Banking: UN warns of risk of premature withdrawal

The UN is warning that the world faces a double-dip recession if governments abandon "macro-economic stimulus." That means that the UN reckons that governments should continue to print money and borrow heavily.

"Ending stimulus measures too soon in an effort to restore the confidence of financial markets could be counter-productive,” the UN Conference on Trade and Development (UNCTAD) said in its 2010 report.

So what is the UN's chosen solution for avoiding further financial meltdown?

"With the end of the debt-financed consumption boom in the United States, which the report expects will no longer serve as an engine of growth for the global economy, and neither China, the Euro area nor Japan likely to assume this role in the foreseeable future, policies for sustainable economic growth, job creation, and poverty reduction should be based on establishing a balanced mix of domestic and overseas demand."

So, in the absence of consumers borrowing money to buy things they don't need with the risk of being unable to repay those loans due to economic conditions, governments should force society at large to borrow money which has to be repaid by taxes, spending the money on government sponsored projects?

The lessons learned during the Asian financial crisis - which western governments generally criticised as bad practice - stood Asia Pacific countries, in particular, in good stead. "economic recovery remains fragile and its pace varies across countries, with emerging-market economies, mainly in Asia and Latin America, leading the revival. These economies had avoided large external deficits and accumulated significant international reserves before the crisis. They contained rises in unemployment during the crisis and achieved a relatively rapid recovery of domestic demand."

The lessons of those countries were not learned in the pre-crash days (when recession was probable but not certain) and have not been applied now. The latest Obama plan - to grow the labour force employed (indirectly) by government (through construction contracts) is not going to be enough to save the white-collar vote but it might save a few blue collar votes in the mid-terms in November.

The IMF comes in for criticism from the UN: "In transition economies in Central and Eastern Europe, recovery has been weak. Many of these economies ran huge current-account deficits and depended heavily on net capital inflows. Direct adverse effects from the crisis were exacerbated by restrictive macroeconomic policy responses to the crisis, often under programmes led by the International Monetary Fund (IMF)."

Those are the same policies that the IMF tried to impose on Asia Pacific nations in the Asian Currency Crisis - and those that followed their requirements such as Thailand - remain weakened.

And it's not good news for Europe: not only is the crisis not over, now Europe is at its heart, says the report "Recovery is also weak in developed countries and resembles the pre-crisis build-up of global trade and current-account imbalances. In the US, domestic demand has accelerated faster than in the leading current-account surplus countries, Japan and Germany, where recovery relies heavily on exports. Moreover, home-grown debt problems have made Europe evolve into the centre of the crisis and a laggard in the recovery."

But the UN's only idea is to lash money into a sinking ship: “Governments should withdraw stimulus only after achieving a full recovery of private domestic demand in their country,” the report warned.

With central banks running out of ideas again, the Bank of England is considering increasing interest rates despite the warning signs of declining house prices in many regions. That, plus the onerous tax burden inherited from Gordon Brown's decade-plus attack on the wallets of all Britons, may mean a short-term growth in credit before it dries up again and defaults rise.

Throwing money at that problem isn't going to help. And the UK is already in hock to more than its annual tax revenues as a result of the failed attempts to stave off recession under Brown when he claimed to have saved the world.