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Times : Worst Of Slump Yet To Come, Says Economist

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I know its on the blog but I felt it deserved its own thread.

We HPCers certainly seem to have an ally in Ann Pettifor.

How immensely gratfitying it is to see someone of such authority tell it like it is.

Link

September 1, 2009

Worst of slump yet to come, says economist

Ann Pettifor predicted a painful end to the good times. Now she says that only radical action can prevent further gloom

Phil Thornton

Ann Pettifor is a member of a select club — the seers who saw it all coming. Now the economist, who predicted the credit crunch as far back as 2003, believes that the worst is yet to come unless there is radical reform of the financial system.

Six years ago she parodied the International Monetary Fund’s annual economic forecast with her own — The Real World Economic Outlook. Then, in 2006, her book The Coming First World Debt Crisis, warned that rich countries were heading for a debt crisis that would overshadow anything seen in the developing world. Both were ridiculed.

With the British and world economies languishing in the worst recession since the Great Depression and with once-mighty banks reliant on government life support, she could be forgiven for being a little smug. Not a bit of it: “No, being Cassandra is not something I wish for. I hate this role of being a gloomer and doomer, as I’m an optimist by nature. But I am very pessimistic now.â€

She is dismayed that politicians have failed to seize the opportunity that the crisis has given them to embark on tough reform of the banking system. Stock markets have rebounded and house prices have stopped falling, but Ms Pettifor fears that politicians and households have started to relax prematurely.

“The economy is no longer in freefall and, as a result, there’s an enormous amount of complacency from politicians, in particular, about what will happen next. I believe politicians have given away the opportunity to restructure the banks and reconfigure the system.â€

She likens Alistair Darling, the Chancellor of the Exchequer, to a high-wire artist. “He thinks that if he can just keep his eyes closed he will get to the other side. Yet underneath him is this vast debt that has not been cleared off the banks’ balance sheets. Many of the banks are still insolvent and this has not been addressed.â€

Ms Pettifor, executive director of Advocacy International, which advises countries on debt management, made her name spearheading the Jubilee 2000 campaign to cancel the debts owed by the poorest countries. She believes that there are only three solutions to Britain’s woes: write off these debts as unpayable; convert the debt into equity; or use the benefits system to raise people’s incomes so that they can meet their debts.

She is baffled that the Government has used billions of pounds of public money to rescue the banks without insisting on any change in behaviour.

She highlights an admission by the Treasury that one company in three is paying interest rates more than nine percentage points above the base rate and is furious that banks such as Barclays feel able to offer bonuses reminiscent of the pre-crash boom. If the banks do not change their ways, she says, the Government must simply withdraw the insurance guarantees that have kept them alive.

Instead, public money should be used to bail out households and businesses threatened by bankruptcy. “The banks are not using the money productively, yet what we need is for the Government to spend more productively,†she says. “But now there is a consensus that governments should not spend any more in this crisis. That will tip us into a big depression.â€

Ms Pettifor, who is a fellow at the New Economics Foundation, a left-leaning think-tank, believes that it is not too late for politicians, regulators and even bankers themselves to embrace reforms that will prevent another cycle of boom and bust. She believes that a culture of easy but expensive credit, which she blames for the accumulation of unaffordable debts over the last two decades, should be replaced with a model of “tight but cheap creditâ€.

“Orthodox economists talk about cheap money being the cause of the crash. But it was not cheap — subprime homeowners were paying 19 per cent interest. It was easy money that was the cause.†This, in turn, led to the massive inflation in property prices — house prices trebled between 1997 and 2007. “We over-borrowed against these inflated prices. The rollicking times were rollicking and now we are getting a bollocking.â€

She was baffled by a recent letter to the Queen — from other leading UK economists — after she reputedly asked why nobody had seen the crisis coming. With a voice bordering on incredulity, she reads out a passage where the letter-writers say “inflation remained low and created no warning sign of an economy that was overheatingâ€.

“What about asset price inflation? We repressed prices and wages but turned a blind eye to assets,†she says, adding that central bankers must monitor asset prices in the same way that they track high street costs.

But how do we achieve cheap but tight credit? In terms of tighter lending standards, it means an enhanced role for bank managers. “When I and my partner took out a mortgage in 1970s we had to see the bank manager, who went through our finances with a fine-tooth comb,†she recalls. “That’s all you need — more bank managers making an assessment of risk.â€

Since she believes that high interest rates were a key cause of the crash, she says that low interest rates for loans are essential.

Her prescription for achieving cheap credit is more radical — nationalise the setting of the London Interbank Offered Rate (Libor), which tracks the rates at which the largest banks are borrowing money from each other and is used to set mortgage and business loan rates.

She says that government intervention to keep real rates at a level at which businesses can make a profit would help to stem the rise in insolvencies that, in turn, leads to people losing their jobs and their homes.

This taps into Ms Pettifor’s long-standing worry over the “financialisation†of the economy that has allowed banks to become the “masters, not the servants†of industry at the expense of genuine entrepreneurial activity.

Future lending should be directed towards sustainable home ownership and business activity, rather than speculation.

At times her model comes close to a form of Sharia, the Muslim financial code that forbids the earning of interest. Indeed, in her 2006 book, Ms Pettifor urged society to return to the traditional religious approaches to usury as a way of curbing the excesses of capital market speculation.

The final element of her vision is a “green new deal†to create economic growth and the jobs needed to fill the “crater†of lost employment and output caused by the crash.

Ms Pettifor would take a leaf out of the Bank of England’s book on quantitative easing but would direct new money to the Government to support green projects.

Private banks could lend to the Government at low interest rates for the same effect. “The fact is that when the Government spends, the private sector is the biggest beneficiary. If the Government announces a home insulation programme, it will be the construction industry that will do it,†Ms Pettifor says.

Her forecasts of a crash have been proved right, but will her latest warnings receive a better hearing? She admits that none of the three main political parties is likely to adopt her policy prescriptions. “There is a weakness in being too far ahead of the game.â€

Edited by Dave Spart

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she sounds a bit confused to me. No mention of the moral hazard of the bailing out of households that she wants to see.

Plus she wants low IRs but tighter credit conditions, and she wants bank managers to enforce this. :lol:

Altogether now.....I dream a dream in time gone by, when hope was high and life worth living. and so on.

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i dont like the sound of her ideas either

Agree on that. Is she Keynes's great great whatever? Divert bank bailout's to irresponsible debtor. Still the taxpayer who pays mind you.

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Agree on that. Is she Keynes's great great whatever? Divert bank bailout's to irresponsible debtor. Still the taxpayer who pays mind you.

Keynes never said that, he advocated saving during the boom to spend during the inevitable recession.

However our idiot leaders just like the spending bit irrespective of which part of the cycle we are in.

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Can anybody tell me why the banks were not allowed to crash and the money used to set up a national bank? Anybody?

Exactly.

It's like a big hotair balloon with a puncture but instead of letting it return to earth they print loads and loads of money to feed the burner to keep the balloon in the air. But they haven't fixed the puncture! They needed to let the banks fall and then set up a national bank. New regulated banks could have then entered the vacuum.

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Exactly.

It's like a big hotair balloon with a puncture but instead of letting it return to earth they print loads and loads of money to feed the burner to keep the balloon in the air. But they haven't fixed the puncture! They needed to let the banks fall and then set up a national bank. New regulated banks could have then entered the vacuum.

Good analogy.

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I know its on the blog but I felt it deserved its own thread.

We HPCers certainly seem to have an ally in Ann Pettifor.

How immensely gratfitying it is to see someone of such authority tell it like it is.

Link

"green new deal" - who does that remind you of?

False wars etc = False Greens!

"but would direct new money to the Government to support green projects"

When did any Govt learn how to spend money wisely, without chunks being taken out of the sum by Vi's all the way down?

Just think of all the executive directorship/Advisor being lined up for MP's in the new BIG BUSINESS of 'Green' companies!

Exactly how 'charities' work!

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Nobody seems to have mentioned this statistic out today.

http://www.statistics.gov.uk/StatBase/Prod...=2&Rank=208

http://www.citywire.co.uk/Adviser/-/news/m....aspx?ID=355638

Expenditure on acquisitions in the UK by

foreign companies decreased from £12.3 billion

in quarter one 2009 to £0.4 billion in quarter two

2009, the lowest quarterly value reported since

quarter two 1987. The number of transactions

fell to 14, the lowest level reported since quarter

two 1987.

There were 14 acquisitions of UK companies by foreign

companies in quarter two 2009. This is the lowest number of

transactions reported since quarter two 1987.

Expenditure on acquisitions in the UK by UK companies

decreased from £8.2 billion in quarter one 2009 to £0.7 billion

in quarter two 2009. This is the lowest quarterly value

recorded since quarter three 1992.

There were 41 domestic transactions in quarter two 2009, the

lowest number of acquisitions reported since ONS records

began in quarter one 1969.

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Nobody seems to have mentioned this statistic out today.

http://www.statistics.gov.uk/StatBase/Prod...=2&Rank=208

http://www.citywire.co.uk/Adviser/-/news/m....aspx?ID=355638

Expenditure on acquisitions in the UK by

foreign companies decreased from £12.3 billion

in quarter one 2009 to £0.4 billion in quarter two

2009, the lowest quarterly value reported since

quarter two 1987. The number of transactions

fell to 14, the lowest level reported since quarter

two 1987.

There were 14 acquisitions of UK companies by foreign

companies in quarter two 2009. This is the lowest number of

transactions reported since quarter two 1987.

Expenditure on acquisitions in the UK by UK companies

decreased from £8.2 billion in quarter one 2009 to £0.7 billion

in quarter two 2009. This is the lowest quarterly value

recorded since quarter three 1992.

There were 41 domestic transactions in quarter two 2009, the

lowest number of acquisitions reported since ONS records

began in quarter one 1969.

'Kinell.

Well spotted.

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Nobody seems to have mentioned this statistic out today.

http://www.statistics.gov.uk/StatBase/Prod...=2&Rank=208

http://www.citywire.co.uk/Adviser/-/news/m....aspx?ID=355638

Expenditure on acquisitions in the UK by

foreign companies decreased from £12.3 billion

in quarter one 2009 to £0.4 billion in quarter two

2009, the lowest quarterly value reported since

quarter two 1987. The number of transactions

fell to 14, the lowest level reported since quarter

two 1987.

/snip

^^^

What he said!

Edited by REP013

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The woman is a clown. She wants to bail out failed people and businesses? Why?

because it seems to be the defacto position of people in the meejia who vehemently oppose the bank bailouts.

They always want to append the line about bailing out greedy bankers with 'we must use that money to bailout indebted households instead.' It's some sort of socially reponsible schtick they've got going that they feel they must emphasise even if it makes them look like confused, misguided muppets.. Cable and co. used to pull that shit of IR's are 0, banks should be forced to lend as near as damn it to 0. If not, we should nationalise them and force them to do so....oh and force them not to repossess anyone while we're at it :blink: . And somehow this guy was supposed to have a clue about the housing market. He must be welcoming the inevitable shrinkage of supply and sharp upward trend in prices as a result of these actions. clown.

And the whole 'why are banks sitting on reserves provided by taxpapers' horseshite was never far away from their lips.

Nationalise them and FORCE them to lend they would crow. Until everyone stopped caring, and listening. And then Estate agents commenting on the housing market recovery took exclusive ownership of the force them to lend line.

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She's got it half right. We shouldn't rely on private banks to lend money full stop. The government should issue its own, interest free exchange notes and supply only just enough to facilitate commerce. That's the only sane money system as far as I can see.

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She believes that a culture of easy but expensive credit, which she blames for the accumulation of unaffordable debts over the last two decades, should be replaced with a model of “tight but cheap creditâ€.

hahahahahahah :lol:

Yeah I can see the banks falling over each other to lend small ammounts at a smaller profit. Half this woman's speil might be "on messsage" with HPC but this article is 90% horse dung.

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she sounds a bit confused to me. No mention of the moral hazard of the bailing out of households that she wants to see.

Plus she wants low IRs but tighter credit conditions, and she wants bank managers to enforce this. :lol:

Altogether now.....I dream a dream in time gone by, when hope was high and life worth living. and so on.

Letting a full blown deflationary crash follow its natural course would give us more hardship than we'd bargain for. She's trying to identify a way forward and I must say she is again many steps ahead of the pack.

I am particularly impressed by her description of the inflationary scenario, that would involve everyone receiving benefits to service their debts. It sounds thoroughly absurd of course but it recognises the fact that inflation cannot take hold in a benign way without wage increases and that these are not forthcoming.

As far as the green spending goes you might interpret it as Keynesian BS but you can also see it as a suggestion to solve the long term quagmire the UK's in. How on earth can the UK generate wealth in a globalised world. Now is the time to ask the question. Anyone got a better idea?

That woman is quality IMO. We need more people like her, capable of analysing problems before they occur.

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We HPCers certainly seem to have an ally in Ann Pettifor.

How immensely gratfitying it is to see someone of such authority tell it like it is.

I am sorry to disagree, but she is not an authority, and especially not an ally worth having.

She believes that there are only three solutions to Britain’s woes: write off these debts as unpayable;

Easy-peasy. Just why did no-one think of that before?

convert the debt into equity

It has been done and failed to help, seeing as there are no buyers except the taxpayer.

or use the benefits system to raise people’s incomes so that they can meet their debts.

She is off her rocker. Does she advocate putting foreign debtors on British benefits? It's not like it is primarily British debt that threatened to take RBS down. Even if so, their assets exceed the entire British GDP, so exactly who does she want to tax to raise the money?

She should stick to something she has a clue about, or blame the journalist for misrepresenting her ingenious views that are not utterly confused at all.

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So, yet another "tax the prudent till they bleed to prop up the bubble-blowers" advocate? It seems her only difference is that the Govt should feed the junkies rather than the dealers.

On ye go Hen! I'll happily pay shitloads of tax so that the debt-junkies can keep asset prices (homes) in a bubble well beyond my reach. :angry:

Edited to add: What's the fear of asset price deflation? They were quite happy to keep asset price inflation out of the RPI and CPI calculations - keep them out when they deflate and hey presto! No Problem!

Edited by Radge

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On her comments on Financial Services reform, I posted this:

The problem is most of our politicians are not smart enough to realise the confidence trick being deployed by the banks and City of London, and for those that do, it purely serves as a way to support profligate Government spending.

There is a money-go-round where the Bank of England through quantitative easing buys Government Bonds at over inflated prices from the banks, effectively giving them free money. They then use much of this money to buy new bonds from the Government. This enables the Government to borrow cheaply to keep the profligate spending going, whilst the banks get to make a safe, all be it low interest rate loan. Cash not taken up by the Government in this way ends up in other places such as the multitude of speculative casino operations run by the City.

The casino operations work rather like this. Imagine you have 3 gamblers, who agree to a game of poker. They each borrow £50k from a bank to use in the game. Player 1 wins and walks away with £120k, Player 2 holds onto to £30k and Player 3 loses everything. Player 3 now goes bankrupt, player 2 is an impaired debt as he only has £30k, and Player 3 is considered a roaringly successful player who has special and unique talent. Meanwhile the bank is now forced to right off £50k from player 3 and £20k form player 2 and so requires support from the taxpayer.

Now imagine an entire industry based on this principle and you have the UK banking sector.

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On her comments on Financial Services reform, I posted this:

I think I might print that up on a Tshirt.

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just aired on radio 4 with presenter winifred 'come here if you're 'ard enough, pal!' whateverherface.

basically r4 took devils advocate view that hp stabilising, wave of shop closures and related redundancies now over, green shoots showing etc.

ap said that the banks like lending sub prime because its easy money - until the default. as default happens often i wonder why they like to lend sub, even if it is 16 %. do they make so much on the few that do repay at 16 % that they can afford to allow the others to default, or rather we can as we now prop up the banks with tax cash.

ap thinks that if the banks continue to charge too much (in her opinion) to businesses to lend, enterprise suffocates, and that ruins the banks. a vicious circle as she put it.

i still have a nasty feeling she wants to qe, and give out cheap credit, and that her definition of tight lending is far too lax.

Edited by loginandtonic

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Since she believes that high interest rates were a key cause of the crash, she says that low interest rates for loans are essential.

Her prescription for achieving cheap credit is more radical — nationalise the setting of the London Interbank Offered Rate (Libor), which tracks the rates at which the largest banks are borrowing money from each other and is used to set mortgage and business loan rates.

She sounds clueless.

She needs to study AUSTRIAN ECONOMICS, if she wants to have anything useful to say

do you know what, Dr B, they all of them really scare me.

i dont think we have ever been so short of talent and economic know-how as we are now.

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