Geogre Kerevan: Economy needs help to avoid new depression

IT’S beginning to feel a bit like 1937 again. That was the year the Hindenburg crashed, Guernica was bombed and the Dandy first published. It also saw America and Britain go into double-dip recession after four years of steady recovery from the pit of the Great Depression.

Yesterday, the market volatility in America and Europe continued apace. This followed publication of more negative economic data – statistics that suggest the stimulus packages put in place after 2008 have run out of steam. Gold touched a new high in Asia, and oil – a bellwether of economic growth – fell. Is this just a case of summer collywobbles brought on by the failure of American and European politicians to perform? Or do we need a fresh stimulus plan?

According to Andrew Haldane, executive director for financial stability at the Bank of England, “we have nothing to fear but fear itself”. In a paper comparing the Great Drepression with today, Haldane quotes Franklin Roosevelt’s great dictum, claiming the problem in 2011 is “an exaggerated sense of fear” which is making us risk-averse.

Haldane has a solution: “With fortuitous timing, there is a new tool in the box, a third arm of macro-economic policy. This is so-called macro-prudential policy.” By this he means varying the financial regulatory regime to retard or stimulate bank lending. He praises Roosevelt’s use of macro-prudential policy in 1937, saying: “Fear in financial markets was mounting. The situation was eerily reminiscent of today. At that point, Roosevelt turned macro-prudential … a relaxation of prudential and valuation standards was announced for US banks … It worked. Lending and growth resumed.”

The only macro-prudentialpolicy I know of has been to force banks to raise their capital ratios at the expense of distributing profits to shareholders. Haldane’s paper (on the Bank’s website) has a table showing that growth in UK bank lending has recovered somewhat since the dark days of the credit crunch. But contrary to Haldane’s optimism, it remains barely in line with our anaemic GDP growth. I don’t call that a macro-prudential stimulus. That, coupled with the reluctance of consumers to spend, means we need a fresh economic boost if we are to avoid another 1937. Ditto America.

But what? The markets will punish any increase in government borrowing, so that suggests another round of quantitative easing. It’s no accident that the ending of the US Federal Reserve’s second QE package in June heralded the current bear market. What about this week’s higher-than-expected inflation figures, you ask? Why not combine QE with a nudge upwards in interest rates and give savers the courage to take risks again?

Shell and BP both know a merger is their destiny

ROYAL Dutch Shell failed to learn the lesson of BP’s disaster last year in the Gulf of Mexico, and was unnecessarily tardy in publishing details of its oil leak in the North Sea. That said, the Shell leak was only about 0.02 per cent the size of the BP spill.

For years, there have been hints regarding a marriage of the two UK oil majors. Both need to secure scarce new oil supplies but are excluded largely from prospecting in Opec countries, which contain 75 per cent of proven reserves.

Russia’s state-owned Gazprom effectively expropriated control both of Shell’s Sakhalin-2 project and BP’s Kovykta field. This spring, BP’s plan to explore the Arctic with another Russian firm, Rosneft, also collapsed. Shell wants to start drilling for oil in the Arctic in 2012 but its North Sea leak might lead to legal difficulties in America.

Other western oil giants face similar problems. But that means it is only a matter of time before the whole global industry consolidates. Better then for Shell and BP to merge, than have either – probably BP – picked off by the America majors.

In 2004, BP’s then boss, the ambitious Lord John Browne, sought a merger with Shell, only to be blocked by his own board. Last year, as BP’s shares slid following the Gulf spillage, it was Shell’s turn to contemplate a dream merger that would dwarf Exxon-Mobil, the American behemoth. Shell backed off because of BP’s potential Gulf liabilities. But if BP’s American problems diminish, expect those merger rumours to start again.