Liam Halligan: End the grotesque bailouts and face reality

By Liam Halligan
The Telegraph, London
Saturday, June 20, 2009

http://www.telegraph.co.uk/finance/comment/liamhalligan/5587809/Its-time...

This column has long-argued that the Western world's policy reaction to "sub-prime" has been wrong. In my view, the grotesque fiscal bailouts and the money printing, the ongoing assumption financial regulation could be tweaked rather than reformed wholesale, have made our collective predicament much worse.

The consensus view, far from grappling with the technical and political difficulties of implementing the required policy response, has failed even to admit the extent of the problem. Yet such an admission is a prerequisite, the first step in fact, of doing what needs to be done.

For almost two years now, our leaders have been in denial, burying the details and delaying the really tough decisions. In recent weeks, though, something has changed.

For the first time since the credit crunch hit the headlines in August 2007, reality is punching through. Powerful people are breaking ranks and saying what needs to be said. Pretty soon we may even begin tackling the root causes of this debacle by facing down the vested interests and making the changes necessary to rescue the Western world from years of economic stagnation.

Earlier this month, Angela Merkel, the redoubtable German chancellor, took a stand and appealed for "a return to policies of reason" -- calling time on "quantitative easing," the deeply misguided policy that has seen Western central banks double the size of their balance sheets to buy government debt.

QE was always a ruse to recapitalise insolvent banks by the back door, so their powerful executives could avoid admitting previous mistakes. Yet it has shattered the world's faith in the West's policy-making competence. It has destroyed any authority we had to tell economies elsewhere what to do.

QE will result in high inflation -- in turn, destroying investment and jobs. And it will mean that, for years to come, Western taxpayers pay higher interest charges to service our government's debts.

Almost alone among the ranks of the seriously powerful speaking sense, Merkel was last week joined by Mervyn King. At the annual Mansion House dinner, the Bank of England Governor called for Gordon's Brown's disastrous "tripartite" reforms to be scrapped, returning banking supervision to Threadneedle Street.

That has to be right. UK banks have been able to act so irresponsibly because the authority to monitor them was split between the Bank and the FSA. In fact, Brown was so addicted to the political feel-good factor resulting from ever higher leverage that his system was explicitly designed to allow responsibility for reining in the banks to fall between two stools.

King also stated "it is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee".

These words echoed around the world. The Governor is calling for a re-instatement of the "Glass-Steagall" firewall -- the removal of which allowed investment banks to merge with commercial banks. That meant taxpayer-backed deposits could be used by bonus-fuelled traders to make high-risk bets -- in the knowledge the state would have to fund a bailout given that ordinary voters deposits were involved.

By calling for a new "Glass-Steagall," King is taking on Wall Street and the City -- among the world's most powerful vested interests.

Yet, politicians need to realise it's precisely because this safeguard was removed, and the "universal banks" became so big, that what started as a banking crisis has become a fiscal crisis -- a crisis so severe that some of the world's leading nations could default and, at the very least, several generations of Western taxpayers will be saddled with the bill.

Other harsh realities are now also coming to the fore. New figures confirmed UK government debt is rising quicker than at any time in history -- not least due to the bank bail-outs. As the recession hits tax revenues, May saw the biggest surge in monthly public sector borrowing since records began.

In this context, the Tories are now finally allowing themselves to face down Brown and his economically-literate allies -- by admitting spending cuts are necessary. How ridiculous does Brown sound when he contrasts "Labour investment with Tory cuts"?

Then there is "deflation" -- in my view, the "biggest lie" of all. In May, CPI inflation remained at 2.2 percent -- above the Bank of England's target. Were it not for the government's temporary VAT cut, the CPI would be 3.4 percent -- with the Bank have to write yet another public letter explaining why it's so high. We're a million miles from deflation.

As I've often said, the "danger of deflation" was always a myth -- conjured up to give Western governments an alibi to pursue wildly expansionary fiscal and monetary policy and perpetuated by the vested interests benefiting from such largesse.

If we're to emerge from this crisis, and avoid similar future disasters, powerful figures now need to recognise and expose such inconvenient truths.

* * *

To contribute to GATA, please visit:

http://www.gata.org/node/16