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2008 All Over Again

It’s becoming a media cliché to compare the status quo to 2008, but it is a hard one to avoid.

  1. UK nominal demand growth has started falling off.
  2. MPC hawks have been proudly strutting around the media showing off their brave inflation-fighting credentials, as the CPI rate sits above target.
  3. Mervyn King decides – as Ben Chu writes – that the banking system again has a capital shortfall not a liquidity problem, and reluctantly opens up “liquidity schemes”, probably under pressure from the Chancellor – rather than simply easing the monetary policy stance.
  4. HM Treasury goes into something close to a blind panic, reverting to “creditism” – that nominal spending is determined by bank lending – and concentrates its efforts on schemes which might “fix” the banking system, and encourage new lending.

It would be funny if it weren’t so serious. Today’s Guardian:

“Throwing money at banks won’t solve economic crisis, Ed Balls says”

Ed Balls has warned that an emergency multibillion-pound package to inject
lending into the British economy still fails to address the lack of economic
confidence and demand.

Bravo, Ed!  I take back anything I ever said about Mr Balls which was less than complimentary.  But wait a second… wasn’t this exactly the Labour government’s prescription for a demand shortfall in 2008?  “Fix” the banks using fiscal policy to encourage lending, loosen the fiscal stance with some “high-multiplier” investment spending, mostly ignore the monetary policy stance, and well, hope for the best?

It’s only a shame that this policy combination resulted in the worst collapse in nominal demand on record.  Good luck everybody.

Update: Scott is not impressed either.

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