An economic reflection

As 2008 comes to a close, one can look back and reflect that this has been an extraordinary 12 months that no-one one could have predicted.

Certainly, there were a few of us who thought that the economy needed long-term restructuring but at no time did anyone think that the whole edifice of the financial system would come crashing down as it did this summer.

Indeed, even when established firms such as Lehmann Brothers were being allowed to go to the wall, governments across the world remained in denial about the state of the global economy. Only when other banks started to come, cap in hand, to governments asking for public money to bail them out did politicians finally start to realise that the whole prosperity of the last decade had been built on quicksand that was slowly consuming those financial institutions in which millions had entrusted their savings.

The millstone around the neck of individuals, businesses and even governments has been the general philosophy that debt is good for the economy and that borrowing more and more money is acceptable behaviour, even though to many, it was unaffordable.

The first domino to fall in the global financial crisis was when American banks, many of which were backed by financial institutions in the UK, realised that the individuals that they had lent money to could not afford to pay it back and should never have been allowed to be put in that situation in the first place. This failure exposed the policies of other banks that were more than willing to lend money to anyone. Worst of all, governments turned a blind eye to these actions as increased expenditure and higher house prices brought in billions in additional tax revenues.

When countries such as the UK were floating on a sea of debt, very few people thought that banks would go to the wall and take the hard earned money of savers and ratepayers with them.

The reaction of the UK Government to the last couple of months of economic meltdown is one which political commentators have been observing in great detail.

Various polls have indicated that potential voters have started to back the incumbent government although whether that will continue is largely dependent on whether their primary economic strategy of reducing VAT by 2.5% will work or not.

For many, it is puzzling that the sole political strategy to deal with the crisis is the encouragement of greater consumerism when it was debt that got the economy into trouble in the first place. Indeed, if the retail sector does not recover during the first couple of months of next year, it is difficult to see what else the Chancellor can do without cutting government expenditure.

Of course, the people that have been forgotten by the UK Government are those who did not take part in the consumer splurge of the last decade. Whilst the lowering of interest rates has certainly eased the pressure on many homeowners, the result has been misery for savers across the UK and a reinforcement of the belief that those who have been frugal with their spending are now suffering because of the profligacy of those who have gone into debt.

Savers are a group that politicians ignore at their peril and it may be those who have not been supported by government policy who decide the result of the next election.

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