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Tuesday, 23 October 2012

Who has caused the recession?

As ever its all in the numbers.  Some say it was the fault or default of the banks in 2008.  The government poied up about £70 billion in cash, but that was used mostly to buy shares, which had and still have a value.  Discount the value of the shares and we are down about £25 billion.  The government also carried out some balance sheet support, wrapping banks assets in a cosy 0% risk weighted guarantee, which was nice because we made some premium income for providing the service and the guarantees were never likely to be called and they weren't, and they are gone now.

So net net the banks have cost us about £25 billion, which is not good.

Now compare that with the £600 billion of extra government borrowing from 2006 to 2012.  That's £600 billion borrowed out of approximately £3.5 trillion of spending . £575 billion of that borrowing had nothing to do with banks.  It was spent on civil servants pay, welfare and all the good things that we expect from government, except that in those 5 years the government spent 20% more than it was collecting in taxes, and has remarkably little to show for the "investment" that politicians claim their sending represents. The fact that we can't really point to anything enduring paid for out of this borrowing show how wasteful it is (capital schemes with solid assets are generally under PFI and don't show up in these numbers.

So if the £25 billion the banks have cost us created a problem, as some might contend, why is that any different from the £575 billion of government spending in excess of revenues.The £25 billion thrown at the banks might have caused a hiccup, but since money is fungible the £575 billion that the government has borrowed and spent and will never see again must be a problem that is at least 23 as big.

As ever, the truth lies in the numbers.

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