Adam Smith Institute

While the British people are coming to terms with their own recent borrowing excesses, the government is doing quite the opposite in an attempt to stimulate the economy out of recession. Will they ever learn?

Based on the largely discredited theories of John Maynard Keynes, the government’s plan is for the government to fill the gap in the economy left by the now reticent private sector. Ignoring the fact that the ideas behind these policies are highly questionable, Keynes’ plan rests on the government acting countercyclically to the health of the economy: saving in the good times in order to spend in the bad times.

Due to Labour’s outrageous profligacy with taxpayer’s money and their loose borrowing since coming to power, the state of the public finances are well worth losing sleep over. Now is not the time to borrow more. They might as well be putting our taxes up, as we will be the ones to pay it back in the end. Brown and Darling are behaving in a fundamentally immoral way, inspired by political survival more than anthing else.

The reason for so much red on government’s balance sheets is simple: too much spending. Thus, government spending needs to be capped, only increasing in line with increases in inflation and population. If this had been in place in the good times, things would look very different now. The increased revenue could have been put away for a rainy day (now), or even better, returned to the taxpayer through tax cuts.

We might as well face up to the truth: they will never learn. It is so much easier to spend other people’s money. Thus, the only way to stop them spending is tie their hands behind their back. Now we just need a referendum on government spending…

If you haven’t read Dennis Sewell's recent Spectator article on the financial crisis yet, you should. It makes a very compelling case that big government, far from being our saviour, is at the root of the current situation. To digest his argument:

• Roberta Achtenberg, President Clinton's Assistant Secretary for Fair Housing and Equal Opportunity at the Department of Housing and Urban Development (HUD), believed that racism was preventing minorities enjoying the same level of home ownership as whites.
• She set up a network to bring lawsuits against any mortgage bank suspected of practising unlawful discrimination. When HUD's investigators couldn't find any overt racism they tried to prove ‘disparate treatment’ of minority groups instead. When that didn't work, they went after ‘disparate impact’.
• The mortgage banks got the message. In contrast to previously conservative lending practices, "Mortgages were offered with only 3 per cent deposit requirements, and eventually with no deposit requirement at all. The mortgage banks fell over one another to provide loans to low-income households..." Now these banks are responsible for more than three-quarters of dodgy subprime loans.
• Meanwhile, national banks were put under a different kind of pressure: "Changes were made to the Community Reinvestment Act to establish a system by which banks were rated according to how much lending they did in low-income neighbourhoods. A good CRA rating was necessary if a bank wanted to get regulators to sign off on mergers, expansions, even new branch openings." At the same time, Congress backed Fannie Mae and Freddie Mac to expand mortgage loans among low earners, and introduced new rules let them securitize subprime loans.

Smoking gun, anyone?

European leaders were all looking smug earlier this week as they pumped another $250 billion into the markets and announced that the financial crisis was officially over. None more smug than Gordon Brown, of course, whose plan they had adopted.

The fact that they had been able to get together and decide anything at all gave the markets a brief boost. But now the European stockmarkets are sliding again, and our great leaders seem unusually shy about media appearances once again.

Investors know that the $250 billion will have to come from somewhere, and of course it will come from bigger borrowing, bigger deficits, rising taxes and cutbacks. The recession that everyone was waiting for has suddenly got worse. And because Europe and the US aren't going to be expanding so fast, other countries are being hit too, particularly those like Russia which produce the oil, gas, minerals and other commodities that fuel Western economic growth. The downturn just got global.

Meanwhile the bail-out plan is not alloyed good news for bank investors. It came with the price of some political demands, like banning dividends and bonuses. So banks will find themselves losing their best people to other sectors, and anyone who has any cash left will be looking for dividends elsewhere.

Given the amount of money that goes through the markets each day, $250 billion looks a modest sum. Can it really stop the rot? It seems to me that you really can't buck the market. But you can use an awful lot of taxpayers' money trying.