It is doubtful that Britain’s economic woes are entirely the result of Brexit. In the ordinary course of the business cycle, we were overdue for a recession anyway. Add to that the spectacular current account deficit and vast public borrowing that resulted from Osborne’s ill-conceived and ideologically-driven attempt to run a government surplus, and you have a recipe for a very unpleasant depression. The Brexit vote will not have helped, of course. But in reality Brexit was the pin not the bubble.
Underlying all of Britain’s economic woes, however, is the failure to resolve the 2008 banking crisis. While new – and very weak – regulations were put in place in an attempt to protect ordinary depositors from the ill-winds of the global banking and finance sector, the truth is that the banks are still “too big to fail”. This means that taxpayers are still on the hook for banking malfeasance.
Worse still, round after round of bank bailouts, quantitative easing and interest rate cuts (aimed at preventing zombie borrowers from defaulting) have failed to deliver a shift to any meaningful economic renewal.
Stress testing was supposed to reveal weaknesses within the banking sector; allowing banks to rectify problems and build resilience. The sad truth is that these tests have morphed into public relations exercises designed to reassure investors and depositors that all is well with banks that are actually on the verge of insolvency. As Professor Kevin Dowd of Durham University points out:
“The stress tests lack credibility because of conflicted objectives, and because political pressures on the Bank and the Bank’s own institutional self-interest create incentives to engineer a pass result. The stress tests are also counterproductive in that they create new systemic risks that are invisible to everyone’s risk management systems.”
Dowd fears another banking domino effect collapse, spreading from the troubled Italian banks into Germany and from there, across Europe and the UK:
“The Bank of England is asleep at the wheel again, and we will be back to beleaguered banksters begging for bailouts – and the taxpayer will be ripped off yet again, but bigger this time.”
The Bank of England response to these economic woes was to cut interest rates from 0.5 to 0.25 percent, and to pump yet more funds into UK banks in the hope that this will trigger renewed lending. But why should it? Everyone knows that the economy is going down. And with Brexit uncertainty adding to the problem, companies are hardly about to rush out and invest in new business activities. Nor are households likely to be motivated to buy new houses or cars if they believe their jobs and/or standard of living are threatened.
It is true that the drop in interest rates – if it is passed on – will put an additional £22 per month in the pocket of the average mortgage holder. But even this will not automatically translate into increased consumption. Britain’s households and firms continue to struggle under a mountain of debt almost as large as in 2008. As a nation, we have been able to service these debts because of low interest rates – thereby preventing a run of bankruptcies that would have crashed the banks eight years ago. But we have not paid off the debts themselves. So any new money that does find its way from the banks to firms and households may simply disappear into the ether if it is used to pay off existing debt.
Any sober examination of central bank policy since 2008 has to conclude that it has failed. The USA saw a small spurt of growth during the fracking boom; but even this was at levels that would have been regarded as weak in the years before the crash. The economies of Europe, Japan and the UK have been stagnant. What little growth we have seen has been the result of population growth rather than any rebound in the economic base. Quantitative easing has helped pump up unsustainable bubbles in property, fine art, corporate junk bonds, automobile loans, student debt and fracking – all of which now look set to burst with devastating consequences for the global economy.
We might kick the can down the road just one more time. A Clinton victory in the US presidential election will pave the way for a new round of US quantitative easing. If this is coordinated with new QE in Europe, Japan and the UK, the world might just collectively service our debts and keep our banks afloat for another year or two. But the underlying problems remain. And rehashing the same failed remedies over and over is not going to change that.