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Bookmark and ShareJosh Ryan-Collins is a researcher in the Business, Finance and Economics team at nef.

The recession is over claim the newspapers.  Growth has returned.  House prices are  definitely on the up.  Let the good times role.

That’s the good news – at least, for anyone who doesn’t think the Earth’s resources are finite.  The bad news is we are probably entering in to another credit bubble, of exactly the kind that caused the last financial meltdown.  But are we really that surprised? If you neglect a child and let them eat so many sweets they get sick, the general advice is to set some pretty strict rules afterwards to limit further sweet bingeing. In contrast, the financial sector has just had billions of pounds thrown at it by governments (and taxpayers) and, in return, it has been asked to change very little about how it operates.

As this astonishing interactive graph from the New York Times shows, big finance, after shrinking from $1.87 trillion dollars market capitalisation in the summer of 2007 to just $290 billion in March 2009, has now tripled in size from this low back to to $947 billion. Some of the banks got knocked off along the way of course, meaning some of the survivors – such as JP Morgan Chase – are even bigger than they were before the crash. And the sector as a whole is even more concentrated and, arguably, poses more of a systemic risk.

Yet, suggestions by Lord Adair Turner and, more recently, the Germany Finance MInister, Peer Steinbruck, that perhaps it might be time to impose a tax on financial transactions are being given short shrift.

Steinbruck’s neat suggestion is that receipts for the tax could be used to repay the cost to governments of tackling the crisis, including the bank bailouts. That sounds like the kind of policy that might be quite popular over here, with both Labour and Conservative struggling to put together attractive election manifestos in the face of the huge public sector deficit, caused in no small part by the bank rescue packages. Alas there is little sign of enthusiasm for the idea from the other members of the G20 that will be meeting later this month.  nef, you won’t be surprise to hear, has been arguing for a tax of this nature for some time, most recently as step 15 in our From the Ashes of the Crash booklet published last year.

Meanwhile, back in the UK, its all about house prices, as ever. And thank goodness, they seem to be going up again. But here again, the rate of increase looks scarily bubble-like (see graph below). House prices have increased for 3 consecutive months now meaning prices are flat across the year. One explanation, suggested by recent data on lending, is that banks are finally starting to hand out credit again, but have a strong preference for mortgages. In contrast, corporate lending, which is need to kick-start the real economy of businesses making profits and creating jobs, was shrinking rapidly.


The danger then is that the government’s £175 billion quantitative easing program – which has involved buying 7% of UK GDP – may have got bank’s lending again but only to feed another damaging house-price bubble.  Its not surprising though, when you consider that interest rates are zero, there is a severe shortage of housing in the UK and property is still the only asset that doesn’t attract capital gains tax.

Instead of just handing the banks billion of pounds to do with what they want, the government should either be creating credit directly in areas that will be most beneficial for the economy and environment – such as a green energy, transport infrastructure and domestic energy efficiency – or at the very least introduce taxes to both financial transactions and capital gains in property to prevent us sleep-walking back in to bubble economics.



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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.