How To Solve The Global Financial Crisis: A 20 Point Plan

We are often asked by our readers: “How would you solve the Global Financial Crisis?”

Having analysed in detail both the factors that led to the boom and the actions of governments since the bust, it’s clear that what’s needed is a much more radical plan. Below is a 20-point plan of action that we believe would help Britain return to sustainable prosperity.

It’s worth noting that many of these steps would also help other heavily indebted countries such as the US, Japan, France, Italy, Spain etc.

  1. Slash taxes: Immediately slash the main rate of corporation tax from 24% to 12.5%, just as Ireland did in January 2003. The result in Ireland was an increase in tax revenues of over 24% per year. Cut the cost of starting a new business by deferring national insurance contributions for the first 3 years.
  2. Cut regulations: Cut regulation with an emphasis on employment law and health and safety rules. Complying with such regulations costs small businesses in Britain more than £16 billion a year. British businesses are burdened by huge quantities of bureaucratic red tape, and as a result Britain ranks 89th in terms of the regulatory burden imposed on businesses. That puts us behind Egypt, Paraguay, Zambia and Saudi Arabia. Ensure that the remaining regulations were massively simplified.
  3. Reduce the size of government: Reduce the size of the state to around 25% of GDP. Today total public spending in the UK accounts for 46.7% of our national economic output. Meaning that almost half of our economic activity comes from government spending which gets its money from the private sector. This places a huge burden on the portion of the economy that actually creates wealth and jobs. The Office for Budget Responsibility predicts that 710,000 public sector jobs will disappear in the years ahead, however this is only the same number of posts created by Gordon Brown during his years of profligacy. To quote President Reagan: “In this present crisis government is not the solution to our problem government IS the problem.”
  4. Cut government waste: In addition to reducing the size of government, steps should be taken to make government more efficient. In terms of the effectiveness of government and its agencies, Britain ranks 72nd out of 139 countries. Putting us behind Ghana, Pakistan, Malawi and Egypt. The two areas to tackle first are education and infrastructure. Despite an increase in education spending of 60% in real-terms between 1999-2000 and 2009-2010, Britain ranks 28th for the overall quality of its education system, behind Costa Rica, Lebanon and Malta. And in terms of maths and science Britain ranks 55th, behind Romania and Cyprus. The UK’s roads rank 35th below Portugal, Namibia and Croatia.
  5. Return to sound money: Begin the process of returning the British pound to a gold exchange standard, the benefits of which have been discuss here and here. Although a strong currency would harm exports, the benefits of attracting capital investment and the likelihood of regaining world reserve currency status would more than outweigh the negatives.
  6. Move to full reserve banking: Begin the process of moving away from our system of fractional reserve banking, in which a bank need only hold a fraction of depositors’ money in reserve, to a system of full reserve banking.
  7. Drop GDP: Drop GDP as a measure of reporting economic prosperity. GDP measures spending, and the amount we spend is not always indicative of how wealthy and prosperous we are, particularly in a credit boom. The focus should be shifted to metrics such as real after tax disposable income.
  8. Improve economic reporting: Record and report more realistic statistics and produce a more accurate dashboard for the health of the economy. Inflation measures such as the consumer prices index (CPI) should actually reflect the true rate of inflation.
  9. Adopt Austrian economics: Adopt and begin teaching Austrian economics rather than the warped version of Keynesian economics we follow today.
  10. Raise economic and financial literacy: Introduce economics and finance into the national curriculum, so that people understand that it’s saving and investment that makes a society wealthy and prosperous, not borrowing and consumption. NB: Such nonsense as the Efficient Market Hypothesis would be left out.
  11. Break up the too-big-to-fail banks: Take steps to break up the too-big-to-fail banks.
  12. Ring fence the banks: Split high street banking away from investment banking.
  13. Limit financial leverage: Impose strict limits on financial leverage.
  14. Regulate OTC derivatives: Regulate the Over-The-Counter derivatives market.
  15. Return to capitalism: Return to true free-market ‘Laissez-faire’ capitalism and get away from the crony capitalism or corporatism we have today. The best regulation is failure. There would be no more bailouts.
  16. Stop interest rate suppression: Stop the artificial suppression of interest rates by the Bank of England through its programme of QE.
  17. Prepare for peak oil: Start preparing for peak oil by incentivising the development of alternative energy sources such as clean coal, thorium, tidal power and algae.
  18. Balanced budget: Make balancing the budget a legal requirement. Only under conditions such as war could the government go into debt, and not without a vote in parliament.
  19. Reform the FSA: The financial regulators have consistently failed to protect investors and the public from massive fraud and market manipulation. The FSA should therefore be reformed such that it has the power to stamp out corporate and financial corruption. Sufficient incentives and protection should also be provided to whistleblowers like Harry Markopolos so that next time someone actually does listen.
  20. Establish a new ratings agency: Over the past six years ratings agencies have proven themselves almost entirely ineffectual. As a result it is very difficult for investors to gauge the credit worthiness of banks and other financial institutions, many of which still hold a large amount of toxic assets and remain highly leveraged. A new independent ratings agency should therefore be established that isn’t afraid of telling the truth and providing an accurate assessment of troubled companies and countries.

The bottom line

It’s true that these steps would induce an economic recession, or even a depression. But the bottom line is that a severe adjustment is inevitable anyway. The fact is, the sooner we get the pain out of the way, the sooner we can begin a new cycle of true prosperity that is actually sustainable.

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