Financial crisis: Alternative routes to recovery

6th June 2012

Doubling the dose or changing the prescription

Neil Woodford is one of the tiny handful – literally – of fund managers who achieve name recognition. He's an A-list celeb in a field dominated by B and C-listers (or worse.)

So sit up and pay attention when he tells Citywire that "governments are powerless to spark a strong and sustainable recovery in developed world markets as they continue to grapple with the aftermath of the 2008 banking crisis."

He's worth listening to because his enviable reputation for beating the averages means other investors will heed his words – perhaps leading to a hoped-for virtuous circle for his fans.

More of the same

But fund managers are paid to make micro-decisions. Woodford got out of Tesco and he has backed both ends of the health see-saw with long positions in both tobacco and pharmaceuticals. The difficulty with his macro-economic pronouncement is that it backs the orthodoxy which has caused the mess with a prescription that offers little extra than more of the same formulation. It's a case of "if the medicine fails to work, double the dose".

In his Edinburgh Investment Trust annual investment report he states that developed world economies faced a period of ‘inevitably lower growth, as the necessary deleveraging takes place. Whilst low interest rates and innovative monetary policy can help offset the negative impact of deleveraging, the tools available to central banks and governments are not powerful enough to effect a strong and sustainable recovery,' he said. However, Woodford offers no clear alternative route to recovery.

The orthodoxy can be challenged

One of the worthwhile comments on the Citywire story suggests a dose of stimulation – the same recipe that worked in the 1930s in economies as diverse as New Deal America and Nazi Germany. Julian Stevens writes: "What is needed are measures to stimulate the movement of money in the economy. When money changes hands, taxes are generated. Given that the health and vigour of all consumer based economies are driven by consumer spending, a simple measure that the government could enact to stimulate consumer spending might well be to halve the rate of VAT, even if only for a trial period of 12 months."

And he also has the original idea of stimulating spending by Britain's army of the retired. He says: "The government could make available just to annuity funds tranches of high yielding gilts." This would pump more spending money into the economy.

So two ideas from someone who adds: "In the current state of the nation's finances  what's needed are simple and radical measures. Tinkering about with proposals to tax hot pasties and sausage rolls is just a flipping joke."

It could be, however, that the Treasury has a bigger plan than just testing the temperature of tasty titbits for a tax take. According to The Independent, chancellor George Osborne plans to ask Britain's squeezed savers for cash to spend on infrastructure such as new railways and roads. The bonds would be guaranteed by the state – and presumably pay more than the current crop of mean accounts.

Meanwhile in North Dakota….

North Dakota is an oil-rich state which most consider conservative, right wing and far from radical solutions. Yet according to The Centre for Research on Globalisation, it has the lowest unemployment rate in the United States. And that is not just down to its mineral wealth – other states with similar or greater oil potential have higher workless levels.

If oil alone is not the answer, what is so unique about the state?

The answer, according to the Centre is that North Dakota is unique in having its own state-owned bank. In a lesson so far unlearned in a UK which has state-controlled banks in the shape of  Lloyds and RBS, "access to credit is the enabling factor."

The Centre adds: "The Bank of North Dakota (BND) does not compete with local banks but partners them. It also has a loan program called Flex PACE, which allows a local community to provide assistance to borrowers in areas of jobs retention, technology creation, retail, small business, and essential community services."

Using spare capacity as a route to recovery

A Council for Foreign Relations conference last year also
rejects the "austerity is everything" line. Among other ideas, it suggests that underutilisation of resources is the major problem.

Justin Yifu Lin, Chief Economist And Senior Vice President, World Bank Group told the meeting: "In almost all the high-income country, in spite of the recovery in the past two-and-a-half years, we see the capacity utilisation rate is still about 10 percent below that of 2008. And in effect, high unemployment rate is a reflection of underutilization of capacities. And because of that high unemployment rate, certainly consumption will be under pressure. But at the same time, because of the large underutilization of capacity, it's hard to find good investment opportunities. And often, you have slower growth in consumption and investment, you are going to have sluggish recovery. And with a sluggish recovery, there is a high unemployment rate."

One solution, he suggests is the government increasing social spending, primarily on infrastructure. Others at the conference pointed to the way growth in China arises from state directives.

Take over the printing presses

Alternatively, governments could regain control over their currencies from the banks as this blog suggests.

Ben Dyson states: "As long as banks are able to create money, we will have financial crisis after financial crisis. Unless we change the system very radically right now, the next 20-30 years will be very miserable for everyone. The solution is remarkably simple – so simple that most economists overlook it. We need to make it illegal (and impossible) for the banks to create money, and give the responsibility for creating money back to the state.

Taming big energy to pay for big infrastructure

Finally, The Peace and Freedom Party, which describes itself as "California's Feminist Socialist Political Party" may not get many votes from investment bankers (or fund managers). Party executive member Steve Zeltzer blames deregulation for the problems. He writes:

"The Peace and Freedom Party supports placing all energy under public ownership and democratic control. We support using the profits from this public oil and energy industry to develop and build a mass transportation system that will allow working people to be able to get to their jobs, and intensively develop such non-polluting energy sources as wind and solar.

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