Have we all gone mad?

In the run up to the G20 summit in Britain, much has been written about the views and opinions of different groups regarding how to solve the current financial crisis; but very little has been heard from individuals and small business leaders.  Alistair Schofield therefore thought it would be interesting to find out what they think.

Way back in the early 1980s when I was an undergraduate studying economics life was simple; you were either a Keynesian or a Monetarist and these two definitions were roughly paralleled by party politics – Labour being Keynesian and the Conservatives being Monetarists.

My own personal view was that the argument was pointless, with each philosophy being equally valid but in different circumstances.  To apply either generically would be foolish.

I have therefore watched the current economic crisis unfold with a sense of total horror as, in my opinion, we are prescribing the wrong medicine for the illness.

I have kept this view to myself for quite some time as, if I am right, then it would imply that Presidents, Prime Ministers, political advisors, leaders of multi-national corporations and many other respected and learned people must be wrong.  Clearly (I have been telling myself) I must be missing something.

However, in the last few weeks, my confidence has been boosted by a small number of people expressing reservations similar to my own.  The Governor of the Bank of England and the Leaders of the Conservatives have both suggested that the country cannot afford to significantly increase debt levels beyond current levels and the Euro MP Daniel Hannan pointed out I a speech in the European Parliament that “you cannot spend your way out of a recession or borrow your way out of debt.”

To gauge the views of other people I therefore submitted the following question/observation to members of the Institute of Directors group on the business network LinkedIn:

Surely the financial crisis the world finds itself in is as a result of us all spending more than we could afford. Consumption, particularly in western economies, has been running in excess of real wealth as the result of the financial institutions creating illusionary wealth through excessive lending.

Yet governments around the world seem to think that the solution is to pump vast quantities of cash into the system and encourage us to carry on spending at these unsustainable levels.

Gordon Brown's argument in favour of this is that ‘every other country is doing the same’. But isn’t it also true that every other country was ‘doing the same’ when we got into this mess in the first place. I find no comfort in this lemming-like justification.

Is it just me or do other people think that ‘the Emperor is naked’?

The following are the responses from various people.  I have not identified them by name and in some cases I have provided a précis of their response:

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The Emperor is VERY definitely naked and yet, as in the story, only a few people are prepared to admit it or worse still can even see it. I am convinced that anyone with half a brain cell could have determined that more spend + more debt does not equal boom but BUST!

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These days we laugh when we hear that everyone tried to keep the deck chairs out and lined up on the Titanic with the brass band still playing whilst she sank, however, it appears that once again we haven't learnt anything and we're now throwing good money after bad.

Unfortunately though, I don't have a crystal ball and as I am neither an economist nor a sage, I can only suggest Darwinian Theory - Survival of the Fittest!

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You are right, he is mad - I could go on forever but will restrict myself to a couple of short comments lest I raise my blood pressure.

1. Some banks ran their businesses very badly but we just pat them on the head and say there-there don't worry we will bail you out and hence we reward failure and keep the old bad ways going. We should have let them go which would have been an appropriate capitalist response to a problem caused by unfettered capitalism but no, we use a socialist solution to a capitalist problem and simply compound the whole problem and for a long time to come. The money used to bail them out could have been used directly to support the savers, borrowers and pension investors exposed by those banks going down. Instead we have missed a golden opportunity to start a real structural change that would benefit all in the future.

2. Similar example to the above – let the big car businesses go bust and invest the money used to rescue them in innovative alternative energy transport businesses.

3. Gordon – please don’t use the word “global” to imply there is some divine entity that did this to us. The globe consists of individual countries with individual governments who have the responsibility to control what happens in their patch – get over it Gordon – you have made many big mistakes on the road to buying popularity for Teflon Tony and yourself but Teflon got out in time!

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I think there should be a debate about what sort of economic system we want, since there are major signs that the existing one has failed to deliver, at least in some very important aspects.

Instead what I see is our government and others assuming the best thing is to repair the old system, when the experts have not yet concluded how well it will work.

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I am, and have always been, a capitalist but it is very clear that the current implementation of this approach has some issues which need to be resolved - simply rescuing the bad banks sends the message "all is fine".

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I did find it worrying that the Bank of England started celebrating economists in 2007 by printing a picture of Adam Smith on the new £20 note. I felt it was a little self-serving. I hadn't guessed the half of it.

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Isn't it the case that this Government fuelled a debt based society which made our economy particularly vulnerable when the recent events unfolded? Other nations (Sweden and Australia spring to mind) did not put themselves in that position and are now much better equipped to cope. The response of adding massive amounts to the national debt burden and printing money to support the bail out does not engender confidence in those who are driving the bus.

The oft repeated line "this is a global problem" seems to me to be a rather obvious and simplistic attempt to divert attention away from the damage which local policies have wrought.

What I really don't understand is why the opposition parties are not holding the government to account more, considering the magnitude of the mistakes which have been made.

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Our addiction to debt and credit is the underlying issue that got us here - we borrowed too much on cheap money and rising assets when our actual individual earnings decreased - we created money out of thin air. At some point we have to reduce our debts - it's just a fact so going the opposite way is just starting another boom cycle that has to end in a another harsh crash later. If we keep employing the same methods then this will become a cycle with every crash getting successively harder to survive.

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Hi Alistair, you have sparked an interesting discussion here, well done!

You are absolutely correct, individuals need to be paying down their debts, we need asset prices to fall (in particular housing and land), we need the value of commercial properties to fall so that rents are reduced. We need to see spending cut and taxes reduced.

The government is mad to be piling debt on debt, which will eventually lead to increased taxes.

In the end we are going to see a return to rampant inflation, huge job losses, increasing taxes and lower consumption.....Ho hum!

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What has happened is huge boom followed by huge bust. Boom fuelled by huge borrowing - banks in 2000-2007 lent 700 billion pounds more than they got in deposits – the Government did the same.

And it is NOT that the problem went unnoticed - e.g. the great investor Warren Buffett built up a huge cash pile in recent years because he “could not find anything worth buying”.  He also called derivatives weapons of mass destruction. Mervin King, at the Bank of England, warned repeatedly about excess spending, lending, banks taking too much risk etc. - but to no effect as Gordon Brown had taken bank supervision away from the BofE.

Unfortunately the reality is we are all going to have to tighten our belts dramatically for many years to come.

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The problem is not the debt per se, but what it has been squandered on. Silly consumers buying stuff they don't need with money they don't have.

Debt fuelled investment is a different kettle of fish and can be very economically beneficial. In the thirties a significant recovery from the depression was local authorities selling 60 year bonds to fund the building of large quantities of well designed affordable housing and demolish slums. This also happened after the second world war.

In each case there was a large public debt happily funded by savers over more than one generation. Most construction and other workers wisely saved some and spent some of their wages but avoided substantial personal debt and the result was a steady level of economic growth and long term societal improvement. There are similar opportunities now in "green" industries for example.

The big difference these days is that we haven't got anyone in government with management skills or the ability to think beyond the next headline. The biggest failure of government is the complete inability to think, plan and act long term in the interests of society as a whole. This decay began in the 1970s and continues to this day and stems from the fact we now have "professional" politicians rather than professional people entering politics to bring their skills to bear for the public good.

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Let us not forget that Gordon promised to end boom and bust - unfortunately he only completed half the job!
The reason the opposition are not criticising too much is they were also complicit in doing nothing when things were 'good'.

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Conclusion

Despite the resounding silence it appears that there are many people who are not in agreement with the Government as to the best way to alleviate the problems caused by the Credit Crunch.

I suspect that the reason these dissenting voices are not being heard more widely is because the issues involved are complex and people are unsure as to whether their instincts are correct.  The problem is that in the absence of a wider debate on the subject, the current approach is in danger of being seen as the only approach.  If you have a view on the subject it is therefore beholden on you to make that view known.

About the Authors
Alistair Schofield is Managing Director of Extensor Limited.
The authors of the various comments are members of the Institute of Directors group on the networking site LinkedIn.