Coppola Comment

Since the 2008 financial crisis, business investment has fallen considerably. This chart from ONS shows how gross fixed capital formation collapsed in 2007-8 and has remained flat ever since: The associated commentary from ONS notes that the main falls have been in "dwellings", and in plant & machinery: The revised data suggest that GFCF fell sharply following the onset of the economic downturn, as businesses revised priorities in the face of a reduction in domestic and international demand, and as conditions in credit markets tightened. The downturn in the housing market also had a substantial impact on investment in Dwellings, which fell from £15.8bn in Q1 2008 before the economic downturn, to just £10.9bn in Q3 2009. Investment in Plant & Machinery also fell, while investment in Other Buildings & Structures and Intangible Fixed Assets remained relatively static during this period.  Basically, businesses just don't seem to be inves...

In a recent post , I noted that insolvent banks need to be treated differently from illiquid ones. Banks that are basically solvent but suffering cash flow problems need to be provided with plentiful liquidity: banks that are insolvent need to be allowed to fail (with protection for depositors and essential functions). The problem is telling the difference. Bagehot advised central banks to "lend freely against good collateral at a penalty rate" to illiquid banks. Note his advice about collateral. That's how you tell the difference - if a bank's assets are poor quality and/or its balance sheet is already so encumbered that only its poorer quality assets are available for use as collateral, it is much more likely to be actually insolvent. The same applies to businesses. It can be hard to determine whether a business is actually insolvent or simply suffering severe cash flow difficulties. Cash flow problems, if not resolved through timely application of sufficient wor...