I\’m not sure what Hutton is smoking these days. Something extremely powerful I\’m sure though.
The last, best and most palatable option is to join the euro, and fight a referendum campaign on it being our get-out-of-jail-free card – a means of avoiding de facto national bankruptcy and emasculation of the property-owning middle class while offering a route to reindustrialisation and underwriting the City of London. Inside the euro, both the government and the City would be able to sustain the spending and lending necessary to avert recession. The competitive level at which we would join would boost industrial exports for a generation. And the middle class would not have its savings wrecked by inflation. We would avoid the clutches of the IMF.
As we\’re all surveying the rubble we\’re agreeing that the root cause was that interest rates were set at inappropriate levels. So, in order to counter act this we\’re going to give away our power to set interest rates?
Good one, good one.
Especially since the people we\’re to give this power to would have, in the recent past, have set them at even more inappropriate levels. Lower than we did in the boom (which would have increased the boom of course) and now higher than we do in the bust (making the bust deeper of course).
Plus we still have a massive structural problem which makes the UK economy not part of an optimal currency area with the euro. Our method of financing housing is 1) massively more based upon owner occupation and 2) financied at floating interest rates. Compared, to, say, Germany that is.
So as and when interest rates change (assuming we join the euro) those changes will have a much greater impact upon the UK economy than it will on, say, the German.
Euro membership would thus makes the booms and busts greater…as it observably has done in Spain and Ireland in recent years…..which isn\’t really what we\’re trying to achieve here, is it?
Finally, membership of the euro would mean that we cannot change our exchange rate: worth remembering that the UK began to recover from the Great Depression the day it came off the gold standard. That is, the day that we adopted a floating exchange rate rather than a fixed one.
Perhaps someone ought to have a word with Will about his ingestions. Clearly something is causing him to fall off his rocker.
Plus the Eurozone would be stupid to let us join. An economy as large as ours could easily fatally destabilize the Euro.
We’d first have to work towards converging the budget deficit figures towards the Maastricht criteria. So, cutting expenditure and increasing taxes. Personally I think they should anyway – because printing money in a recession is dishonest. But if you can stabilise your economy outside the euro, why join?
My personal view is that the euro could still be fatally unstable. The dangerous time will be when it rises in value. The less well-off regions will have problems trading outside the bloc. But they pay their debts by printing euros which Germany et al has to accept at an exchange rate of one-to-0ne with their own. How long will north Europe let that go on?
Ahh, he wants to join the modern variation of the ERM – oops, sorry Will, I know I shouldn’t have said it!
of course we could use the opportunity to structure our housing market finances properly, shifting interest rate risk from the borrower to the lender by issuing 15 or 30 year fixed rate mortgages, something our new scottish mortgage banks could do easily while simultaneously selling covered bonds to long term institutions eager for low risk yield. Set the rate close to the5.5% they will be rolling off in the new year and allow borrowers to refi only into another fixed product. Refi risk for lenders is low, getting locked in is no longer a fear and the volatility risk is shifted to those that can most take it. The three people that don’t like it: banks ‘cos the old system was more profitable, politicians ‘cos falling rates made them look good and the BoE ‘cos it allowed them to “control” the economy have no moral let alone economic legitimacy to object. It should be a top priority. (Not that this is a plea to join the euro, it isn’t!)
Tim adds: Good idea, but those covered bonds are securitisation…not likely to fly at present.
Best to have an LVT (-> CD) so the BoE can prevent property bubbles by
1/ Raising reserve ratios.
2/ Raising the LVT %
Pingback: Splat. Clunk. - Charles Crawford