Polly on Dave

This is laughable, coming from Polly.

Cameron\’s plan for retrenchment is economically illiterate, and would be frighteningly dangerous if he were in power.

Economic illiteracy accustaions from Our Pol? However:

Take his plan for a loan guarantee to let banks lend again with the state as guarantor. It sounds good – indeed, the government has already said it will do the same, responding to the Crosby report. Cameron\’s deceit, in his eagerness to cut borrowing, is to pretend he can do it cost-free by raising interest rates enough to cover any losses from failed loans. Nonsense, say those working on the scheme. To make it self-financing, he would have to raise the loan interest rates to many times their present rate, and no one would want them. Guaranteeing loans, some of which would fail, costs some £2bn – but in Cameron\’s fantasy economics he pretends he can both fix this crisis and cut spending.

What\’s rather more sobering is that in this case she\’s actually correct. If the interest charged on loan guarantees is to cover the potential losses, then they would indeed have to be at market interest rates (market interest rates already encompassing those default risks). And the point is that no one\’s all that keen at borrowing at market interest rates, the deficiency this plan is designed to cure.

Whether it\’s a good plan to guarantee such debts is another thing entirely. But as she\’s described the plan, Dave really is being economically illiterate. Which doesn\’t really bode well, when Polly is more clued up than the Leader of the Opposition.

8 comments on “Polly on Dave

  1. Polly: “Guaranteeing loans, some of which would fail, costs some £2bn

    The FT, recently, on the topic of such loan guarantees: ” Defaults on loans covered by similar schemes since 1981 have run at 28 per cent…

  2. Isn’t it a problem with intitutuions being unwilling to lend (due to them having to recapatilise) rather than with buisinesess being unwilling to borrow?

  3. Bit of both. The companies who’re borrowing are the ones who need to refinance struggling businesses based on cheap debt or go bust; but the people who have good ideas and ought to be borrowing (even if it’s a bit more expensive) to grow them aren’t.

  4. I thought rosscoe was right – lending costs are relatively cheap (historically) if you can borrow the money, it’s just that no-one wants to risk lending any money. People and companies are happy to borrow as much as they need.

  5. Polly said: “Nonsense, say those working on the scheme.”

    They would say that wouldn’t they.

    Lenders are recapitalising like buggery, in part due to cocking up the risks they are exposed to, in part due to upped capital adequacy requirements and in part thanks to some tightening their belts. Does Polly not see the protection racket the EU plumped for by saying to banks ‘you must increase your capital now’ while being the only serious source of that capital? Add in the various central bank secret lending schemes, tat for cash swaps, a decade of failed regulation and idiot bankers we are burdened with a lending market that departed the real world long ago.

    There is a reasonable argument that we’ve tinkered so much and for so long we can hardly stop tinkering now. However, at the very least Dave appears to want to reduce indebtedness. That sets him some considerable distance apart from Gord.

    Polly certainly plays a mean game. The blatant tractor statistics on public sector debt are used to admonish Dave’s comments on debt in general. We are horribly burdened personally and public sector debt is expected to balloon.(Did Germany, Italy, Japan etc have the same rate of public sector debt inflation we are projected to have or did it creep up over time? If so how did they suffer at the time of the expansion? Ours will go from 45% to nearly 70% in 3 years.)

    Sad to say Polly and her ilk suffer from the same delusions the banksters did – that of seeing only the horizon that suits them. CDOs plus insurance did not equal no risk and house prices were not likely to always go up. Cuts in spending (or even slower growth) don’t automatically equal cuts in services. Does Polly never waste a penny?

  6. ” If the interest charged on loan guarantees is to cover the potential losses, then they would indeed have to be at market interest rates (market interest rates already encompassing those default risks)”

    Er..did/do the market rates encompass the default risk? They should, but if they had accurately assessed the risk for the past few years then surely we wouldn’t quite be in the mess we are now?!

  7. if they had accurately assessed the risk for the past few years then surely we wouldn’t quite be in the mess we are now?!

    Indeed. The proposed government guarantee scheme will only make things worse, as the banks will have less incentive to judge risks correctly.

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