Is the sky falling in?


The economic news is unremittingly bad. The sky is falling in and all the solutions being put forward by the Government feel like trying to pushing a broken down car with a rope... The latest suggestions of guarantees of up to £20bn of loans to small businesses potentially involves very large taxpayer liabilities and is in effect a subsidy to bank lending. The whole story of this recession has been of the taxpayer shouldering all of the risks without any of the rewards.

Why are the partially-nationalised banks not being required by the Government to maintain the flows of lending? There does seem to be a confusion in the objectives the Government is setting the banks - telling them to lend more but also hold more in reserve and rapidly repay Government loans. As Vince Cable has said, the Government seems to lack the bottle to break the banks' lending strike. It finds it much easier to use taxpayer-financed guarantees than to get tough on the taxpayers' behalf. But the real problem is the complete collapse in what Keynes described as entrepreneurial animal spirits. No amount of government action can overcome that. I fear we are getting into increasingly unknown territory with the economy.


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