Don't be fooled -- the recession is far from over

In the early 30s, plenty of people called the end of the Depression. We shouldn't be so naive now
Nick Cohen
The Observer
Aug. 11, 2009

It's over. Officials can tell historians how they grappled with the Great Crash of 2008. Labour can hope against all reason that the electorate will re-elect it for saving Britain. The rest of us can return to normal, which to the British means borrowing huge sums to gamble in the property market.

The bets turned sour last time, but why not take a flutter now? Or buy a new car? Or just stop worrying that the sociopath in human resources will call you in for a "little chat"? Reasons to be cheerful abound. Last week, the Royal Institution of Chartered Surveyors said that its prediction that house prices would fall in 2009 was hopelessly pessimistic. Car sales rose for the first time since April 2008, while the marvellous recovery in the stock market continued to delight all those brave investors who had bought cheap in the spring.

Everyone was enjoying an unaccustomed optimism, until the Bank of England announced that the crisis isn't over until the Old Lady of Threadneedle Street sings and she is still too depressed to croon.

The decision by the Monetary Policy Committee to carry on with the emergency strategy of printing money to reflate the economy shocked observers, who believed that it must share their good cheer. Evidently, the Bank feared that the rise in the markets was not a sign of a return to growth but a "sucker's rally".

The derisive phrase has an ominous history. One of the greatest of all stock market delusions was the sucker's rally in the American markets after the Great Crash of 1929. Investors forgot images of weeping Wall Street dealers screaming that they would sell at any price and watched excitedly as prices bounced back. In June 1930, a delegation of bishops and bankers begged President Hoover to help find work for the unemployed. "Gentleman, you have come 60 days too late," Hoover replied. "The depression is over." Within a year, soup kitchens had spread across America.

Christina Romer, head of President Obama's Council of Economic Advisers, has warned him not to repeat a similar failure to grasp how fragile recoveries can be by Hoover's successor, Franklin Roosevelt. In 1937, when the American economy was at last on the mend, Roosevelt's administration thought that it could restore order to the public finances, only to see its spending cuts and tax rises send a healthy economy back over the edge. Meanwhile, throughout Japan's "lost decade" of the 1990s, every sucker who announced that normality was returning later recanted.

At the beginning of our crisis, David Blanchflower urged his colleagues on the Monetary Policy Committee to ask: "What should we do if we think Britain's position is as bad as America's in the 1930s or Japan in the 1990s?" The MPC's answer has been to keep its foot pressed hard on the accelerator and ignore all those who urge it to drive carefully.

When Mervyn King delivers his inflation report on Wednesday, my guess is that he will say that he remains fearful about the lack of credit in the economy. The media talk about the failure of British banks to lend and too often forget that the foreign banks, which used to supply credit, have not merely cut back on their lending, but wound-up their British operations. The MPC is not only concerned about banks lending too little, but that there are fewer banks to lend anything at all.

I wonder, too, if King will talk about the menace of unemployment. For a bulimic country, which has gorged itself on debt, mass unemployment will bring mass defaults, which will pose a new threat to the worm-eaten edifice of our banking system.

King must be grateful that he does not have to fret about the political consequences of the recession carrying on or a recovery being so weak and short-lived we will barely notice it. But David Cameron and George Osborne ought to be waking up in cold sweats.

With his sniper's eye for an enemy's weaknesses, Peter Mandelson noted the other day that the Tories were talking about cuts in public spending with indecent "relish". And, indeed, many Conservative core voters are delighted by the prospect that Cameron will have to reduce radically the size of the state, rather than lead the moderate, consensual administration he thought he would be running before the crash.

If the Bank of England is right, however, and the crisis is not over, it is far from clear when Osborne can start cutting spending and raising taxes. He must want to get the pain over with early in a parliament while he can still blame Gordon Brown for the nation's woes. As Robert Chote from the Institute for Fiscal Studies says, he must also be aware that if he does not offer a plan to cut quickly, investors may panic and push up the price of British debt.

Maybe Mervyn King will offer him a way out and tell him that quantitative easing can take the strain, and the Treasury should not be distracted from reforming the public finances. But if he doesn't, or if he does and he's wrong, the Cameron government could make the same mistake as the Roosevelt administration and enfeeble a recovering economy.

Beyond these scenarios, which are already frightening enough, lies that shamefully ignored prospect of mass unemployment. If King raises it on Wednesday, it will be a welcome break with the past.

I have scanned the serious press in vain looking for bold ideas to pull university lecturers off academic research, for instance, and order them to teach tens of thousands more students, or to create as many cheap, state-funded jobs as possible.

At least far-sighted Americans lobbied Hoover in 1930. Polite society in Britain today is not even asking what it will do if there are hundreds of thousands of justifiably furious young people on the streets.

The least bad answer is to imitate the Bank of England and keep the foot pressed down on the accelerator. The risk of investors refusing to finance government debt remains less severe than the continuing danger that precipitate tax rises and spending cuts will push Britain under.