What to make of Peter Mandelson’s latest idea to prop up the car industry, as splashed by today’s Times? Basically, the plan is that the Bank of England will use taxpayers’ cash to back the loans offered by finance companies to potential car buyers. And the hope is that this will free up credit and stimulate demand for all those cars sitting unsold on garage forecourts across the nation. There’s much room for initial mischief from the Opposition – “Gordon Brown: buying someone else’s car with your money,” that kind of thing – but greater damage will come if the plan simply doesn’t work. And there’s certainly potential for that.
To my mind, it all comes down to whether people aren’t buying cars because they can’t get credit, or because they’re tightening their belts as the economy nosedives. If it’s the former – or a mix of the two – then this measure may help a little. But, if it’s the latter, then the scheme will achieve next to nothing. After all, if people just aren’t going to buy cars, then the availability of credit options won’t convince them otherwise. So what is it? Lack of credit or belt-tightening? I rather suspect the latter, but haven’t seen any numbers that can confirm it either way. If any CoffeeHousers can point me in the right direction, do shout out in the comments section.
This all raises a more general problem that faces the Government. As the recession worsens through 2009, it’s likely that belt-tightening will more and more become the factor behind falling demand. That means that any Government efforts to stimulate demand – be it for cars, houses or flat-panel TVs – will struggle to have any imapct whatsoever. You just can’t stimulate demand that doesn’t exist – a fact which will strengthen those “headless chicken” charges coming from the Tory benches.
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