Half-baked idea about elasticity of money supply

Oct 22 2008 by Bill Gleeson, Liverpool Daily Post

SOME commentators have suggested in recent days that all of the money the Government has used to bail out our banks need not harm public finances or alter existing public sector spending or tax plans.

The argument goes that taxpayers’ money invested in the shares of British banks is a beneath-the-line, off-balance sheet trans-action. The Government, proponents of this view claim, is not so much spending its cash as swapping it for another class of valuable assets.

They go on to argue that, since the bail-out money is investment and not current spending, it need not be included in the public sector borrowing figures.

What nonsense.

The money invested in the banks is real money, cash that could have as readily been spent on paying teachers or nurses. The claim that cash can be accounted for in the same way as bank shares is based upon a surprisingly simplistic understanding of double entry book-keeping. Debit invest-ments £37.5bn, credit cash £37.5bn. It’s a woolly- minded, technocratic argument that doesn’t stand up to much “real-world” analysis.

The banks’ shares are not investment in the same sense as building railways, schools and hospitals, especially since there is no proposal to offset the investment in the banks by reducing spending on the traditional types of public sector infra-structure schemes. Yet the money does have to come from somewhere, either from increased taxation, lower public spending or more borrowing.

Those that think cash is the same as bank shares should try offer-ing the shares to nurses in lieu of pay and see what happens. Cash has a fixed value and can be applied to any purpose, whereas, in contrast, bank shares are an investment the value of which is uncertain and, in any case, can only be realised at some unknown point in the future.

Of course it’s true that the banks’ shares could be eventually sold at a profit, but don’t count on that happening for sever-al years yet. In the mean-time, the mounting government deficit will have to be shown in public sector accounts. Frankly, anything else smacks of the sort of half-baked thinking about the elasticity of money supply that we saw on Wall Street in the past decade that caused the credit crunch in the first place.

THERE is another bit of commentary doing the rounds at the moment that I wouldn’t give much credence to either.

Several pundits have suggested in recent days that the world could face economic depression, not just recession.

I prefer the view offered by Arcadia’s Sir Philip Green yesterday, when he said that shop-pers aren’t going to stop shopping altogether.

The owner of Top Shop and Bhs says the group’s stores have been through recessions in the past and come out the other end to enjoy the good times, and they will do so this time round, too.

Sir Philip is right. Things will pick up. In the meantime, we are in danger of fretting too much. There is no chance the country will go into depression.

That said, it is going to be tough for the next 18 months. Businesses will go bust and people will lose their jobs.

In the meantime, I have come across evidence that Govern- ment moves to improve liquidity in the money markets is working.

A relative who turns 70 this weekend and whose income is a state pension and no more than £250 a month from part-time market research work was just yesterday offered the chance, without any solicitation, to extend her mortgage by £5,000.

Maybe Christmas is back on after all.