Monday, March 17, 2008

The collapse, and subsequent takeover by JPMorgan Chase, of Bear Stearns investment bank has sent more shock waves resonating around the world's economies. The climate in the banking sector is clearly one of fear. Banks, which routinely lend to each other on a daily basis, are no longer doing so - so fearful are they that today's loans could turn out to be tomorrow's bad debts.

In a move designed to ease these fears, the Fed has already cut the rate at which it lends money to commercial banks, and is expected to cut the more general interest rate (yet again) tomorrow. Whether these interest rate cuts will work or not is moot, however - the worries are about whether loans will be repaid at all, not about how much interest is charged on the loans. In this context, the discount rate cut is a tinkering at the margins. (That's not to say that the economies of the US and UK don't need interest rate cuts to ease fears of recession - they do, but that's a slightly different albeit not altogether unrelated matter.)

More radical moves are under way with the coordinated approach of several central banks to ensure that loans can be made to the banking sector. The Fed is making up to $200 billion available, the European Central Bank up to $15 billion. The Bank of England is making £11.35 billion available as 6, 9 and 12 month maturity repurchase agreements (repos). The question is: will this be enough, or does the fact that the central banks are doing this just serve to make the whole system yet more nervy?

Wednesday, March 12, 2008

In light of the fact that inflationary pressures are still present, while the economy is turning down, it is clear that separate policy instruments are needed to ensure that the objectives of low inflation and high employment are met. In the recent past, monetary policy, in the form of interest rate adjustments, has been much to the fore. The announcement in today's budget that fiscal policy will be used to bolster the economy is therefore welcome.

Borrowing by government will rise to £43 billion over the next year. The government remains committed, however, to keeping to its 'golden rule' that borrowing for current expenditures should be neutral over the business cycle. This being so, the government projects that its budget deficit will fall in subsequent years.

Growth forecasts have been adjusted downwards, but the government is still anticipating growth of 2% (give or take 0.25%) this year. It expects a growth to pick up next year. This seems optimistic, and a delayed recovery could threaten adherence to the 'golden rule'. But the threat of recession now is quite severe, and it seems appropriate that - whether the 'golden rule' is met or not over the course of this cycle - fiscal actions should be taken to bolster the economy at this time.

Friday, March 07, 2008

An interesting story has broken today about the antacid medicine Gaviscon. The patent on this drug ran out several years ago, but Reckitt, which manufactures the product, has effectively precluded the marketing of generic equivalents by objecting to suggestions put forward for a name by which the unbranded product can be known. This has allowed Reckitt to sustain profits, but has cost the National Health Service (or, more accurately, the taxpayer) millions of pounds that could have been saved if an unbranded equivalent had been available.

Patents exist to give innovating companies protection from competition for a limited period. If there were no patents, companies would be reluctant to invest in research and development because imitators would come along and reduce the profits that the innovating company has earned as a result of its research. So it is right that patent protection should be available.

For a company to attempt to extend monopoly power beyond the life of a patent is understandable - it gains extra profits if it is successful in doing so. But this does also deny society the benefits of competition.

What really beggars belief about this story is that the authorities have allowed prevarication about the name of a generic product to go on for years. It is this failure to get to grips with an issue that has really been costly.