The new lending scheme initiated by the government through the Bank of England is imaginative and offers the kind of initiative which, properly used, will help the economy. The key phrase is ‘properly used.’
We know that there is mounting anxiety that the crisis in the euro zone is stifling the recovery in the U.K. This blog is not convinced of this entirely, but it is the current political mantra. Other parts of the world are doing better and if you aim at these, there is good opportunity; witness our booming foreign owned car industry. Underlying all the economic issues of the West is the crisis of debt. Overhanging the UK is the second largest total debt in the whole world, second only to the US. In the US total national debt is about 1x GDP. In the UK it is x4 of GDP. In money the figure is a little short of $ 9 trillion. In comparison it is twice as high as the next highest, Germany.
This grotesque debt overhang includes both private, public and corporate debt and at some point has to be repaid. Meanwhile it has to be serviced. Set against this background, economic stimulus based upon more borrowing is little short of silly. Unfortunately modern adherence to the free market, a concept seriously dented in several places, gives the banks the money and they do the lending. In earlier times, which in retrospect were more successful than perhaps we thought then, there were often significant restrictions on to whom banks could lend and for what purpose. These always formed a key element of the Budget.
Politicians, including Osborne (what a busted flush the Chancellor is becoming) are slow to grasp that easy loans and cheaper mortgages are the path to calamity. This new money must not on any account contribute to the inflation of static assets and it must on all accounts stimulate production and employment. Thus, businesses making things which can expand and take on people, infrastructure projects, plant and machinery, re-tooling, research and so forth should be where this money goes.
Under no circumstances should it get into the housing chain. We are just beginning to see signs (not in the South East) that house prices have at last fallen to the point where first timers can have a go. The value ratio is now 4x income. It is still too high. Until it drops to 3x, sustained recovery is impossible and until it drops to 2.5x, the economy will be unable to take off. Until it does take off the chances of paying back $9trillion are slim.