The living dead and a prospect too horrible to contemplate
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It chills the soul but one of the positives for lenders David Smith, economics editor of the Sunday Times, identifies at our Strategy lunch is that in this recession unemployment has been mainly concentrated in the under-24 age group - positive because otherwise the level of repossessions could have been a lot higher (see feature starting on page 22).
But am I being unduly gloomy? After all, the evidence suggests that house prices have stabilised and many of the world’s big economies, although not ours, have returned to growth.
Also, thanks to quantitative easing the stock market has seen an astonishing recovery although the downside here is that this has also led to the return of obscene City bonuses and a fresh challenge to the government, or any new one that might be formed in the spring.
This government and the next will have to show the City who’s the boss while avoiding an exodus of expertise to more accommodating franchises such as Switzerland.
On that score the Liberal Democrats’ ever vocal shadow chancellor Vince Cable has been ambiguously reassuring, telling the BBC that the banking industry is probably too big for the UK economy anyway. This echoes a view expressed earlier in 2009 by Lord Adair Turner, chairman of the Financial Services Authority.
The concept of zombie banks is one the book The Zombie Economy extends to zombie governments, zombie firms and zombie consumers which could interact to create a double-dip recession
So there’s no reason to fear French president Nicolas Sarkozy’s challenge to the City. He wants “the world to see the victory of the European model which has nothing to do with the excesses of financial capitalism”. With chancellor Alistair Darling, Turner and Cable on the case we have an insider A-team working to that end anyway.
To be fair, a consequence of deleveraging banks is the possibility of deleveraging the economy which might be one of the reasons why we’ve been so slow to return to growth and it’s been predicted that our gross domestic product will slip below that of Russia in the not-too distant future.
Of course, quantitative easing and massive stimulus packages are supposed to act as a compensating factor but on that score the jury is still out, both in the UK and the US. As can be seen in Craig Focardi’s report on the US mortgage market (see page 29) it’s apparent there’s more pain to come.
How bad this will be is anybody’s guess but if you turn to Chatroom on page 35 you’ll see that in stress testing lenders the US authorities amazingly overlooked big hitters Fannie Mae and Freddie Mac. The concept of zombie banks - not quite dead but not fully alive - is one the book The Zombie Economy extends to zombie governments, zombie firms and zombie consumers. These could interact to create a downward spiral but because economic stimuli have yet to work the immediate challenge is the ability of governments to borrow.
As the book notes, stimulus packages could become too expensive but if they are brought to an end too soon there’s a risk of creating a double-dip recession. And that’s a prospect too horrible to contemplate.
