Talking Airhead

Commenting on monetary policy is seldom a measured affair - between the ideological hobby horses and political allegiances, rational thinking rarely comes into it. Stepping across the pond to Olde England, a particularly damaging form of delusion is taking hold, courtesy of a nefarious perma-optimist called Anatole Kaletsky.

In his latest piece of sanctimonious claptrap, Mr. Kaletsky contends that the UK government is "right" to be ratcheting up the borrowing to a dizzy 57% of GDP. Poor Anatole, he fails to realise that the quasi-nationalisation of the banking system has two very nasty consequences to his quaint academic theories.

First, bankers will be "guided" to lend based on political expediency - especially if a Spring election is on the cards. As an example, in normal times a bank may well lend to a sound private-equity backed firm, and not to a group of credit-naive households. But with a state-run lending system the priority becomes votes, not rational loan underwriting.

Second, banks need to de-leverage. Even if you set aside the massive writedowns from the upcoming bankruptcy tsunami, banks would be crazy to be lend more - math tells them to make net lending negative, in order to repatriate funds and rebuild the balance sheet.

So Oliver Brown and Laurel Darling have completely misunderstood the problem, and lumbered an already imbalanced economy with a debt millstone.

I actually met a client of Mr. Kaletsky's research services yesterday. A key selling point was that the reports concerned were "straightforward - simply A to B". Just like a train heading for a crash, I guess.

PS: Anatole, just for your information - it's now cheaper to buy credit protection on Unilever than UK government debt. Your piece states that this borrowing binge is "not a serious problem" - the market seems to be pricing in something horribly different.