The real solution to the economic crisis by Bill Kay

Don't get excited - what I'm about to say may strike you as so obvious as to be a complete waste of blog space. If so, please move swiftly on with my good wishes and the hope that the word will spread and we can all then get down to sorting out this mess.
For it seems to me that the millions of words, acres of newsprint and forests of trees that have been devoted to the causes of and solutions to the crisis have left many people - expert as well as non-expert - confused. Meanwhile, thousands of protesters in London are threatening to string up bankers, brandishing slogans like 'We won't pay for their crisis', and up in Edinburgh that nice, shy Fred Goodwin gets his windows broken and his car vandalised over the huge pension he is insisting on drawing from RBS. Good on you, Fred, I'd do the same - but I'd keep my home address quiet.
Ironically in view of the public outrage, the bank bailouts are last year's story. The banks' losses started the crisis, so they needed fixing first. However, that put politicians in the uncomfortable position of lending them money to sort out their mistakes, instead of letting them go bust as would happen with nearly every other industry. But that phase is virtually over, give or take the odd few billion here or there.
The real problem is just beginning, as brilliantly set out by John Waples in today's London Sunday Times. It's so succinct, it's worth quoting at length:

'The jump in stock markets on both sides of the Atlantic over the past two weeks, combined with the bank recapitalisations, has given hope that the worst may be over. But let’s be clear — this recession has only just begun.

'All we have achieved so far is to make the banks strong enough to withstand the onslaught of what is to come. The recession is now making a direct hit on the economy. We know that the government thinks it can contain at least £120 billion of bad news. That is the size of the total buffer it has insisted our big four banks need to hold in reserve to withstand the torrent of impairments to come. And that is before the banks take part in the asset protection scheme, designed to help dispose of toxic assets. This could run into hundreds of billions.

'Some 120 small businesses are going bust every day and the economic consequences of this are huge — mortgage and credit-card defaults, personal bankruptcies and a collapse in consumer spending.

'And there are some corporate upheavals, in the shape of big restructurings, around the corner. These will result in debt-for-equity swaps and multi-billion-pound bank write-offs. You only have to look at the 50% fall in Boeing’s order book last year to get a feel for what’s happening. Then work back through the supply chain.

'We are still only at the beginning of taking leverage out of the system and it is going to take years to unwind everything. There are some encouraging signs, such as the issuance of corporate bonds, but too many people still cling to the hope that recovery is not far off. This is going to be a long haul. The stock-market bounce of the past two weeks reflects only the fact that at a (pre-exceptional) trading level the likes of Barclays, RBS and Lloyds are on the mend, even though lots of their corporate and retail customers are heading for intensive care.'

Got it? The problems are only just beginning. The solution? It's so obvious that it shouldn't need saying - more economic activity.
That can come in one of three ways: more spending, more investing (in real things, not just stock market investors passing money among themselves), or more donations - to charity if you like, but the nearest beggar will do just as well.
The important point is that whoever you release money to must also use it to do one of those three things. Keeping in a bank or under a mattress will not do.
Critics have said that debt got us into this mess, so it can't be the way out. But one of the big problems is that banks aren't lending. They've taken fright, and that is starving industry of the cash that keeps it going. You can say it shouldn't, but that's the way business works and keeps everyone in jobs.
Banks are still lending in small ways. They haven't yet started cutting credit card limits. Stores are still issuing store cards.
The problem there is that more and more of us are worried about keeping our jobs or maintaining other sources of income as interest rates have been cut. So we don't want to borrow, thank you very much.
We have national leaders, many of whom will be saying their piece in London this week, telling us to spend (but not too much) and then go into reverse and save (but not too much), unless you are in China, in which case it is your global duty never to save another penny and go on a wild binge for the rest of your life, preferably buying as much foreign stuff as your government will let you.
But while these mixed messages sound all very well in economics seminars, they are no use to the general public. Craziest of all is this notion that we should spend to beat the recession but then save and pay off debt to get western economies back in balance.
We are creatures of habit, so once we are used to a given level of spending - and the standard of living that that brings - we don't like reining it back. What are we supposed to cut? Ditching the odd trip to Starbucks or McDonald's is fine, even overdue, but are you going to stop seeing your friends, or going on holiday, watching TV or using an iPhone? These are the kinds of decisions that would make a serious impact, but they are the hardest to do.
So I think the politicians and economists are going to be disappointed twice over. We will spend, but more cautiously than before, and save, but not enough. The biggest source of new debt, mortgages on bigger and bigger houses, will simply not be permitted by the banks, whatever Obama or Brown may say. And an enormous amount of spending was tied to moving house - new carpets, curtains, TVs, washing machines and so on.
And we will save more, but much less than our leaders would like. Result: as Waples predicts, this crisis is going to have to be allowed to play itself out, painfully and over several years. The quick fix, of lurching from overspending to oversaving at a signal from on high, just ain't gonna happen. As with the long-predicted pension crisis - too many baby boomers soon drawing pensions that will have to be paid for by a shrinking workforce - we will muddle through. But millions will be thrown out of work and there will be more social upheaval. We must pray that that upheaval does not install the sort of power-crazed warmongers that the world suffered in the 1930s. That's the real bottom line.