The best and the worst

Bottler Brown is full of himself. He has saved the world, now he is going to set up a new world order to prevent such chaos ever happening again. (I wouldn't bet on the latter as many experts suggest that the cause of the instability, in part, was the botched system he introduced for banking regulation which failed at its first test!)

To correct two of his most recent porkies:

1) The present banking chaos is not a completely world-wide problem. Some developed countries have had no problems with their internal banking arrangements. In this category are countries like Australia, Canada, and Sweden.

The world recession will surely hit them when it comes, but their banks are all still strong. None have been closed, none have been nationalised, none have needed vast sums of public money pumped into them. To disappoint the left, if this is the end of capitalism than capitalism in those countries seems to be thriving.

2) Even in those countries where there have been problems, the severity has varied enormously. The two largest sufferers have been the UK and the USA, and Iceland perhaps ought to be added. What these countries have are banking regulatory systems which failed. In the USA politicians in 1977 and 1995 compelled/forced the major mortgage lenders to lend to borrowers who were not going to be able to repay. In the UK and Iceland banking regulators slept through years when signs were becoming very clear that large skyscrapers of lending were being constructed on shaky foundations, business plans were being used which were bordering on the very risky. The problem was not one of insolvency but one of illiquidity. Borrowing short to lend long does not need much of an adverse movement before it becomes panic and disaster, as Northern Rock and B & B illustrated.

Even well designed banking supervision, overcoming the uncertainty and confusion of the UK system, can fail if the politicians encourage and indulge in too much debt or allow credit to become too easy.

It is to be hoped that the present crisis is moving towards resolution without further loss of jobs, income and wealth. At some point regulatory systems must be evolved which resist political interference and which produce heeded warnings.

We are soon to enter painful recession, if we are not already there. Sadly, unlike Norway which has accumulated budgetary surplus with which to meet the pressures of recession, the UK's public spending spree and then bank bailouts have left us with a higher debt to GDP ratio than anywhere in the developed world. Recession looks very likely, and we could not be in a worse starting position. So much for the other Brown porkie that we are well placed to meet the storm!