Problems sparked by the financial crisis have not gone away, but have been transferred to the public sector, economist Roger Bootle posits in his new book.

In “The Trouble With Markets: Saving Capitalism from Itself” Bootle argues that in large measure, the underlying cause of the financial crisis was the result of an idea that markets work, and that governments do not.

“Despite the trillions of dollars lost, and despite the worries of millions of people, more than this — much, much more — is at stake,” Bootle writes. “For this crisis has delivered the killer blow to an idea that has underpinned the structure of society, framed the political debate, and moulded international relations for decades.”

Bootle, director of Capital Economics and an economic advisor to business accountancy firm Deloitte, reflects on the pitfalls of the corporate system and puts forth his ideas on the future of capitalism.

He discussed his book and his economic predictions with Reuters at his London office.

Reuters correspondent Sumeet Desai talks about the G20 draft communique and what it means for rebalancing the world's economy.

Difficult - that’s how Liberal Democrats’ treasury spokesman Vince Cable sums up the outlook for Britain’s economy as it comes out of the recession.

He spoke to Reuters during an interview at the LibDem autumn conference in Bournemouth.

Remember that old chestnut about how it's a recession when your neighbour loses his job and it's a depression when YOU lose yours?

Well, research carried out by Datamonitor suggests a similar divergence between British consumer perception and behaviour during the current economic downturn.

The survey found that 90 percent of UK consumers believed that the country was in the grip of recession but slightly over half of them (53 percent) said their household finances have either improved or stayed the same. Similarly, twice as many people feel their job is safe as those who have actually lost or fear they will lose their jobs.

"In the majority of households there does not appear to have been any significant increase in financial strain that results in consumers displaying recessionary behavior,"

"On the contrary, only 8 percent globally think that their household's general financial situation has worsened significantly since before the downturn, and thousands have actually benefitted from reduced mortgage repayments, for example."

Datamonitor said the UK could be in the grip of a "psychological recession", adding that the term was not meant to trivialise the economic contraction but to illustrate that the knee-jerk psychological reactions of consumers to the threat of recession were "primarily responsible for the perpetuation of the recession."

Its solution is to...well, look on the bright side.

"The communication of positive messages through the government, the media and the banking industry is what is needed to facilitate a psychological shift and confidence boost amongst consumers, bringing about a 'Psychological Recovery.”

(An earlier version of this post incorrectly said that Friends Provident had commissioned the Datamonitor survey)

MacroScope is pleased to post the following from guest blogger Julian Chillingworth. Chillingworth is chief investment officer of UK investor Rathbones. He questions here whether Britain will face a second downturn shortly after struggling out of recession.

Are we likely to witness a two-tier recession in the UK?  Perhaps not a recession but certainly a secondary downturn. A vast number of people have enjoyed lower mortgage payments and a level of job security, but will this last?

The UK is in somewhat of a unique position in so far as it faces a regime change, with some obvious ramifications for policy.  However, whoever takes the seat (most likely the Tories) must still cut back public expenditure and raise taxation, both within the context of high unemployment.

It will require the wisdom of Solomon as a further rise in unemployment hits tax-take and results in rising social security payments. Who would want to be George Osborne?!

Key will also be the state of the financial services industry, the banks – other G7 nations do not have the ‘core component’ element to deal with in this respect – and the consumer won’t be moved in any meaningful fashion until there is real evidence of stability there.

Economic news is improving, but in the near term sentiment will be led by the direction of earnings.

The bottom line is the US might be troughing out, but this time round, we in the UK could be on our own for a little while longer.

Time was when a British education had a cachet, especially among Britain's far-flung colonial territories.

But could the prestige of even a Cambridge or Oxford degree be a little dulled in these parlous days for the British economy, now labouring under massive public debt and a decade-high unemployment rate?

That appears to be the case in the former British colony of Singapore, whose rapid economic development since independence in 1965 has seen it accumulate hundreds of billions of dollars in reserves and attain a GDP per capita on par with Italy.

The city-state's newest opposition politician Kenneth Jeyaretnam has complained that the Singapore press -- often accused giving more favorable coverage to the ruling party -- has been referring to him as a "British-trained economist".

Jeyaretnam, like many members of Singapore's political establishment -- including the country's first prime minister and current prime minister -- went to Cambridge.

"I wonder why I have never read in the Singapore press, British-trained mathematician prime minister Lee Hsien Loong or British trained-lawyer, Minister Mentor Lee Kuan Yew," Jeyaretnam said in a speech to the Singapore Foreign Correspondents Association earlier this month.

"Naturally I suspect that the mainstream media want to light up a subliminal marker in the people’s minds that a) I’m a foreigner and b) that my economics is suspiciously left-wing because it’s from a country associated with economic failure and the welfare state."

Ouch.

Britain's recession, like the downturns in most other places, is being hailed as either having reachえｄ bottom or tailed off in its decline. The latest to trumpet the beginning of the end is the British Chambers of Commerce, which said business orders and sales had continued to fall in the second quarter but at a slower pace than previously.

So does this mean that the Bank of England will soon start raising interest rates from the negligible 0.5 percent reached last year as policymakers sought to pump liquidity into a failing economy? Not according to researchers Capital Economics, which argues in a new report that market assumptions of higher rates at an early stage are misplaced. They offer three reasons:

-- A return to strong levels of activity and rapid price gains in the housing market is unlikely for some time, even at very low interest rates. Meanwhile, the overall economy is likely to expand at only sluggish rates in the foreseeable future. And even if the recovery continues to gather pace, the large amount of spare capacity - or slack - in the economy suggests that there should be no hurry to tighten policy at all.

-- Even when monetary policy is finally tightened, some part of this will involve the reversal of the Bank of England’s quantitative easing programme. Although the likely order of events is far from clear, this could delay the need for a conventional tightening in the form of higher interest rates.

-- Thirdly, there is good chance that monetary policy in general takes a back seat to a substantial tightening of fiscal policy as the government responds to the growing pressure to sort out the public finances. This is likely to take the form both of higher taxes and a severe squeeze on public spending and would require monetary policy to be kept correspondingly loose to prevent the economy from slipping back into recession.

So, essentially, the BoE will not be able to raise rates because a) the economy is a long way from good b) it has other things to unwind first and c) life is going to be so miserable for Britons that low interest rates will be their only salvation.

This latter point is beginning to excerise a lot of thought in Britain, with the head of the Audit Commission criticising politicans for failing to be honest about the need for cutbacks, given a forecasted £175 billion public deficit this year -- more than 12 percent ofgross domestic product.

"People had better understand this is an unprecedented situation. We have never seen anything like this in your lifetime or mine," Former prime Minister John Major, who knows quite a bit about crises, told TV presenter Andrew Marr.

(Reuters photos: Eddie Keogh and Darren Staples)

Gordon Brown is counting on a swift economic turnaround. It’s probably his Labour Party’s only hope of avoiding a humiliating electoral defeat to the Conservatives next year.

The latest news on the economy has certainly got people in Downing Street smiling. The housing market is stabilising and some commentators are even talking about Britain becoming the first major country to pull out of the recession.

Treasury forecasts of reasonable growth that were derided just two months ago suddenly don’t look so bad.

The Number 10 dream scenario is that the economy recovers strongly, Brown takes the credit and the polls turn in time for a May election.

But what happens if the economy does turn around by the end of the year and the polls don’t get any better?

If that happens, some party strategists are wondering whether that might be a good time for Brown to step down, say in January.

He could say he did what he set out to do — get Britain through the recession — and it was now time for a new face.

The honeymoon bounce could end up being Labour’s only hope.

--Gerard Lyons is chief economist at Standard Chartered. Any opinions expressed are his own. --

Britain is clearly a Jekyll and Hyde economy. Or that at least is what the Chancellor would like us to believe. The bad news we are now seeing in the economy, public finances and across parts of the financial sector will not last. We are in the Mr Hyde phase. But, don't worry, we will soon be back to the normal Dr Jekyll soon.

The Chancellor believes the recession will end by year end. That is credible. But then he believes recovery will be rapid, and after contracting 3.5 percent in 2009 we will see growth of 1.25 percent in 2010 and 3.5 percent in 2011. This is fantasy, particularly as this rapid rebound is expected to occur not only as the legacy of the debt bust lingers on, but also as fiscal policy is tightened aggressively through significant tax hikes, largely on those on high incomes.

Strong growth, tax increases and efficiency savings are, the Chancellor believes, about to reduce the budget deficit by half over the next four years. I have my doubts. The legacy of this borrowing binge will live on for much longer.

What we saw confirmed today was the UK was returning to high borrowing, high debt and - in our view - much weaker growth than the Government believes. Add in the higher regulation that is likely to hit, and one wonders how the UK will prosper as the shift in the new world economic order, which is already underway, gathers momentum. As we see a further shift in the balance of economic and financial power from the West to the East, to those economies with low taxes and which save and invest, how will the UK be able to prosper?

There were three areas to focus on in the Chancellor's Budget speech:

The first thing to note was how the Chancellor tried to prepare us for the bad news he was about to deliver. It is not our fault he said. The Chancellor had a number of defences: he had already taken measures to help, the downturn was global, all forecasts had been reduced not just his, and as bad as this recession is, he outlined a relatively quick rebound to strong growth, which in turn would allow government borrowing to fall. Robert Louis Stephenson would have been proud.

One could not argue with the Chancellor's opening paragraphs when he highlighted the shocks that have hit in recent years, and the global nature of the financial and economic crisis. Moreover, he used this as justification for the measures already unveiled, claiming credit for the boost he provided in the Pre-Budget Report at the end of last year. He claimed the total support provided would safeguard half a million jobs. And he announced further measures to help employment today.

These measures are to be welcomed, it is vital to keep youth unemployment to a minimum. But even with this, unemployment will rise sharply, and for some time. Although the Chancellor made the best of a bad job in delivering his Budget nothing could hide the poor underlying foundations on which he built his story. The Chancellor believed the economy's underlying strength, in terms of its diversity, flexibility and resilience would allow it to recovery soon. Yet the economy is not only fragile, it is already cracking under the pressure of the debt overhang.

The second focus was that the economic numbers are too optimistic. But one would not have expected anything different. His forecast of -3.5 percent growth for this year and of a recession ending before the year is out are credible. Confidence is a key factor in any recovery, but one wonders whether those who have cut their discretionary spending will feel the urge to go out and spend? I doubt it. And without a rapid recovery in spending, firms will be reluctant to invest. And if the recovery is weaker, debt levels will be higher, and the pressure to curb public spending aggressively will grow. No sooner had the Chancellor sat down, than the IMF released its new forecast for the UK, of -4.1 percent this year and down -0.4% next. We expect -3.7 percent this year and sluggish growth of 0.4 percent next.

Third, the budget numbers. Six months ago the Chancellor was badly out in his projection of where the budget deficit was heading. That needs to be taken on board when you hear the Chancellor's prediction for the fiscal outlook now. Even during the good times, when the economy's growth was more stable and predictable, the Treasury was often out in its predictions on the budget deficit. It only takes government spending and tax revenues to be out slightly for the budget numbers to be far different from those planned.

Thus the fiscal numbers unveiled should be viewed more as a message of hope, rather than a forecast. The budget deficit, the government believes, will peak at £175 billion this fiscal year, stay around that level at £173 billion next, before heading lower to a still high £97 billion by 2013-14. But as the headline numbers fall, the government's net debt will continue to climb, from a ratio of 55.4 percent of GDP now, to 76.2 percent of GDP by 2013-14. What if growth disappoints?

What if tax revenues are hit harder? Even on the upbeat economic views presented today the Government will have to borrow £703 billion over five years. Financial markets will not be convinced that this Budget will return public finances to a sustainable footing, as the Chancellor hopes it will.

Clearly the likelihood of an election next year, and not just the extent of the recession, had a bearing on the actual measures unveiled The Budget provided a stimulus of £5.2 billion to the economy this fiscal year of 2009-10, followed by a small tax hike of £0.1 billion in 2010-11 and a large tax hike of £5.23 billion in 2011-12, with that claw back set to continue in subsequent years.

At the time of the Pre-Budget Report I referred to it as the Good, the Bad and the Ugly: good that the Chancellor was taking timely, targeted and temporary measures to help the economy; bad that he was not doing it from a position of strength; and ugly being the fiscal position he would leave the country with. Today the picture is even uglier than before.

It may not be tax and spend exactly, but it’s definitely tax and borrow.

For the best part of 12 years, Labour has pursued essentially conservative (with a small ‘c’) economic policies, steadily underburdening itself of the ‘fiscally unreliable’ tag that some earlier Labour administrations were (wrongly or rightly) saddled with.

And for most of the past 12 years, as the global economy steadily expanded and Britain’s along with it, with aggregate wealth rising smoothly, Labour looked strong at the helm each time the budget came around.

But since the global economic crisis hit in late 2007,  it has become much harder for the government to keep a tight rein on the fiscal strings as growth has taken a hit, unemployment has risen sharply, and tax receipts have declined. 

Last April’s budget was a tough one for Labour, but Wednesday’s budget may well go down as the one that really showed the government reeling as it tries to keep a grip on the purse strings in some of the most challenging economic circumstances imaginable.

The numbers tell the story and are in some cases eye-bogglingly huge.

Finance minister Alistair Darling says the government will have to borrow 175 billion pounds this year and almost as much next year (173 billion) as it tries to plug a widening gap in its finances. WIth the Debt Management Office already struggling to raise funds (if one recent debt auction is anything to go by), the borrowing requirement could be a very big ask.

At the same time, tax receipts as a proportion of gross domestic product are going to be down, Darling said, and growth is set to contract this year at the fastest rate since World War Two with unemployment edging relentlessly higher.

To try to boost government revenue, Darling has unveiled a new income tax band, although it’s unclear just how much can really be raised from taxing the richest 1-1/2 to 2 percent of the population an ever larger portion of their income.

From next April, those earning more than 150,000 pounds a year will have to pay 50 percent tax, while their benefits allowances will steadily be cut, as they will be for those earning more than 100,000 pounds.

Those new tax policies represent something of a bust for Labour. For 12 years they’ve kept on the right side of business and the wealthy, encouraging entrepreneurship and positioning themselves as a partner with business. But the new top rate of tax suddenly begins to look like a Labour policy of old —  a “tax-the-rich” gambit.

It remains to be seen how the Conservative opposition – now widely expected to win the next election, which has to be called by June 2010 – respond, but on the face of it the high borrowing and higher taxation would seem to play ever more into their hands politically, while threatening them with a dire economic legacy should they win the next election.

For Darling, it may be the best that can be done with an awful hand. Maybe the borrowing can be met, the spending measures announced will have the desired effect, kickstarting economic activity and getting the wheels of commerce turning. Maybe. But it’s a slim chance will little more than a year to go before an election.

Borrowing and taxing may be what’s needed (or the only means available) to try to right the economy in this uncertain time, but it’s unlikely to help Labour’s prospects of holding onto power.