.

Osborne keeps saying his austerity plan has restored confidence on the markets, but what confidence is this? UK government bonds have low interest rates but thats a consequence of expectations of long term low interest rates from the B of E as much as confidence that we won't default, rates were never high anyway even when Labour were in power.

The 'market' has no confidence in the economy hence the private sector banks don't want to lend. They had all this supposed evidence that austerity can be expansionary because by cutting the size of the state it releases resources to the private sector so the private sector will grow, but it wasn't an issue of fighting over resources anyway because there are large numbers of unemployed workers and large amounts of investment funds being unused.

There are four components of demand, consumer spending, business investment, government spending and net exports. Most of our main trade partners are in a worse state or as bad a state as us so we can't expect huge amounts of exports any time soon, so if we're committed to cutting government spending we are relying on consumer spending and business investment - and where is this going to come from....?

The big joke is the government even rejects the tax cutting argument. If you want to stimulate demand then cut VAT and you get a direct effect on spending, because people only benefit from a VAT cut by spending. It's not like an income tax cut where people will save some of the benefit so it doesn't contribute to demand. But the Tories for some reason seem totally disinterested in this tax cut, the tax cuts they want is tax cuts for the top earners, which have the lowest effect on contributing to demand. The IMF has suggested the UK needs to look at VAT cuts as a stimulus but Osborne won't have it.

The Tories have never cut vat. They introduced it as part of the EU package at 10%. When Labour left office in 1979 it stood at 8% The first Tory budget put it up to 15% (they'd denied they'd double it in the campaign and they didn't

) They then increased it to 17.5% in 1990, where it stayed until the temporary cut in 2009. This cut was decried as useless by the Tories and Lib/Dems but IMO did more to stimulate growth than any other measure Labour took in that period. Almost the first thing Osbourne proposed was a VAT increase to 20%, The result is what we've now got.
The Tories believe in low taxes - but low income taxes which benefits the better off more than low VAT benefits them. It seems to me that it's an ideological thing with them. But the time for ideology is rapidly running out. Time for some pragmatism. We're up s h i t creek time to look for the paddle.

This is a very good point and I believe "major hound" hit the nail on the head when they said it was for ideological reasons they cut income tax and not VAT.

[url=http://www.telegraph.co.uk/finance/economics/9339754/Cable-calls-for-state-support-to-boost-new-house-building.htmlVince Cable calls on government to stimulate housebuilding[/url

Someone should remind the dopey old fooker he IS part of the government

What Cable is suggesting would have to be agreed between Treasury and Dept for Communities & Local Govt (Eric Pickles), its not something he could control in BIS. So Cable is saying this in public to try and put pressure on his colleagues, he has probably already been telling them this in Cabinet.

At least Cable is speaking out a bit and not just being a toady parroting the government line.

Wouldn't it be better if he was more forceful in presenting his views to Cabinet and getting them implemented, rather than constantly appearing like an embarrassing old uncle that everyone has to make excuses for?

Maybe he and Brown could form the a new party called "Brilliant but Bonkers"? The Monster Raving Loony party is old hat (literally) now and needs replacing something more pertinent to the current world situation.

There is of course collective responibility where the Cabinet is concerned. Cable's line is "things'd be a lot worse if it wasn't for me" Bear in mind that Cable is a former member of the Labour Party and as such is probably still at heart a social democrat. I wouldn't be surprised to see him do a "Hesletine" but he'll probably pick the moment he can have most effect.

Yes - Alastair Darling cut VAT to 15% for a year in 2009 but when the Tories came in they were quick to say that the cut in VAT 'made no difference' hence they hiked it up even higher than it had originally been. But of course when it comes to higher taxes for top earners, they are full of warnings about how this will devastate the economy because all the rich will go to Switzerland etc.

The Office for Budget Responsibility analysis released at the time of the election said that they estimated 48% as the optimum upper tax rate, which begs the question if Osborne was cutting from 50% why not choose 48% rather than going to a sub optimal rate of 45%...

I expect over the next few years we will see a similar story - the top 1% rich increase their wealth disproportionately whilst the other 99% become relatively poorer, as there is never any real evidence of 'trickle down' effects, but the argument then will be that the reason it isn't trickling down is because top tax rates are too high, and wages at the lower end are also too high, and you need to cut taxes for the top earners and allow wages at the bottom end to adjust downwards and THEN you will see some trickle down effects....

I'd expect to see quite the opposite over the medium term. Low wages for the majority stifles demand and over time causes the rich to lose out.

So the rich will be campaigning for a 'living wage'. I look forwards to it because their strong lobbying power might see it be delivered.

And you can add to that another excuse for the economy not picking up that employ laws are too restrictive and what we really need is "reform" making the labour market more flexible which is euphemism for making everyone fearful for their job and for wages to be driven down further as a result.

I used to associate the word "reform" with good things. Reform of bad practice, stopping child labour and so on. These days whenever anyone says a phrase like "Reform of the labour market" you just know they really mean the erosion of hard won and [unecessary[/u rights that [iwill[/i lead to abuses.

Osbourne



Tim Nice-But-Dim


i do wish this hadn't been pointed out to me.

I think this is important, as it doesn’t get sucked into pseudo-Keynesian multiplier mythology; if you invest it has to be in something that genuinely creates growth, but that’s the incredibly hard part in Western economies. It may be a populist meme that fat cat banks aren’t lending their bailout dosh to poor hard pressed businesses, but the real problem is businesses aren’t going to the banks with robust investment opportunities, instead you’ve got some firms sitting on reserves because they cannot see the investment opportunities they really would like to go after, you’ve got some firms choosing to pay down debt rather than borrow more because of economic uncertainty and then there are the ones who keep the myth alive, the failing businesses and highly speculative “opportunities” who would have struggled to raise finance before the financial crisis.

The reality is just so much harder the fit in with the populist narrative where it’s the banks who are at fault, firstly because it’s harder for people to conceptualise a structural lack of robust opportunities than have the idea of a general unwillingness to lend (no matter how misleading it is in practice), and secondly because it makes better viewspaper copy to talk about anecdotal businesses going down the tube because the bank wouldn’t plug the losses than it does to talk about how banks plugging losses on unviable businesses won’t lead to economic growth.

It’s the absence of genuine opportunities for economic growth that is the real problem in the UK economy and in many other Western economies, it is not an unwillingness to hike debt and indulge in half-baked New Deal style money pits which don’t deliver growth, but simply hang on the myth that you can load up with debt to do productive stuff and get a positive multiplier going. Conspiracy theories about this politician or that political party or this pantomime villain are just clumsy bits of misdirection, and building this or that political pet project, or appeasing this or that client group with a subsidy won’t bring growth.

Some of your post made sense ... but "pseudo-Keynesian multiplier mythology" tells me there's not much chance of your view overlapping with mine.

Except he's not very "nice" is he.

Now, "Tim, complete c**t, and thick as pig$h!t" , possibly more accurate.

I think Osborne has more than a look of a well-fed Stan Laurel about him

These two combine to.....

It pretty simple really:
pseudo-Keynesian because much of the vogue for "Keynesian" economics in recent times is pure opportunism based on the idea of governments increasing aggregate demand by deficit spending (stimulus), but it's only pseudo-Keynesian because where this tends to diverge from Keynes is that his management of aggregate demand would mean contracting it at the top of the economic cycle whereas pseudo-Keynesians would retch at the idea (for example New Labour didn't support it in office, and to be fair most governments would find it a hard sell to cut back in good times). So it's a kind of unviable half Keynesian idea that a deficit spending government keeps kicking the can until there's no road left. Also because Keynes was a clever man and he would have mocked the unfalsifiable supporting argument for such a strategy, that if your stimulus fails then it just wasn't big enough (repeat ad infinitum).

The second part is that much pseudo-Keynesian interest hangs off the idea of the multiplier, that if the government spends it will stimulate economic activity that will be multiplied throughout the economy, only problem is, in practice multiplier type effects are a bit of a myth. You could force banks to give £100 vouchers to every unemployed person in the country to spend in their local shops within one month of receipt, it would certainly pump money into the economy, but if those businesses just use the money to pay down their debts or increase their reserves you don't get much of a multiplier and you don't really get economic growth.

So I'm not a fan of pseudo-Keynesians and I don't think much of multiplier myths that underly much of their thinking, it's all a bit silly. If people want growth then they probably need to lobby the Government to do things they may not actually like or want, things only governments can really drive, like commissioning big infrastructure projects: airports, strategic rail links, better roads etc, things that will keep facilitating economic activity year after year, but then those sorts of things are years in the making.

Why does any of this apply currently? We are where we are with the economy whether it is part of a cycle or not. Any lack of contraction under Labour is completely irrelevant what can or should be done today.

Also back in 2008 lets not forget the banking crisis was a game changer and so no one has any idea what Labour would have done without it and IIRC Darling was not going to let the government carry on spending anyway.



Well the government has been printing money pretty fast recently and this hasn't stimulated the economy. Things like a VAT cut and investment in social housing (which would help solve the ever increasing housing benefit bill) are not giving £100 vouchers but are more direct form of government action that I thik they should be taking at this time. Rather than giving a darn sight more than £100 to rich higher rate tax payers in the vain hope this will "trickle down".



At the moment how would you tell a pseudo-Keynesians from a Keynesian? They would both be spending to invest in infrastructure. You could only tell the difference in several years time when (if) we emerge from the recession part of the cycle we are in now.

The economy would be in a different state now had Labour spent less (which they should have). That would have put us in a better position borrow the money we need to spend now. It doesn't help us, now the mistakes have been made, but Labour have to take their [ishare[/i of the blame for our current economic situation.



None of this excuses Labour's overspending prior to 2008.