How can we create a better working relationship between Governments and the markets they regulate?

Generation after generation has to make the choice between them. Why?

The solutions arrived at seem to turn on the nature of the business cycle and the strengh of current booms and downturns.

In the present world recession the context is so severe that it’s become a crisis in both the financial markets and the real economy. Many Governments are having to nationalize part or all of their banking systems. Financial services never seemed so brittle.

Is that really the case though? In a well-argued article, The world needs Up-To-A-Pointism, John Evans suggests that by staying within the boundaries where Governments and free markets work best, the world would be a much more stable place to live and do business.

Although mostly mutually-exclusive, the interface between regulation and free markets could be made to operate more efficiently, to the benefit of both.

It may sound strange but Harvard University bears a heavy responsibility for the credit crunch.

Last week a “flight to safety” of investors in America’s $3.5 trillion Treasury money market was only halted by Secretary Henry Paulson’s swift action in nationalising the banking sector’s bad debts.

Read The Great Harvard Sausage Scandal 2008 over at Syntagma.

Who, then, are the people that created this vastly complex set of financial instruments based on the always-temporary phenomenon of rapidly-rising asset prices? And who were their managers who let them do it?

It appears that a large number of them are alumni of the Harvard Business School, even those working in Britain and Europe. President Bush is one of them. British PM Gordon Brown has surrounded himself with such types for more than a decade.

Read the rest of the article.

The British housing market could take 20 years to recover says one of the City of London’s leading investment banks.

In a note to clients, Mark Hake, an analyst at Merrill Lynch said ” … it looks significantly worse [than the 1990 downturn], with house prices falling faster and further and very little recovery in real terms expected over 20 years. … House prices are expected to be below their August 2007 peak in a further 10 years’ time.”

The investment bank forecasts house prices to fall 17 per cent this year, while inflation is set to continue its upward march in coming months as the economy absorbs the effects of higher oil and food prices.

If that were not bad enough, David Kern, economic advisor to the British Chambers of Commerce, thinks unemployment will rise to nearly two million by the end of 2009. He commented, “The results of this survey signal a menacing deterioration in UK prospects We are now facing serious risks of recession. London appears pretty weak and it’s across the board. Businesses are in a lose-lose situation. Falling demand and the squeeze on consumer disposable incomes will limit how far prices can be increased.”

With Nicola Horlick warning us off shares for three years, there aren’t many places left to put our funds.

As RBS’s credit analyst said last week, cash is the only safe haven now.

After finally ridding the British economy of its endemic postwar inflation, the current UK government seems to be slipping back into its old ways.

The Chancellor of the Exchequer (Finance Minister) recently said, “Pay awards in both the public and private sectors have got to be consistent with our inflation target of two per cent.” His reasoning is that if pay rises were higher, prices would go up and consume the value of higher pay.

A former Conservative Health Minister, who knew a thing or two about economics had this to say on the same subject, “Of course when there is inflation, prices rise, including wages, which are the price of labour. That is what inflation means; the statement is a mere definition. But it is as absurd to say that inflation occurs because prices rise as to say that it rains because the ground gets wet. You cannot have rainfall without the ground becoming wet; the one is inseparable from the other; but we do not mistake the result for the cause.”

His alternative to Labour’s prices and incomes policy approach would be to take money out of circulation by the government spending less or the Bank raising interest rates, or a combination of both.

In Britain, growth is at present around 2pc, and is likely to fall to about 1.3pc in the coming year. Inflation, according to government approved figures is about 3.5 per cent. That gives a total of 4.8pc.

Compare that to a rise in money supply (M4) of 12pc and the cat is out of the bag.

Inflation is caused by having too much money chasing too few goods. And it’s the government that injects that money into circulation, partly by excessive borrowing.

Plus ca change …