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Friday, June 26, 2009

Its all going wrong

If credit is the lifeblood of the economy, then it has been sucked out, vampire-like, from the corporate sector. Banks just aren't lending.

Zero rates didn't work; government guarantees didn't help and printing cash has failed. Perhaps it is time to try something really radical. Perhaps, running the economy prudently by cutting the fiscal deficit and restoring monetary stability might encourage banks to lend.

So how would this radical departure from New Labour orthodoxy work? Firms need to have stability in order to invest. Banks need to know that firms will continue to be profitable over the long run to ensure that loans are repaid.

Big deficits and easy money only serve to create instability and destroy confidence. Hence, the collapse in corporate lending.

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