One of the fascinations of the study of history is living through a genuine historical epoch. We are there now.

Each month another number is described as the “worst since records began”. We are entering the second year of a rare economic depression, which at minimum is the worst for 50 years, and at maximum may be a once in a century occurrence.

In real-time it doesn’t feel like that. Most of us are still doing fine and waiting for the bombshells to drop. It’s a bit like the “phoney war” in Britain during 1940. Hostilities had been declared, but nothing outwardly was happening.

Book history concertinas major events so they appear to fizz in quick succession like fireworks. In reality, there may be months or even years between them.

Quite often the collapse of some political structure, clearly doomed, takes an age to manifest because so many people at the top have a stake in its survival. They pour in quantities of other people’s money to shore it up, or just lie about the real state it’s in. Think Soviet Union or the euro currency zone.

That’s why there’s an air of unreality about another Great Depression now. Various mental buffer zones are shielding us from events that may be truly awful. Politicians are saying one thing in private, while jollying us along in public.

So, given the almost impenetrable armour covering our medium-term futures, what might be the precise problem?

Actually, in my very humble opinion, I believe there is a high level of precision in the problem before us:

Assets prices are falling so fast, no financier can back them until a loan is guaranteed against loss.

What it means is that asset prices have to find a floor. Only then will the real economy find willing partners in the financial sector and lending start to flow. When a 90 percent loan is a safe proposition, i.e., when prices stop falling, the banks will begin doing what banks do again.

No amount of government cajoling will drag them out of hibernation until it happens. At that point the “green shoots” of recovery will be apparent to all, for it’s not the actual amount of money in the economy that counts, but the rate at which it is spent that creates the multiplier for economic growth.

Which then is the chicken and which the egg? If the banks are not lending, the deflationary spiral will rumble on and on. And while prices keep falling, banks will not lend. It’s a classic lock-in without a key.

Sticking my neck out, I think every downturn in asset prices probably has an inbuilt floor.

If official intervention aborts it before that floor is reached, it simply traps pain in the system which has to be purged anyway, prolonging the recovery.

More likely, government actions push the recession below the notional bottom by seeking to ameliorate the ills of the moment; or, as in the present case in Britain, by urging the populace to continue the conditions that caused it.

There is possibly a theoretical case for allowing a serious down-swing to hit its floor quickly, so that conditions return to normal sooner rather than later, leaving the public finances in better shape.

I may be approaching the problem too mechanically. I’m aware that it’s psychology that primarily drives economic activity. I just can’t see the point of uniting the ostrich with the sand by slowing down the inevitable.

If a quick bust has advantages, how might that be arranged without unleashing an unstoppable whirlpool to oblivion?

The fear of an abysmal collapse is overdone, in my view. Normal stop-loss conditions apply as the descent continues. Big investors with lots of cash move in to pick up historically cheap assets, even if the banks are holding back.

In 1981, Margaret Thatcher and Geoffrey Howe acted against the prevailing Keynesian tide in the face of a virulent recession in manufacturing industry, mainly caused by decades of trades union bad practice. Fury erupted. A total of 365 eminent economists, including the present Governor of the Bank of England, Mervyn King, wrote a stinging letter to The Times.

Within a year the economy was recovering. Britain went from strength to strength until once again the government threw it away by fixing the currency to the German mark. Will they never learn?

Is there a lesson there for us today? Hit the bottom quickly to avoid a dead cat bounce. Take the pain on the chin and work with the grain of events. Don’t repeat the mistakes that brought us here.

For that we need politicians with fortitude and talent. We don’t have them yet.

John Evans

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