LIBERTY POST

Another Winter Of Their Discontent

Economy: Britain fell deeply into recession in 2008's final quarter, its economy shrinking 1.5%. That's a 6% yearly rate of decline, the worst since the second quarter of 1980. An unwelcome whiff of the 1970s is in the air.

Britain's top economic policymakers, led by Prime Minister Gordon Brown, are desperately casting about for an answer to Britain's crisis. Brown, who famously promised "no more boom or bust" after Tony Blair's Labor Party took power in 1997, has watched as the economy swooned and the British pound collapsed (see chart).

Things have gotten ugly very fast, with the banking system — once among the world's most respected — now in near insolvency. Things are so bad that U.K. banks' liabilities now total more than four times the size of Britain's total GDP, leading some pundits to gibe that it has become "Reykjavik on the Thames" — a reference to Iceland's bank meltdown last year that paralyzed its once-prosperous economy.

Some have begun comparing today's crisis with the one in the 1970s, when Britain's pound sterling crumbled and its economy suffered from a decade-long bout of strikes and stagflation.

For those who don't remember, it was the worst of times. A coal strike in 1973 led to nationwide blackouts. Angry voters ousted moderate Conservative Party Prime Minister Edward Heath in favor of Labor Party leader James Callaghan. But things didn't get better.

In fact, by 1976, Britain was broke, and had to go hat in hand to the IMF for a $5 billion loan.

In late 1978 and early 1979, Britain went through what pundits called its "winter of discontent." Garbage workers, coal workers, transport workers, even grave diggers, went on strike, and British industry was essentially placed on a three-day workweek.

Fed up with the chaos, the British people turned to Margaret Thatcher, the Tory Party leader, who rebuilt Britain using the ideas of Friedrich Hayek and other apostles of free-market thought.

Within three years of Thatcher taking the reins of government, Britain was booming.

To be fair, the situation today isn't quite as bad as it was in the 1970s. For one, there are far fewer strikes to contend with. For another, Thatcher's boom in the 1980s created a much larger and more diverse economy. Until quite recently, London vied head-to-head with New York as the capital of global finance.

But Britain's ills hold some lessons for the U.S. Believe it or not, Britain has outspent the U.S. in trying to get its economy back on its feet. It has put more capital, as a share of its economy, into its banks. And it's spent lavishly on Keynesian stimulus. It hasn't worked.

Now, it's talking about nationalizing its banks. But this won't work either, and the U.S. would do well not to emulate its British cousins overseas.

Nationalizing the banks might preserve them, but it will lead to a skewed, government-directed allocation of capital. Politicized loans will become the norm. Those who aren't popular or connected — which describes, by the way, many entrepreneurs — will not get loans.

This is already happening in the U.S. with the TARP program. As the Wall Street Journal noted in a news analysis of TARP, "some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states."

Just imagine these banks being nationalized.

Britain, and for that matter the U.S., would be far better off doing something along the lines of the Resolution Trust Corp. The U.S. formed the RTC in the early 1990s to buy bad assets from hundreds of troubled banks, then sell them on the market.

It worked. Banks cleaned their balance sheets, and began lending again. The system was saved.

Something similar would work today, if given a chance. It would be expensive — an estimated $1 trillion or so — but it would restore the banking system to health, and get the economy moving again.

It's a good idea, one we hope President Obama will adopt.