Sep 18 2007
The last ten years of borrowing were not all wrong
There was a good reason why the west needed to borrow a lot in the last decade. The advent of China and India as big producers led to a big increase in their savings. If the west had not helped recycle and spend that money we would have lived through low growth or recession. More recently the oil producers also built up big surpluses which needed recycling.
Some are now implying that lending money to people who could not otherwise afford to buy a home as wrong, and lending money to companies to expand was foolish. Yet a lot of the lending was sensible then and is still OK today. The lending which is going wrong has largely been forced into difficulty by too extreme a swing in interest rates and in anti inflation policy.
The authorities were not wrong to allow borrowing. They were wrong to encourage too much borrowing a couple of years ago by setting interest rates that were too low. Now they are wrong to deter so much borrowing, by setting interest rates that are too high. I just hope they realise in time. It looks as if they are going to start to lower rates on both sides of the Atlantic.
There is nothing worse that the authorites fighting the last war. The anti inflation war is won. Today we need to fight the anti recession war. If anyone thinks money is still too loose and credit too easily available, they must have been asleep for the whole summer!
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John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Of course not all borrowing was or is wrong. But it is the size and quality of the borrowing that need to be examined. How can it be right to lend money to people who will not be able to repay the loans or to encourage profligate personal consumption based on debt? As for inflation, I fear your statement that “the anti inflation war is won” may come back to haunt you. As for the government, they have burdened the public with massive amounts of public debt much of which is not even shown in their accounts.
John, do you think it is possible to achieve permanent on-going growth without eventually having to succumb to runaway inflation? Almost all economic textbooks teach that a free-market economy has to contact after it has expanded to avoid inflation. Also do you consider interest itself to have an inflation dynamic? I don’t refer to the nominal rate of interest which of course acts as a cover for inflation but rather the real rate of interest. Seeing as interest is a demand for money that doesn’t already exist it must therefore introduce an inflationary dynamic? Sorry to bomb you with all these questions John but as someone facinated by economics I’m very interested to read your views on economic matters.
Reply: It is possible for an economy to enjoy long periods of growth without runaway inflation. Remember the international context matters a lot for an open economy. The main point I am making is that this government has lurched from a money policy that was too easy - driving inflation up- to a money policy that is too tight, causing a credit squeeze. We could have enjoyed reasonable growth in the middle of this decade with somewhat higher interest rates, which would have been better.
… or sharing the same toilet bowl as Ming.
The lending problem can only be made worse by the Government’s policy on tuition fees/student loans. Through Blair’s attempt to expand the number of graduates and Brown saddling them with student loan debt we are not in a position where recent graduates are sitting on debts of