14 October 2008

Economic Myopia - Part 2

The government's response to the banking crisis just gets more ridiculous.

They've spent weeks berating the banking industry for being irresponsible and taking excessive risks; Gordon Brown told the UN in no uncertain terms that it was time for the end of the age of irresponsibility.

It seems that the banks are doing exactly what was being demanded of them and have entered a phase of re-evaluation. It is obvious house prices are over inflated and indebtedness is unsustainably high, so the banks are backing away from lending more money until the underlying risks become clear.

So, is the government standing together as one to welcome this new age of caution and responsibility? Of course not! The Treasury Select Committee has criticised the banks for not being hungry for business and not doing enough to support the housing market.

We've passed the top of the land price cycle and we're entering a recession, so house prices are falling while unemployment is rising. Of course lenders aren't hungry for mortgage business at the moment. If they were, they'd be idiots.

To use my analogy from yesterday, the approach the government is taking is like criticising brewers for selling to alcoholics, but pushing them to keep supplying anyway, so we don't end up with large numbers of alcoholics sobering up and suffering with bad hangovers.

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