The Recession – where do we go from here?

Posted: October 23, 2009 in Politics
Tags: , , , ,

As news filters out today that, contrary to wide-held opinion, the economy failed to arrest its slide through July-September, what options are there to help move this country out of recession and back into flourishing economic growth?

Let’s look at what kick-started this global economic slowdown. In the US, sub-prime lenders were flourishing from the late 90s through to 2007…or so it seemed. But there was a big sting in the tail – people weren’t paying back their mortgages and foreclosures were spiralling. For banks that operate very close to the line in terms of profitability, this was a killer, and we saw the first major US banking casualty at Bear Stearns in April 2008. This, however, had been preceded in the UK by the collapse, and eventual buyout by the UK Government, of Northern Rock which was one of the UK’s main lenders of loans for house purchases.

The sub-prime market was already suffering, and the list of sub-prime lenders going to the wall by mid-2008 was growing longer and longer. This had a massive effect on the housing market as house prices plummeted due to the wide availability of foreclosed houses depressing prices. Stock market confidence was hit, and many companies and banks made massive losses on investments, mainly in the futures markets. The so-called “credit crunch” kicked in, with banks now placing severely restricted criteria on lending, which forced smaller businesses that couldn’t rebudget into the ground. The shortage in lending meant that many businesses had to reduce staffing levels, forcing unemployment upwards and placing massive pressure on Government funds for welfare and social security. As the number of people in work decreased, the amount spent on products also decreased, beginning a cycle of depression that is very difficult to recover from. One of the first Government responses was to cut the VAT rate from 17.5% to 15% in the hope that it would allow businesses to pass savings along to customers and generate more trade. The UK car industry suffered massively, with companies having to cut jobs and suspend production. The Government responded by introducing a car scrappage scheme, aimed at stimulating car sales, in addition to the cash injection already given to UK banks to try and encourage lending. With this having no real noticable effect on consumer confidence, the UK Chancellor Alistair Darling instructed the Bank Of England to begin quantitative easing measures, in effect generating money that isn’t really there. This is a last-gasp tactic that is used to try and kick-start an economy into spending money and turning the economy round. The risks of this are that it dilutes the value of the currency and if it doesn’t work, then there are really no other options available.

Now, in my personal experience, the recession hasn’t changed my own spending behaviour – I’m still on the same wage and paying the same in bills and rent, so why would I? I don’t own a car, so the rising oil prices haven’t affected me other than slightly higher public transport costs. But I can see the effect it is having, and people are trying to use the recession to their own benefit, by waiting longer to buy large purchases in the hope that prices continue to drop and they get a bargain. I believe that the tactics of the Government in managing this crisis have been okay, but too long-winded to have a quick effect, which is why we’re still in recession. I’m not sure of the exact figures, but I think the cost of the measures put in place by the Treasury equated to something like £1000-£2000 per person in the UK. Now I may be being a little naive here, but instead of using all this money to try and stimulate businesses from behind, why did they not give each citizen £2000, a time limit of 3 months, and said “Spend this money however you want, within that time limit”. Imagine the massive boost to businesses when they suddenly have tons of people flocking to their stores within that 3 months clamouring to buy whatever they could for that £2000. Direct stimulation. And boom, the recession is over, just like that. No messing about with fiddly schemes, or loans to banks who aren’t guaranteed to pass those loans on, or having to print fake money to do essentially the same thing.

Am I being incredibly naive there?

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Comments
  1. angryxtian says:

    I say we bring back debtor’s prisons to get people to pay there debt and dont have this kind of problem anymore.

    • thatpeskysquirrel says:

      I can’t say I agree…whilst the blame does partly lie at the feet of the people who can’t afford to repay debts, surely they wouldn’t think to get themselves so far in debt if financial establishments were stricter on their lending criteria, and didn’t force their loans/money products down people’s throats all the time. Debt prisons are an archaic method best left in the past, especially in a time when our regular prisons are already bursting.

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