"This is the most serious financial crisis at least since the 1930s, if not ever."
So spoke Sir Mervyn King, governor of the Bank of England yesterday. You don't get to be head of Britain's central bank by indulging in hyperbole.
King was explaining why he was flushing another £75 billion (around$116 billion) worth of money into the system in a second round of "quantitative easing."
Trading conditions everywhere have deteriorated, according to a report issued by the Bank yesterday, "The pace of global expansion has slackened, especially in the United Kingdom's main export markets."
Then in euphemistic terms the report spotlighted, "Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery."
In other words, the euro-zone's banks can't lend because they are over exposed to Greek debt and since no one in the UK will lend we have to pump money into the system. Shock and awe is how the British press described the Bank's move.
Big question 1: what guarantee that this money will find its way to the right places? Will retail banks start lending to small businesses? Will these businesses use the money to hire people?
The philosophical and pragmatic flaw of Anglo-American capitalism is that governments can prime the pump, but private business is under no compulsion to use the money to create jobs.
The last round of QE was marked by inflation in commodity prices indicating that perhaps the money wasn't getting into the wider economy. It seems to have got no further than market speculators in the City of London -
At the Tory Party conference at a panel called "Jobs and Growth," Stuart Fraser, policy chairman of the City of London (London's financial district is its own quasi governmental entity) spoke in the abstract of more targeted government intervention - My memory is he also mentioned Germany as an example of what he meant. Or maybe that was me in my own mind, since Germany has an industrial policy inwhich government and the private sector plan the economy together.
There are several reasons why Germany has done better than any of the traditional G7 economies in the last three years: they make stuff people want to buy in China - like Mercs and Beemers; for historical reasons they resist populist demagoguery (Fox News and the Daily Mail) and so have greater social cohesion; but mainly, it's because federal and local government, industry, the unions, the banks work together to shape the economy.
It's a middle way between rabid free markets and the Chinese model of no political freedom and nomenklatura capitalism.
Big question 2: What will this do to inflation ... since the Bank of England has effectively said it will not raise interest rates for the foreseeable future?