Financial stimuli...?

Hmmmm. So Messrs Brown and Obama want the UK to commit yet greater proportions of its GDP to further economic stimulus plans. As the Governor of the Bank of England has already said we can't afford to do so, this seems like a great plan.

It seems pretty plain that the 'banking crisis' has precipitated the UK downturn - it's caused widespread panic and evaporation of confidence. Whether or not the banking crisis is responsible for the entire of the global downturn is beyond me - I am not an economist - but it's certainly been a key factor.

The UK 'banking crisis' seems to have been caused, in my humble view, by two things.

The first of these was irresponsible people deriving clever ways of creating 'theoretical profit' from 'clever' deals and then showing it as profit in their trading accounts - these deals being backed up by insurance policies to protect against a loss. Insuring against losses may have been well and good - until the insurers ran into trouble - cue AIG.

So, great - notional profit is all well and good - but it isn't 'money in the bank'. In my view this has to be where things started going wrong - i.e. notional money isn't the same as 'real' money - it isn't available, it isn't tangible - hence some of our banks became reliant on the money markets to generate liquidity. Whilst cash was available to borrow, this worked fine and the banks rode happily on the crest of an artificial wave, posting record profits, toasting stratospheric levels of apparent success.

The second key factor was an abundance of irresponsible lending by the banks - the money being lent all too frequently being provided to the banks by the money markets - i.e. they weren't lending their own money, they were borrowing it.

Once the money markets dried up the banks were left high and dry without any 'real' money of their own to play with - what happened next is history.

The thing to appreciate is that the bank's apparent success in the preceding years (and to a degree our economy's apparent success) was about as 'real' as the profit generated by the bank's incredibly clever yet artificial deals - i.e. yes, we appeared to be doing well for just as long as the whole house of cards managed to stay standing. We rode higher than we should have done for a good couple of years - and what is currently happening is readjustment.

It's similar to what happened with the property market - demand rose, prices soared artificially high - they stayed high - they've come down again.

The problem is that the trouble in the banking sector spooked a lot of people - it caused panic. The panic was amplified by the media - panic caused the run on Northern Rock. The run on Northern Rock precipitated further panic - it led to the UK Government nationalising Northern Rock, which started the whole banking-bailout-ball rolling - cue further panic re the state of the banks and the erosion of consumer and industry confidence.

The economy had ridden artificially high and it was due for a period of readjustment. The likelihood is that this was always going to cause a degree of discomfort in certain sectors - however, due to the incredibly heavy, suffocating amounts of airtime dedicated to the 'impending recession' by the media, panic ensued, confidence evaporated - leaving us in the predicament in which we currently sit.

There is no point in our governments expending huge proportions of our GDPs to attempt to reinstate the economy to the artificially healthy state it up until recently appeared to be in - it wasn't real.

As David Tang has said, the key to our recovery is consumer/industry confidence. This makes perfect sense. Yes, parts of the banking sector were always going to run into stormy water, given the way they had been operating - but there was no need for the panic attributable to parts of that sector to spread to everything else! The fact that the panic spread, there can be no doubt, was due solely to the media and some incredibly reckless reporting - governments ploughing billions into business/economies thereafter (cue further reporting) didn't help - it undermined confidence still further.

It therefore does not make sense for governments around the world to keep stumping up (read: borrowing) billions of dollars/pounds to artificially stimulate our economies. The more money governments plough into our economies, the less confident people/industry will be - i.e. if people see the economy being propped up, given adrenaline shots and wheeled about in its customised Pope-mobile, there is no reason why confidence should return - instead it will erode yet further.

We can only hope that common sense prevails. If people spend, the situation will improve - if our governments continue to spend billions and billions on our behalf, though, it will not. Quite why anyone would listen to Gordon Brown anyway is beyond me - it has been reported that up until recently he was taking advice from the very people who are now thought to have pilotted the banks in their charge into the trouble which they are now in!

Wakey wakey people, it's coffee time....