Imagine that the Crisis was a Shortage of Bread


The bailout of the banks and the policy of Quantitative Easing constitute the single worst economic decision in history. Let me prove this by way of simple analogy.

Imagine that the problem was not a shortage of loans, but of food, caused by a deadly bug that had contaminated every grain of soil. Only one strain of produce that was immune: wheat. There was one food we could still eat: bread.

Imagine also that the bread baking industry was going through its own crisis because, a month earlier, the UK’s dominant retailing business, Tescopoly, had decided to sell bread at 1p per loaf in order to rid the nation’s high streets of the few remaining shops that were preventing its continued expansion.

The Government decided to bail out the bakers by:

  1. Servicing the debts of every UK bakery;
  2. Paying senior bakery staff handsomely in return merely for turning up for work;
  3. Fixing the price of bread. The market price of a loaf was £2 (pre-Tescopoly). The price was now fixed at 40p. [UK interest rates were cut post-crash to 1% from 5%, an 80% reduction.]

How much bread did the bakers produce after this bailout?

As the disappointing news of continued starvation spread reports emerged of bakers stockpiling wheat yet ordering new Ferraris.

A second emergency policy was announced: falsifying the wheat accounts. The public knew that the exercise was simple false accounting, but they did not object, so desperate were they for any hope of increased bread production.

Virtual computer generated wheat was treated as if it were real. It was kept in a virtual cold store and the policy was given a fancy name – “Quantitative Freezing".

Incredibly this policy boosted morale for a year or so and was presented as working.

The emperor’s true nakedness was exposed as the bodies piled up.

A longer version of this article was posted at the Cobden Centre here.