28.10.08 by Andrew Montlake

“Sipping down Raki, and reading Maynard Keynes”

For many people of a certain age John Maynard Keynes is a bizarre mention in the classic Deacon Blue song Dignity, but this most unfashionable of economic theorists is making a comeback.

Led by Gordon Brown their solution to the impending crises is to spend their way out of it.

Keynesian Economics argued that in times of depression governments should intervene to stimulate the economy through a combination of interest rate cuts and government investment in infrastructure. Though I am sure Mess’s. Brown and Darling do not quite advocate paying one man to dig a hole and another to fill it in, they have made the point.

Crudely speaking, by increasing investment and creating jobs, low interest rates encourage people to spend more, which helps us get out of a downturn quicker.

The problem is that this means more borrowing and sooner or later this has to be paid back. Which either means spending cuts or higher taxes.

Keynes has been disputed by many economic theorists, and the comeback into mainstream political thinking shows just how far the financial arena has changed over the past year or so.

Whether it works or not remains to be seen, but if this is a course that is nailed on, then interest rates have to fall dramatically still.

Don’t rule out another extraordinary 0.5% cut in rates before the next scheduled one. Whether banks play ball and pass this on is another matter.

Let’s hope it does work – now where’s my bottle of Raki?

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