NCPA - National Center for Policy Analysis


January 27, 2009

Britain fell deeply into recession in 2008's final quarter, its economy shrinking 1.5 percent.  That's a 6 percent yearly rate of decline, the worst since the second quarter of 1980.  An unwelcome whiff of the 1970s is in the air, says Investor's Business Daily (IBD).

Some have begun comparing today's crisis with the one in the 1970s, when Britain's pound sterling crumbled and its economy suffered from a decade-long bout of strikes and stagflation.  Britain's ills hold some lessons for the United States, says IBD:

  • Britain has outspent the United States in trying to get its economy back on its feet.
  • It has put more capital, as a share of its economy, into its banks.
  • And it's spent lavishly on Keynesian stimulus.

It hasn't worked, says IBD.  Now, it's talking about nationalizing its banks.  But this won't work either, and the United States would do well not to emulate its British cousins overseas:

  • Nationalizing the banks might preserve them, but it will lead to a skewed, government-directed allocation of capital.
  • Politicized loans will become the norm: Those who aren't popular or connected -- which describes, by the way, many entrepreneurs -- will not get loans.

This is already happening in the United States with the Troubled Assets Relief Program (TARP) program.  As the Wall Street Journal noted in a news analysis of TARP, "some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states."

Source: Editorial, "Another Winter Of Their Discontent," January 26, 2009.


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