Andrew Sentence ruminated on whether Britain’s bust was preceded by a boom. We have to puzzle over why he felt obliged to put a question mark after the title: The Current Downturn – A Bust Without a Boom?

Most of us have no doubt that the UK suffered a boom. So why the question mark? The answer is to be teased out of the insight he offered into state of economic thought. Speaking on 9 December, he said: “We need to understand better the two-way interactions between the financial system and the macro-economy which have become clear as this crisis has unfolded.”.

Selective Amnesia

The Bank of England was established in 1694. So, despite 300 years of trading in the markets, the economists in the Bank apparently do not have a clear understanding of the way the money system affects the way we produce goods and services and share-out the nation’s income.

Given the wealth of evidence stashed away in the Bank’s archives, we have to conclude that, for some reason, the ignorance is wilful. Could it be that, if the Bank’s economists don’t have a grip on the connection between high finance and the real economy, it’s because they don’t want to know the full facts?

We are left to speculate about why the Bank is obliged to claim that more research is needed. One good reason is that the Bank keeps failing in its duty to predict turning points in the business cycle. It is supposed to keep the economy on an even keel. When it fails to do so – the way to avoid responsibility is to allege that there is a void in knowledge.

All rather pathetic, when you consider the vast resources on which the Bank can draw to ensure that it operates efficiently. In private enterprise, the managers who made such serious errors would be sacked. There is one notable exception to this rule, however, as we have discovered as a result of the way in which the managers of the world’s biggest banks have driven their institutions into bankruptcy. Instead of sacking them, they are rewarded with money out of the taxpayers’ pockets.

The two planks of their “never again” package of proposals are tighter regulation of the banks, and massive expenditure funding of infrastructure.

The regulatory ruse – some calling it Bretton Woods II – is an irrelevance. Over the past 200 years we had bank-funded crises under all supervisory regimes: no regulation, tight regulation and (latterly) light-touch regulation. Count on banks being at the forefront of events at the end of the next cycle.

Return of the Speculators

More interesting is the revival of John Maynard Keynes’ recommendation that governments should fund public spending to rescue the economy from a downturn. The Chinese have developed a £373bn package to head-off its recession, the money going into roads, railways, health care, education and low-cost housing.

The US plans a $200bn expenditure on infrastructure. With bridges collapsing and highways turning into chasms, the renewal of that infrastructure is imperative. The UK’s Gordon Brown is also preparing to announce a similar spending programme. Already the speculators are jockeying to cash-in on the huge increases in land values that will flow from this social investment.

This social spending is necessary, but why has it taken a financial crisis to induce the investment? By itself this spending is a key element in creating the conditions for lopsided growth (to say nothing of social injustice) over the next cycle.

Paying back the Debts

In China, for example, the developers who made themselves billionaires out of real estate have cashed in their urban chips and are opening pig farms. Pig rearing is subsidised by the state. And: the choice of the location of these new “farms” just happens to be close to proposed railway stations. In other words, these shrewd operators are continuing to farm the public purse. In due course, their pig yards will be sold for fortunes to commuters using the new railways.

The massive debts being created by states around the world to fund these investments will have to be paid back. Who pays? The leaders hosted by George W. Bush this weekend haven’t got a clue. So, as usual, the cost will fall on the taxpayer.

This is the final ingredient in the matrix of policies that will deliver yet another “bog standard” boom/bust. As the net gains from all those billions spill over into the land market, the location-louts will return to our TV screens to proclaim a new era of eternally rising house prices. Hail the return of the glory days!

Following the financial system’s cardiac arrest – and cash transfusion – the crisis begins in the arena where we live and work. Employers will accelerate their lay-offs, as credit becomes more expensive and consumers cut back on their spending.

But there will be no bail-outs for the corporations that make things that people want to buy. The value adding organisations will be overlooked as Governments begin to plead poverty, and turn a blind eye as the dole queues lengthen.

Where are the Macho Men…

When the going was good, the politicians aped their celluloid heroes by displaying their prowess for making “tough” decisions. Whatever happened to that species of statesman, just when the world needs them?

In America, George Bush’s presidency is not lame – it died at the microphone, as the president pleaded for Congress to back his futile $700bn bail-out.

In Britain, the bruiser politician, Gordon Brown, has handed over responsibility for policy-making to a “national economic council”. The man who wouldn’t let go of domestic policy during his 10 years in the Treasury has passed the buck. This is the control freak who denied Tony Blair, the then prime minister, advanced knowledge of what was going into a budget.

For those glorious 10 years, Brown kept repeating the two concepts that displayed the image he had of himself: tough, and prudent.

The tough guy is now hiding behind 19 nonentities, on whom he can place the blame when the country elects a new government in 2010. And as for prudence – Brown has been one of the most reckless stewards of the nation’s finances in modern history. He has squandered an incalculable figure leaving the beleaguered taxpayer to foot the bill.

…when we need leadership?

We didn’t need leaders in the good times. With the global economy now in tatters it is not the time for faint hearts – it’s time for tough guys who know what they are doing. Not the wimps who stalk the corridors of power playing politics and putting self-gain ahead of the country’s future.

Yet, that is what we have: people who have escaped into a dream world of denial.
None of them have a clue about what really caused the money markets to crash around us. This means we are now exposed to the cruel decade that lies ahead. The Ship of State is wrecked, leaving us all up the creek without a paddle.

Paradoxically does this not present a wonderful opportunity for the rest of us to take a grip of our destinies? If we work out the causes, identify the cures, and organise our collective energies – can’t we invoke the democratic will in favour of the substantive changes that are needed to prevent this ever happening again? I don’t feel that this act of selflessness is out of the question if anything actually the British people are beginning the search for a cause to fight for.

If we don’t the outcome will be simple. The wimps who talk “tough” will continue to flourish at the expense of the rest of us. And when we eventually look back – reflecting that we should have acted – we will only have ourselves to blame.