How best to fight the recession?
"Fears that the power of interest rates to boost the economy is failing have left The Times Monetary Policy Committee sharply split over how the Bank of England should react today.
Worries that banks’ refusal to lend means that the cost of all borrowing is becoming less relevant have opened divisions over the best next move on rates.
Most members of the independent panel of economic experts are warning of the mounting threat to the economy from the lending drought and on the need for aggressive and unconventional action by the Bank and Treasury to tackle the issue.
But The Times MPC is deeply divided over the implications for today’s decision on interest rates, which is expected to involve a cut to under 2 per cent, a level not reached since the Bank was established in 1694.
Three members call for the Bank to cut rates by a full percentage point to 1 per cent, in what would be its third drastic reduction in three months. Yet such action is opposed by three other members, who argue that rate cuts have become an irrelevant distraction. This faction calls for radical alternative steps to force more bank lending and to boost the flow of credit to businesses. It is suggested that these could include extended guarantees for the banks and perhaps direct public lending to companies.
Even The Times MPC members backing a big rate cut today call for this to be coupled with unorthodox moves through so-called “quantitative easing” – pumping money into the economy and driving down commercial interest rates through the Bank buying up existing debt.
Sushil Wadhwani, a former member of the Bank’s MPC, who called for a full percentage point cut in rates, said: “Rates need to get close to zero quickly and the Bank should then shift to unorthodox measures.”
Bronwyn Curtis, of HSBC, agreed and also backed a one-point rate cut: “If the Bank has to go down the path of using unconventional measures, it is better to cut rates sooner rather than later to pave the way for it.”
A more modest half-point rate cut was advocated by Geoffrey Dicks, of RBS, Charles Goodhart, a founding member of the Bank’s MPC, and Sir Alan Budd, former chief economic adviser at the Treasury. Professor Goodhart said that uncertainty over the state of consumer demand and new wage deals, and the weakness of the pound, justified a more cautious move.
Two panel members – Sir Steve Robson, former Second Permanent Secretary to the Treasury, and Rupert Pennant-Rea, former Bank Deputy Governor – said that there was little point in cutting rates at all. Their stance was backed by Martin Weale, director of the National Institute of Economic and Social Research, who said that this meant there was also little point in voting for any rate change and opted to abstain.
Sir Steve said that “it is pretty clear that cutting rates is having little effect other than to destabilise sterling in a worrying manner”. He argued that the focus should be on the “crux of the problem”, which he said was banks’ “deleveraging” and resulting lending curbs, as well a “major loss of confidence” in many parts of the economy . . . The authorities need to address these issues directly . . . this would point to actions such as open-ended guarantees for the liabilities side of banks’ balance sheets or lending directly from the Government’s balance sheet.”
Mr Pennant-Rea agreed. “The best option is for the Government to guarantee bank loans, for specified purposes and for a limited period. It is high time the monetary debate concentrated on the banks.”
Source: The Times today
Many of you have already finished Unit 2 (Anastasia, Aidana, Long, Beavis and Bibi) others have doine quite a lot of it (Sairan etc) and others will be starting it.
Therefore your HOMEWORK is to outline (and be prepared to defend) policies to recover from the recession in the UK.
This is to be presented on Friday 23rd January.
This is also a Business Studies topic (James and others) so this is your homework too except you have to explain how policies to overcome/recover from the recession may affect a business.