Who was to blame for UK slowdown?

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By Nils Blythe Business correspondent, BBC News The government wants us to spend more to boost the economy "Blame it on the Yanks and the banks." That - according to Westminster watchers - was the way ministers were told to deal with questions about the economic crisis. Dodgy US mortgage lending led to a crisis of confidence in the global banking system and now a savage economic downturn in most highly developed countries.

But it's still all a bit baffling. How did a problem in one specialised part of the American home-lending market bring economic growth to a juddering halt in most of the developed world?

It had all seemed so good for so long. Cheap imports from China and other developing countries helped to hold down inflation rates in most highly developed countries. That encouraged central banks to keep interest rates low.And low interest rates helped push up property prices.

Most developed countries saw property prices at least double between 1997 and 2007. In the most extreme cases - like Britain - average home prices more than trebled in a decade.

In this apparently benign environment, banks became ever more adventurous in their lending.House prices plunged in 2008

In 2001, major UK banks lent out almost exactly the same amount of money that they had on deposit from customers. By mid-2008 they were lending over £700bn more than they were taking in deposits.

How did banks lend more than they had on deposit?The answer is that they borrowed in the wholesale financial markets - with much of the money coming from abroad. So banks in Britain - and many other countries - became dependent on the flow of funds between banks around the world.

And that flow relied on confidence. Last year that confidence was dented, because unquantifiable losses from US sub-prime mortgages had spread through the global banking system.

This year the loss of confidence became a self-fulfilling prophecy. Banks known to rely on wholesale funding were seen as risky. So the potential providers of funds were more reluctant to lend to them. And so on.

When the American authorities decided not to bale out Lehman Brothers investment bank in September, confidence evaporated altogether.Even the mighty Royal Bank of Scotland found itself in deep difficulties.

In October the UK government - rapidly followed by others around the world - stepped in to prop up the banking system. But by then, the damage was already done.

The shortage of mortgage funding had sent house prices tumbling from the start of the year. And as prices fell, banks became even more cautious in their lending to homebuyers.

Something similar happened with business lending.RBS had to be rescued by the governmentAnd by the middle of the year the UK economy was starting to shrink.

Britain is now suffering for having become too reliant on imported goods and borrowed money.But the downturn is also hitting countries like China and Japan which have been big savers and exporters, because their overseas customers are suddenly cutting back.

And this simultaneous downturn in so many countries is going to make economic recovery unusually difficult.

So is it fair to blame it all on the Yanks and the banks? Well they certainly deserve their share of blame.But there are plenty of us who should ask ourselves how we really believed that a borrowing boom, supported by ever-rising house prices, could really create lasting prosperity.

The steady economic growth we enjoyed for so many years has begun to look like a sort of confidence trick. It only worked while everyone had confidence in it. So, in the future, we'll need a more balanced economy, in which we save more and borrow less. And in which we have to find things that the rest of the world wants to buy from us, rather than just being heroic consumers.

In fact, it all sounds rather like hard work, doesn't it!