LPUK does not support bailouts. While I have argued that limited banking bailouts were necessary, that is only in response to a regulatory intervention that should never have happened in the first place and would not have occurred under a libertarian administration.It is true that when government seeks to resolve a problem it created, it tends to make things immeasurably worse. This is no different. However, the choices here are to let the full consequences hit and hit hard with a shorter recovery or whether to gradually deflate the economy in order to mitigate the very worst effects over a longer time. Essentially it's the difference between allowing an aeroplane to nose dive into a fireball or to let it glide into a controlled crash. Which is better will be one for economists, historians and other mystic rune readers. In this instance the UK has opted for the controlled crash method, the effectiveness of which is, frankly, anyones' guess.
There are those who argue that the bailouts are throwing good money after bad. It is not a weak argument. Unless the accounting rules are changed it is entirely likely that the effects will be zero and that the money will be swallowed whole for little return only to end up back here again. As it is unknown which CDO bundles are bad and which are good we have no way of knowing how much is required to restore capital adequacy and properly restart inter-bank lending. We may have given too much, we may have given too little.
As it happens the signs are that it appears to be working and that inter-bank lending is beginning to heat up again. This is probably down to the fact that the sub prime crisis was not as large as feared and market confidence among the banks has returned to some degree. But the greater fear among all this talk of "green shoots of recovery" is that we will enter a double dip recession.
The very panic that caused the collapse of interbank lending could ironically be the very thing that prompts a real sub-prime crisis. And not even "sub-prime" at that. The resultant job losses of the credit crunch and the contraction of the job market could lead to bigger credit defaults, not least on credit card debt which is now said to outstrip GDP. For all we know this could nullify the sum total of the bailouts and the bank would still collapse taking everything down with it.
But then by this point the sum we actually gave to the banks compared with other losses would be somewhat of a moot point. This is all dependent on how deep the unemployment rabbit hole really goes. Who can say? I would love to make grand pronouncements but I have seen people far better qualified than I (actually that's just about everyone) admit that they haven't a "scooby do", so it would be arrogant of me to indulge in direct certainties. My gut feeling is that this is one of those very few instances where government doing something is better that it doing nothing.
That being said our present administration has taken it upon itself to bailout everything that so much as squeaks. Rather than restricting bailout activity to safeguarding the continuation of UK PLC, it seeks to bring everything under its direct control. There are strong arguments for ensuring the biggies do not collapse but we have been too eager to to bailout minor building societies you've never heard of, in trouble not because they have been directly affected by the crisis but simply because they have made seriously questionable investments. The purpose of these bailouts is not therefore for our economic survival but to maintain favour with the electorate.
The second tier of the bailout strategy is Keynesian spending. The idea that spending public money on civic infrastructure will keep money moving and that the resultant improvements will have a net return for the economy. There is some wisdom in that. But this is our government we are talking about. Our governments definition of investment much differs from mine or yours.
When we imagine investment on civic infrastructure we think of roads, schools, bridges and railway links. Our government on the other hand thinks of windmills and carbon capture storage system of zero value to the economy. Furthermore, as we have discussed at length on this blog, not only will this policy result in an energy supply shortage, it will also quadruple our energy bills thus negating any beneficial action (whatever that might be) the government has taken on our behalf.
And for some reason it does not end with the banks and the national grid. Mandleson has plans afoot to "invest" in the auto industry. A case for libertarian non-intervention if ever there was one. But while there are votes to be had, jobs must be protected! And so we have a government out of control, spending like a bankers wife on bonus day.
But even if such measures worked, this is all a sticking plaster at best. Present policy is predicated on the idea that a debt based, consumer spending economy is sustainable and desirable. It isn't on either score. We need to be producing and exporting, be that innovations, technology or whatever. While we live in a country which punishes profit, stifles innovation and entrepreneurialism, drowns our enterprises in red tape and continues to shift the regulatory goal posts, we cannot hope to nurture or retain the businesses we need to maintain even present levels of employment and our bloated state. Not least while we are sill members of the EU.
With that in mind there is only one obvious choice at the ballot box.
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