Tinkerbell Economics?

Interesting Question from a friend of mine today in a Facebook group I manage as part of my teaching.

"I'm confused, sir, Mr Teacher, sir, if the British Government has injected £400bn into the banking system because it's in difficulty because the banks aren't lending to each other and they're not lending to businesses and aren't lending to individual people, but the British Government didn't have £400bn to do this, so has had to borrow the £400bn, my question is this - Who lent the British Government £400bn?"

I had my students try to answer this... the only clue I gave them was Tinkerbell. In the end they got it... confidence

In Peter Pan -- Tinkerbell is dying because people no longer believe in fairies... but she will survive if enough people believe in fairies. In the play (not the book) Peter asks all the children to shout "I believe in fairies," to bring her back from the dead.

And so to Tinkerbell Economics -- if we all start beleiving in the markets again then like Tinkerbell it will all work again.

To which one student said " So the worst thing we can do is stop spending?" Answer -- of course... keep spending and consumer confidence can be restored. Stop spending and the deflationary impact of the crisis on growth will be exacerbated and magnified.

Sound implausibly simple?

This was in Newsweek:

"It's all about confidence, stupid. Every financial system depends on trust. People have to believe that the institutions they deal with (their "counterparties") will perform as expected. We are in a full-blown crisis because investors and financial managers—the people who run banks, investment banks, hedge funds, insurance companies—have lost that trust. Banks recoil from lending to each other; investors retreat. The ultimate horror is a financial panic; everyone wants to sell and no one wants to buy. Paulson's plan—still lacking essential details—aims to avoid that calamity." (Tinkerbell Economics)

http://www.newsweek.com/id/160098