Breaking Cover

Light blogging this week, thanks to the competing demands of work, Glenrothes and trying to have something approximating to a life. However, I'll break cover to make the following observations.

• In the present financial situation, the tendency to jump up and down yelling 'I told you so!', whether it relates to interest rates, borrowing, house prices, securitisation, boardroom pay, bonuses or whatever – can be overwhelming, whether indeed you did tell people so or not. The fact is, the present situation is unprecedented in any of our lifetimes. History books are likely to be as useful right now to our policy makers as a dog-eared undergraduate copy of Lipsey.

• Sadly, the Western taxpayer is going to be seen as the only solid guarantor for financial institutions. If banks require to be recapitalised by the state, we the taxpayers must get something in return in the form of an equity stake.

• Central banks should offer to further guarantee deposits and extend liquidity to the commercial banks.

• While the actions of governments may be the best hope of restoring stability in the short to medium term, we should recognise that direct government management of our financial institutions is unlikely to offer the best route to their recovery in the long term.

• Sooner or later, something is going to have to be done about the 'toxic' securitised debt on bank balance sheets. Whether its unwound in some way or ultimately taken on by the state, the extent of that debt needs to be quantified, and fast.

• It seems inevitable that interest rates will be cut quite substantially, which ordinarily would allow inflation to grow. However, we should recognise that inflation has been kept artificially low in recent years by cheap imports from Asia and migrant labour from Eastern Europe. Effectively, it's been inflation postponed.

• In any case, if the economy has grown further than its productive capacity is able to sustain, then inflation is probably the least of our worries right now. Deflation is probably the outlook for the next few years.

• Just as the banks must be able to lend once more to eachother, it's important that businesses are still able to access capital to finance themselves.

• Labour mobility is a key driver of economic growth. For that reason, it's imperative that the housing market is kept going.

• China, Russia and the oil-rich Gulf economies are the countries with the capital to invest right now, and the debt to exchange for equity. There is likely to be a substantial rebalancing of world power and influence in the next few years from the US and Europe in favour of the east, and we'd better get used to the idea.

• I enjoy a good cyber punch-up as much as anyone, but I'm inclined to ignore some of the sillier posts out there trying to criticise comparisons which have been made between Scotland and elsewhere. The fact is, no open capitalist economy has shown itself to be immune from events elsewhere. If there's any lesson to be learned, it's that size offers no protection to exposure, whether you have a economy the size of America or indeed one the size of Iceland.

• Finally, if anything, it's those who act firmly and decisively, regardless of size, who will emerge in the best shape from the present maelstrom.
  

Right, it's bedtime. Let's all hope that this has a positive and calming effect.