Coffee House

How bad is it, Mervyn?

7 October 2011

Remember when Alistair Darling said that we faced the worst financial crisis for sixty years? Now Mervyn King has trumped that piece of doom-mongery by telling Channel 4 last night that "This
is undoubtedly the biggest financial crisis the world economy has ever faced" (see video above, three minutes in). The Governor of the Bank of England saying that this is the worst crisis
ever? On the day that he rushed another £75 billion into the economy? As mood music goes, it is a particularly dreadful symphony.      

It is also the sort of situation that Ed Balls will relish, especially with the Pre-Budget Report approaching. And it is true: George Osborne is in a tight spot, both politically and economically.
Economic forecasts will tumble; deficit reduction will veer off course; and calls for a growth agenda will intensify, even aside from what the government announces this autumn. Indeed, the shadow
chancellor covered much of this ground in his comments yesterday.

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But the politics do not all go Balls’s way. Far from it. There is, after all, something very different about about a bust — should one occur — that comes one year into a government, and
one that comes ten years into a government. A poll in May (I cannot find a more recent version) suggested that
"If the British economy gets worse in the next 12 months," Labour would take as much blame as both the banks and the state of the global economy, and twice as much as the Tories. Stir in
Ed Miliband’s aversion to policy, and it is far from clear that Labour will capitalise from these economic horrors.
And as for the economics, two questions hover blackly over yesterday’s events. The first is whether a round of QE that amounts to 5 per cent of GDP will have a significant effect on economic
growth. And, as Clarissa explained in her post yesterday, the evidence from QE1 certainly casts doubts on

And the second question is how this will affect inflation. The Bank’s official position is that inflation isn’t really the problem, especially not in future — and that was supported by
Osborne on the Today Programme this morning. Which makes this a good time to pull out what, in a
perverse sort of way, is one of my favourite graphs of the crisis. It’s from Citi, and shows just how often, and how much, the Bank has underestimated inflation in recent times:

Read Coffee House’s briefing on QE here.

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Show comments
  • daniel maris

    Why hasn’t King been sacked? He’s useless. He’s now claiming there is the worst world financial crisis ever when the world economy is growing at about 4% on average!!

    Some crisis!

    We need some fresh thinking on the economy.

    How are we going to create a sustainable economy that can deliver a good spread of wealth across the nation, with no one excluded.

    Some ideas:

    1. We need structural changes: more employee share ownership, more co-ops and John Lewis style partnerships.

    2. Develop indigenous green energy solutions, that people can own themselves.

    3. Reduce the working week.

    4. Increase domestic food production.

    5. Abolish welfare and replace with workfare.

  • Dimoto

    Forlornehope – hmmm, debatable.

    As somebody pointed out recently, there are three methods of calculating GDP, the output method (which makes the headlines) is considered by many to be the least accurate in a recession/slow growth.

    Apparently, by expenditure, GDP growth in Q2 was 0.3%. But everyone is getting suicidal because GDP growth (output) was corrected down from 0.2% by a fraction of 0.1%.

    Talk about angels dancing on pins.

  • El Sid

    @Sylva – you’re missing the point of the bank downgrade. Moodys downgraded the banks because they were less likely to be bailed out by the UK government. To quote Moodys (–PR_227067) “It is more likely now to allow smaller institutions to fail if they become financially troubled. The downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government.”

    Inasmuch as the downgrade reflects risk that has been transferred from the government to the creditors of the banks concerned, the Moodys downgrade implies that the UK government is a safer haven than it was.

    Yet you complain others are economically illiterate!

  • Forlornehope

    It is growth in nominal GDP, not real GDP, that is crucial to reduce both the deficit and debt as a percentage of national income. The present rate of inflation suits Osborne very well. It would be inept to crow about though and he is not inept.

  • oldtimer

    A couple of observations on King`s remarks to ITV (which have a slightly different emphasis to his replies to Ed Conway of Sky News).

    First his remark that the last international action, when Brown “saved the world”, did not work. My conclusion now is that it is a case of every country for itself. The UK has already tried c30% deflation; evidently this is not enough for King or the Chancellor. Hence more QE.

    Secondly he sounded a little more sympathetic to savers, if no more helpful, than in his remarks to Conway. Then he came across as saying, in effect, stuff the savers; they will be even worse off if I don`t do this QE.

    Then there are the actions, or inactions of those squanderbugs, the PM and the Chancellor. If we do indeed face the economic catastrophe that King says we face then there should be action this day to cut every unnecessary expenditure and every self indulgent expenditure that puts the UK in jeopardy. Where is their sense of urgency? I see none.

    To repeat a comment from earlier posts, on present evidence these two are unfit for the offices they hold. The Conservative party should sack them and put grown ups in charge.

  • John B (UK)

    Strapworld – agreed, and that is exactly what the problem is with this government.

    Whatever they may say about fixing the deficit and “putting the house in order”, they completely lose any trace of credibility by sticking to this insane committment to throw £150 billion at useless windmills, countless billions at the EU, overseas aid and military adventures, and what can only be described as vanity projects like the £32 billion high speed rail link – while at the same time we are closing libraries, raising energy prices so much that many more pensioners will be faced with the “heat or eat” dillemma this winter, and giving our servicemen and women notice while they are still in their submarines and tanks.

    There is sadly now an ugly and often it seems to me immoral gap between what this government claims it stands for, and what it does in practice.

    As a life-long Conservative voter I am both angry and deeply saddened to see what the party has become.

  • Sir Everard Digby

    The clue is in the headline -Merv has no idea how to resolve this but does not have the humility to admit it.

  • Dimoto

    Peter Hoskin’s piece is shot through with doom laden assumptions.
    Certainly reflects the current (Winter approaching/holidays a distant memory) zeitgeist though.
    I guess Christmas is about the earliest we might “snap out of it”.

    Everyone, foes and supporters, will probably be relieved when Mr King goes, he doesn’t have the gravitas to make measured statements and have them taken seriously.
    So instead, he indulges in hyperbole, politico-speak and “hints”.
    Be nice to have fresh thinking and (if possible), precise, straight talking.

    Anyway, Merv’s memoirs should be a hoot !

  • jheath

    The correct question would seem to be “How bad is Mervyn?” How does he keep his job?

  • strapworld

    Andy H makes a very important point. IF the state of affairs was as bad as we are constantly being told why didn’t this government follow the excellent course of action of the Canadian Government faced with an equally dire situation. Was it not a 10% cut on everything wages, benefits etc?

    Why pay billions to International Aid and any benefits if we have not got the money?

  • Andy H

    Those that claim that they are fed up with hearing that it is a Labour’s fault are living in denial.

    The seeds for our predicament were sown when the economy was run on a deficit, during the boom years.

    To claim that this historic failure does not impact our future, is to deny that spending your credit limit on your credit card last year has nothing to do with the fact that you are in debt today.

    It is time that the reality of the disaster of the last Government was fully realized, or do you believe that Liam Burne was joking when he left a note saying there was no money left?

  • Sir Graphus

    Far too much of the debate is about how the economy can show growth, however superficial, in the next quarter or two, and GDP as if it were the only worthwhile indicator of economic health.

    There is no talk of long term fixes, how return the country to economic sustainability, to have a confidence that our children might have jobs; and of other indicators such as the balance of payments.

  • Sylva

    Peter just read the underneath extract from your article. Is this not sign of desperation from right wing writer like you.
    For how long will this confused set of guys governing us maintain the slogan “Labour left us with the mess?” We are not interested in that. They just prove how Economically illiterate they are. No growth policy from Osborne and now he has taken the economy to his best slogan ” TO BE LIKE GREECE”

    Osborne again on Britain being save haven and what are we left with Moody downgrading 12 financial institution in the UK. So how save is this haven?

    Osborne once said Printing money is seen as a desperate situation from a desperate government. So how desperate is his government by injecting £75billion into his Bankers friends coffers while ordinary family up and down the country suffers from hike in VAT and cut to some welfare top ups.

    Charles Kennedy a Coalition partner sitting close to Baronesses Warsi on Question Time last night said Ed Balls speech during Labour conference had more growth substance than that of Osborne (Current Chancellor). Sign that the right are void of economy policy.
    But the politics do not all go Balls’s way. Far from it. There is, after all, something very different about about a bust — should one occur — that comes one year into a government, and one that comes ten years into a government. A poll in May (I cannot find a more recent version) suggested that “If the British economy gets worse in the next 12 months,” Labour would take as much blame as both the banks and the state of the global economy, and twice as much as the Tories.

  • commentator

    Cameron and Osborne are the Ted Heath and Tony Barber of our age. Totally out of their depth and desperately trying to generate inflation to renege on the UK’s unpayable debts. Of course Osborne can fall back on the experience and gravitas born of a big ego, a large trust fund, a History degree from Magdalen College Oxford and a summer spent folding shirts in Selfridges.

  • michael

    Sterling has had its devaluation versus the USD and the EURO and there is no longer vat inflation as of january…
    EB -“deflation looming bla bla”…
    MK’s 75bn inflation pep: political economics?

  • Liz Brown

    and the lunatics are in charge of the asylum

  • MajorFrustration

    “Inflation a blip” only because the rise in cost of fuel and energy falls out of the twelve month cycle – that element of inflation does not actually go away but remains in the system

  • Hugo Chav


    There is going to be a Mega Crash in the UK when the bond vigilantes turn up.

    When debt to GDP approaches 100% there is no way back.

    Currently we are at 60%. Our deficit will probably add 10% per anum. Within the next three years the market will react and we will have a sovereign debt crisis or a currency crisis. It is a given.

    Cameron and Osborne will be crushed.

    For years I have ranted and raved on the Coffee House that we needed a government of National Unity to carry out serious cuts to public spending and implement radical supply-side reforms. We had a chance whilst our balance sheet was strong, the country could have pulled together.

    Dib, dib, dob.

  • Nick

    Labour’s current line is that Osborne has talked Britain into a recession with his comments that Britain was bankrupt like Greece.

    As always the Tory MPs on Newsnight etc make a poor showing of arguing against this.

    I don’t actually recall saying the UK was bankrupt, more that his policies had saved the UK from the same fate as Greece.

    Furthermore Darling and Cable at the last election both said that cuts would be “severe” and “worse than under Thatcher”.

    And the biggest problem facing the UK economy currently is imported inflation. As higher petrol, energy and food prices cut into household budgets. And the main cause of this was the collapse of sterling, on Labour’s watch.

  • TomTom

    These guys are idiots. Velocity declines so they boost Quantity and use the Bank Multiplier hoping to encourage economic activity. They have debased the exchange rate but everyone else is doing the same, so they get Stagflation.

    We have an open market with cartels in energy, food retailing, clothing etc. Raising VAT was bizarre – German VAT on prepared food and hotels is 7% not 20%. Pay cuts and fear of redundancy coupled with rising living costs and taxes reduce discretionary spending as savings are eroded.

    We are heading back to 1873-96. This is going to be decades of grinding decline for Voters with champagne excess for the top-end of the FIRE sector.

    Osborne had a few months to get it right and has now blown all credibility. He should be replaced

  • strapworld

    Welcome back Mr Hoskin.

    I worry that the Bank of England announced this latest round of QE at the end of the Conservative Party Conference, during which we were all fed spoonfuls of oil on the world’s financial troubled waters.

    Cameron tried to convince us that he was a leader -a joke really- but if he knew what was about to happen, If he was aware of the true state of affairs and that some of our banks were about to have their credit rating reduced, that shows, to me at least, a total lack of leadership. Cowardice in fact.

    We do not appear to have any politician in any party to whom the public can look to for real leadership, and that is something this country needs.

    What does Littlejohn say..we are on the way to hell on a handcart!

  • Jez

    ‘Doom Mongery’

    Nice terminology! I’m going to use that.

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