Interest rate cuts still not cheering up the doom-mongers

Nov 20 2008 by Nevill Boyd Maunsell, Birmingham Post

The Bank of England comes up with the totally unexpected news that it reckoned the post-Lehman havoc warranted an interest rate cut of at least two per cent.

That carries the implication that it intends to go well beyond the 1.5 per cent it delivered earlier this month.

In half-ordinary times the stock market would have celebrated such a surprise. But instead, yet again, it fell like a stone.

All right, that had more to do with what the plight of the American motor industry is becoming than the inner thinking of the Bank of England.

Still, share prices have sunk to a level where, historically, they should be interesting, back where they were in the depths of the last recession 18 years ago, and heading towards the levels of the devastation of traditional British industry in the early 1980s.

Last month the dividend yield on equities ran up past that on ten-year UK bonds, a traditional signal that the gloom is overdone.

Every conceivable disaster must surely be there in share prices, plus a sprinkling of inconceivable ones.

In real life, though, such comforting thoughts are stifled by a growing sense that we are in for a much longer slog than seemed possible just six weeks ago, pre-Lehman.

The longer the slog the slimmer the chance of escaping gross errors of judgment on the part of the government, the Bank, the FSA, the Americans, the Euros, let alone the boards of mere British public companies.

Next Monday, for a start, it is hard to see Chancellor Darling getting by without one in his Pre-Budget Statement. Gordon has exultantly flagged up an unprecedented pump-priming exercise. The man who abolished “boom and bust” now sees his chance to beat the recession and win an election at a single stroke.

Well, tax cuts can win elections. But the history of governments spending their way out of recessions is at best mixed. It was Hitler, not Roosevelt, who finally drew the line under America’s Great Depression.

This time lack of bank lending, not lack of public spending, is the bugbear. The banks (other than HSBC and Barclays) have taken Gordon’s billions, but defied his order to lend – they judge that their survival hangs on shrinking their balance sheets.

This is a head-on conflict of interest. It may not be resolved until he nationalises one or more of them outright. That will be later on in the slog.