Tuesday, 25 November 2008

Mr Darling to the rescue

Britain it seems to me, has changed radically in the last few days.  We are no longer a free market economy - the package of measures put forward by Mr Darling mean, in effect, that Britain has become a command economy.   It is a bit ramshackle and ad hoc as command economies go.  We haven't become the Soviet Union overnight.  But we quite clearly aren't leaving things to the invisible hand of the market either.

Reading between the lines I think I can see what is being attempted.  At the height of the property boom about 8% of consumer spending was funded by what was called Mortgage Equity Withdrawl (MEW), i.e., borrowing against the increased equity in your property.  This source of new spending has, to say the least, become untenable.  The chancellor's proposals in the short run seem to amount to replacing this missing spending with government spending based on borrowing.

In so far as it goes, this sort of makes sense.  The shock of a sudden removal of spending would benefit nobody.  We need to get out of the debt dead-end we are in, but going cold turkey isn't the best strategy. 

Will it work?  I hope so, although there is a lot that can go wrong.  And I really don't think that in reality there was much alternative.  The big question is whether it is part of a sustained effort to redirect us to an economy based on generating real value.  I will wait and see.

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