Speaking to the Treasury Select Committee this morning Posen, a US macro-economic policy expert from Washington DC, said the UK is “beating the clock” when it comes to fixing the economy and the banks.
He said: “It’s pretty clear what the ideal should be – you fix the banks before you run out of fiscal borrowing, full stop. The UK is much closer to beating the clock on this than the US or most of the other major economies. Everyone here has been much more forthright and aggressive in dealing with the banking problem.”
But Posen warned that if a country’s banks are not capitalised by the time a stimulus package run out, an economy could hit another credit crunch.
He said: “At some point there will be a hard constraint on your borrowing and if you haven’t fixed the banks by the time you get to that constraint you will end up with another credit crunch, financial fragility and a lack of confidence in the economy – it’s a very serious matter.”
When asked about the nature of any UK recovery, Posen argued that it was very difficult to predict when things will stabilise. He said that rather than a curve, the economy will experience a “sawtooth pattern” as it moves up and down, much like the economy of Japan in the nineties.
He said: “We are looking at firm conditions, and it would surprise me if we were back to positive growth by 2010, but it will not be a smooth ride.”
Posen also played down the bank of England’s decision to pause on its quantitative easing strategy. He said the MPC may continue to stop and start easing as it assess its impact from one month to the next.
He said: “Much too much is being made of this so-called pause. The Bank is still engaged in quantitative easing, it has not withdrawn quantitative easing and it has not foreclosed on future quantitative easing, it is just trying to calibrate the right number and it’s very hard to work out what the right number is.”