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| Bean or Congdon: were the bailouts necessary |
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| Written by Giles Wilkes |
| Wednesday, 26 August 2009 15:59 |
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Charles Bean of the Bank of England has delivered an in-depth speech on the subject of the Great Contraction. Many of its observations will be familiar to you students of the Crunch, but they are exceedingly well-put and, coming from an influential BOE character, worth reading. Above all, he asserts that the credit crunch was a key determinant of the deep economic recession that followed the turmoil of September/October 2008. He provides several mechanisms: the loss of wealth, the withdrawal of credit, feedback loops between the banking sector, households, demand, house prices, back to banking, and sharply lowered expectations of future economic growth and credit availability. Above all, he thinks bank capital is essential - which is why the recapitalisation of October 2008 was so important:
Who could argue with this? Not me - it is hard to imagine what the world would look like had the banks' diminishing capital been allowed to carry on falling last Autumn. But 'bustling with economic promise' is unlikely to feature in the description. But Tim Congdon has a radically different view, one that to me seems to cross the line into the realm of ideological barminess. The banks didn't need the capital, they were bullied into it. The economy would have been fine if the government/BOE had only provided enough liquidity. Bank capital is nothing to do with it:
What an amazing account. Compare with this from the FT at the time:
And never mind that plenty of banks also chose to raise capital, including for example HSBC which was far healthier. According to Congdon, the economy only turned down because there were warnings of a big recession from Government: yes, that's right, the famous free market that monetarists trust so well in other areas can be led round by the nose by what Darling thinks will happen. Whereas Sumner thinks the markets were showing amazing prescience in predicting a recession, predictions that the government authorities ignored. I am still in the dark about what true monetarists really think about markets - are they perfect efficient instruments for the prediction of future events, or dumb animals that can be manipulated with ease by central authorities? Both views seem to emerge from these writers. Read both Bean and Congdon. The latter is great, because he lays bare the way monetarists (are forced to) think if they are to be consistent in their diagnosis and prognosis. His account for how increased money can boost the economy without banks having increased capital is particularly, um, courageous. Tyler Cowen agrees the bailouts were a good idea. In other news: Gordon Brown finally admits the inevitable. Too late: credibility blown - chance of leading rather than following debate gone. Debate about fiscal crisis in US is hampering Obama's reforms. Excellent discussion from Mark Thoma about the real use of macroeconomic models. Prediction is not the point. A really gloomy prognosis from Tim Price.
The IPPR calls on the government to ask richer students to pay their fees upfront. |
| Last Updated ( Wednesday, 26 August 2009 20:55 ) |



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