In 2008 economies across the globe crashed as a worldwide shortage of cash liquidity brought the financial system to a standstill. Rather like a car that has run out of petrol, subsequent attempts to restart the engine have failed. Like any stranded motorist we have poured financial petrol into the banks by way of quantitative easing; but instead of kick-starting the economy we have flattened the battery and wasted fuel.
The root problem is that there is a blockage in the system. To stay true to our motoring analogy: it is just like the air lock that occurs when a car runs out of petrol. Fuel is unable to reach the engine and attempts to get back on the road are doomed from the outset.
A mechanic will tell you that the correct way to restart the engine is to 'pump prime' the engine. In the old days it means pouring just a dash of petrol into the carburetor which would then allow the engine to run for long enough to pull the fuel up from the tank. In economic terms this is what we need to do with our financial system. The fuel of course is money and the engine is economic activity.
In the same way that a fuel tank serves a car, the banks serve an economy. There is little point in filling either if the 'motor' is not running. We have to reduce the amount of money which has been practically free flowing into the banking system and instead look at ways of injecting it directly into measures that genuinely stimulate growth.
The Keynesian principle of pump priming was first employed by President Hoover, and in economic terms it has the same vintage as the old mechanic's advice. But that does not make it any less appropriate although it does mean that we need to tailor it to fit current circumstances and to meet today's requirements.
So what are these?
It seems likely that Britain will remain in a recession, certainly an economic slump, for some time yet and there is a clear need for measures that help us all cope a little better with this scenario. If we cannot boost the amount of money that people are able to bring into their households then we must reduce outgoings and ensure that when the economy does recover then everyone will feel the benefit. This means that we need to reduce fixed costs. And in our society, perhaps the biggest one of those is rent.
The government has made no secret that it wishes to reduce the welfare bill. The largest and perhaps the most problematic part of this move is tackling housing benefits. But rather than focus on a few families, wouldn't it make more sense to try and reduce everyone's rent? If so when we would all have more money to spend on the high-street and economic growth would follow. This is nothing new. Last time mortgage payments fell, the economy grew.
The government claims to be putting in place a number of infrastructure projects to fulfil the need for growth. Unfortunately most of these are some time away and will do nothing to reduce the fixed costs of normal citizens.
What I am talking about is a genuinely brave move that would involve tens of billions of pounds.
The government is due to implement further QE measures of about 75 billion later this year. I suggest we use a full third of this to pump prime: using the money to fund landlords to replace their existing borrowing. The money should target housing associations which currently borrow at 5.8% - replacing this with funds borrowed at just 3%. It would be on the condition that the reduction must be passed on in full. If this was rolled out into schemes to buy out private landlords, the impact would be immediate and very significant.In a stagnant economy the smallest reduction in costs can have a massive impact. The government would be able to legitimately reduce its housing benefit spend and the local economy would grow as self funding rent payers have more money in their pocket. An improvement in cash flow would then allow the banks to start operating properly again.