Friday, February 20, 2009

The Recession: 'Suck it up'

It's rare that I praise an article which has appeared on LIBERAL CONSPIRACY, but Aaron Murin Heath's pieced headlined WHY DO OUR POLITICIANS CONTINUE TO MISLEAD IS ABOUT THE RECESSION is a really original piece of writing. If it were written by someone on the right he'd probably be accused on adopting a 'do nothing' approach. His central argument is that recessions happen, there's nothing unnatural about them and we just have to deal with them...
What bothers me though, is that people - politicians and the media mainly - view this recession as something that needs treating. When in fact, rather than being the disease, the financial crisis is the cure.

The recession is a market correction of a hugely over-inflated housing market (it will correct, and home values will/may return to a more realistic level of appreciation). The recession is a reaction to borrowing on a massive and wholly unsustainable scale. The recession is the global economy snapping back, as rampant growth surpassed the finite resources we have available.

We should stop thinking of the recession as something we can spend our way out of, and just swallow our medicine. Governments, rather than trying to perpetuate a bankrupt economic status quo (see the reduction in V.A.T.), should be using funds to provide basic safety nets for those who fall through the cracks.

We should stop lying to ourselves. We need to be honest. We can’t afford to continue spending money we don’t have. Continuous growth is an illusion. Markets will fluctuate. That’s the way it is. We spent more than we had. We borrowed beyond our means. And now we have to suck it up.

Sorry. But we need to grow up. And our politicians need to stop bullshitting, and tell us what we don’t want to hear. The recession is the cure. Now let’s stop making matters worse, and deal with it.
I contrast this with a comment left under the article by Sunny Hundal, in which he says...
By re-capitalising the banks you’re failing to take your own advice. If you want everyone to suck it up, surely the banks should be the last to be bailed out since they’re the ones who screwed up big time.

If one really wanted to be radical and punish the people wh made the mistakes, then the govt woud create new, mutualised banks, which guaranteed deposits in other banks, but other than that let them go bust. Goodbye Lloyds!!

The problem of course is that it would take half the insurance markets, and hence the world markets with them.

Does he really think Lloyds Bank and Lloyd's of London are the same thing?


Richard Abbot said...

'The value of your investments may go down as well as up'. Remember that?

Bill Kristol-Balls said...

That phrase has been re-written for the 21st century Richard -

'The value of your investments may plummet as well as fall'

I thank you :)

Unknown said...

It just goes to show you can't be too careful.

Daniel Johnson said...

Arguably, it could leave insurance companies very exposed as well: AIG is the perfect example of how risk was sold on in complex ways. These were then insured by all sorts of large companies. I've no idea whether Lloyd's would be badly hit, but it might not be a good idea to push it too far...

Boo said...


Three words: Do nothing Party.

As someone who has looked at the house prices as a prospective first time buyer (and have promptly had to lie down in a dark room)these past couple of year. My one reaction to Gordons attempts to reinflate the bubble has been WTF.

House prices have tumbled by 20% from 2005. Why were they so high in the first place?

kinglear said...

Boo - property prices are almost always a function of the cash that can be borrowed to buy them. Cash dries up = prices drop. More cash available ( 6/7/8 etc times earnings and 125% LTV)= prices go up.
Iain- I have a fear that the insurance company crash might be waiting to happen - but that really is too scary to think about.That said, the solution to the problem is more saving,less borrowing NOT more borrowing,more spending. Its sore, its painful but as the writer says its the only answer

Oldrightie said...

All is well, Lord Scandal Prone of Harltlepool is going to talk Britain up. Bit rich from one of the clown's got us in this mess.

jwildbore said...

Iain - big leap by you to assume that he was confusing the two Lloyds.

I think the comment about insurance markets relates to credit default swaps. If a bank collapses and these are cashed in - the sheer size of the claims potentially puts over-exposed insurance companies at risk. I am not sure to what extent these policies were stress-tested when written - but banking collapses on this scale are unusual.

As another commenter mentioned - the plight of AIG is an example. This leads to contagion where re-insurance companies get hit and the collapse acts like a domino. The US Government stepped in to bail out AIG for this reason.

LloydsTSB together with HBOS represents a very large bank - the ripples could be huge.

Man in a Shed said...

There's a lot of sense in what Aaron Murin Heath said.

There was a lot of sense in what John Maples said also - but he caught hell for it.

Weygand said...

Sorry, but this argument wrongly conflates the disaster and the effects of the disaster - the recession and the effects of the recession.

The recession is inevitable and must run its course, but it is possible to have some influence on exactly what that course will be.

In theory, steps might be taken to mitigate the overall effect, but even were this impossible, one can certainly alter the place where the burden is felt.

Should savers suffer to help the indebted, should certain sectors of the economy be given preferential treatment for the wider public good etc?

There can few more important current political debates than that of deciding which parts of the economy/society should have their burden relieved and which have it diverted upon them.

Nick Thornsby said...

Recessions do happen, but the long term trend is still an upwards one. But a recession is not a good thing because people, disproportionately the poorest, suffer.

Recessions (a shrinking of the economy) are caused by slowdown of spending (which in turn is caused by a reduction in confidence, which in turn is caused by numerous things, in this case a financial sector crisis).

So the more people and businesses cut back on spending, the deeper and longer the recession becomes.

The Government can either do the same as businesses and people and cut back spending (or keep it the same) thereby reducing demand (or keeping it the same as before the recession). Or the Government can do things to increase demand within the economy: cut taxes or spend on infrastructure projects which will obviously make the recession less bad for many people, and may take us out of it quicker.

Very often, many spending projects can just be brought forward to stimulate demand now and funded through borrowing (taxes deferred), which makes no difference to public debt in the medium term. It is also a sound investment because ending the recession sooner, or keeping more people in work, helps Government tax receipts, which would otherwise suffer even more.

Tax cuts or extra spending (that wasn't already planned and is funded through borrowing) are a different matter because you have to judge whether the value of doing them (in the short term) is more than the cost of doing it (in the medium/long term).

The government's fiscal stimulus hasn't worked because it is not bold enough and it is not targeted to be most effective.

Tory policy would lead to more people losing their jobs and would probably lead to the recession lasting longer.

Madasafish said...

I expect the FTSE to end 2009 at 2,000.
And all the UK major insurers to be bailed out by the Government.

And gold to reach $2000.

SO far all is on plan.

(and I am deadly serious and having put my money etc, I'm doing very nicely so far - up 60% so far this year.

Anonymous said...

They mislead because the messenger always gets shot! Or they get accused of talking the economy down. What is truely disgraceful is people lose money because of this false optimism!

There is a point when things will turnaround: the point of equilibruim - from a selfish point of view because my job has already been lost i hope for it to be quick but savage rather than years of poor performance. The bounce back in this scenerio might enable me to refloat.Unfortunatly "One Eyed Idiot" has ensured years of poor performance through his wast of money on things like VAT!

Michael Heseltine told it how it is last night on Question Time when he said that people looking for a Keebab in Peckham might not have the choice of shops but whether they could afford to buy it or not!

The economy is not going to turn around any time soon - there is a fatal lack of confedence! (Something Hezza pointed to as well!)I don't think the avalance of job losses likely to hit us has started either yet - it was more like a bit of drifting snow since Xmas.

javelin said...

Recessions aren't 'natural' - they don't need to happen. Human greed is natural and that will lead to a recession. Correcting the markets means correcting 'greed' and other negative aspects of human nature. Gordon didn't correct greed, he encouraged it.

The Labour Party has allowed greed to thrive amongst amongst a large percentage of the population and donors as a means to and end to distribute wealth from the tax paying middle classes. I presume the Conservatives would have allowed greed to thrive (like it did in the 80s), but would not have taxed and spent so much.

Both parties have had their eras of allowing greed to thrive. The nature of the Labour party means the consequences will be worse.

Both Government and Companies have been guilty of not putting money away for a rainy day - Government wasting billions on social programmes and Banks wasting billions in bonuses. Finally, money is not invested in this country as jobs and investment is off-shored by both companies and Governments.

The main thing that will come from this recession is a MASSIVE GLUT of EMPLOYEES. The future. The future will be about preserving high paid jobs and savings in the UK.

The Grim Reaper said...

Labour Party trolls all over this site today, aren't there Iain? They must be getting worried.

Aaron Murin Heath is correct. I have no more to add to that.

Bob said...

Given the amount of financial services cross selling between prodcts/loans/insuarcnes, the banks are the majority sellers in the personal market in these areas.

pxcentric said...

The banks' profits remain in private hands, whilst the debts have been nationalised, because "we" spent more than we had.

In other words, we are to be punished for doing what we were asked to do.

This is an outlandish confidence trick and the perpetrators will be found out. Best not to be on their side when they are.

Anonymous said...

Labour are the Party of Financial Incomptence and supported by the Liberal Democrats!

Labour LD Labour - Out Out Out!

Trend Shed said...

That is a great article - although it requires people to be honest with our situation as a country before they can agree with the article.

I imagine that this is where I will differ with Gordon Brown, because I suspect that he would disagree wholeheartedly with the article.

Unknown said...

It's not about LBG and LoL being the same thing, it's about where insurance companies (which are often pension funds) keep their vast reserves of cash inbetween taking them in and paying them out. is a case in point.

Chucklenuts said...
This comment has been removed by the author.
DiscoveredJoys said...

I've often thought that statements like 'capitalism is dead' or 'the market is broken' show that some people misunderstand how stuff works.

Markets overheat, and then correct themselves. Regulation and governemnt intervention are meant to smooth out the fluctuations somewhat.

Unfortunately the Nu Labour 'Government' chose to lighten regulation and encourage the expansion of the market - into a government assisted 'bubble'.

Having pumped up the economy too far they are now almost certainly making the 'correction' deeper by borrowing more money.

We would have been better off if they had been the 'do nothing' party.

javelin said...

Through all of this what has remained constant is that the fundamental economics of the HUGE scale of the UK Government debts, and the reliance on cheap credit in so many business models. Think about which businesses need credit to see them through (1) any seasonal business - such as farming or tourism (2) any project based work where money is paid at the end of the project (3) any investment in plant and machinery that is paid back by production of goods in the long term - such as car makers. All these problems have yet to unwind in the economy. The potential for problems is staggering.

The bond markets have priced in unemployment to reach up to 15% over the next 3 years and Government spending will be forced to be cut by up to 25% as foreign investors will refuse to lend the UK the money because they believe the UK Government simply wont be able to afford to repay the debt at the current levels over the next 10 years.

The Government wont have a choice it will be forced to cut, cut, cut and cut again.

rob's uncle said...

Re: ' TO MISLEAD IS . . ' ; I suggest MISLEAD US . .