George Osborne, the Chancellor of the Exchequer (that's the archaic name we use for our finance minister in the UK, I have to explain for my overseas readers) has announced that he will be using £40 billion of public money to underwrite bank loans to small businesses, as there is perceived to be a problem with these businesses not being able to obtain credit from the banks, and this is said to be hindering the "recovery".
What this amounts to is the government taking over part of the banks' job for them, using the its ability to borrow money at low interest rates to subsidise the loans to businesses. It would mean firms being able to borrow at 4% rather than 5%. Across the political spectrum this is generally regarded as being a good thing.
But it seems to me strange that a Conservative chancellor is effectively nationalising banking in this way. Is this not big-statism, and an interference in the normal commercial working of the banking system, things to which you would expect right-wing politicians naturally to be opposed? What are the implications of this?
The government is able to borrow money at low rates of interest because it is perceived by lenders to be at very low risk of defaulting. Businesses are charged a higher rate by the same lenders because they pose a higher risk. If there is a problem with firms being able to obtain credit, this must be because the banks do not feel certain enough that they will be able to make a profit on the lending without charging a high rate. The credit problem is not a problem with banks being nasty or selfish, it is indicative of underlying contraction or stagnation in the economy: a recession without "recovery".
By nationalising part of the risk of lending to businesses at low rates, the government must reduce its own creditworthiness, creating a risk that it will be charged marginally higher rates in the longer term, as the risks of businesses defaulting on their loans are transferred through government accounts. To an extent, therefore, in an indirect way, this government is advocating a similar approach to that which it is so ready to criticise in the heavily-indebted European countries like Greece and Italy, where interest rates charged to government have spiralled because of uncertainly about repayment in the long term. Where there is uncertainty about economic expansion in the near future, there is no free, easy way out of a credit crunch. The government juggling bits of the lending system between public and private sectors is a sticking-plaster solution which cannot change anything fundamentally because the recession is really out there, for reasons other than what banks do.
Somehow politicians and the media have managed to convince the public that the recession is a product of the problems of the banking sector, rather than the problems in banking being just a symptom of a real fundamental economic problem. The recession was all caused by unwise mortgage lending in the USA, according to many. More recently, the stress has been on the idea that it is all the fault of those running the Euro.
I have always believed that there is an underlying recession which exists because of the reasons that recessions and depressions always occur: commodity shortages and environmental issues, which are opposite sides of the same coin. Problems in banks and national banks are just a delayed manifestation (delayed by borrowing on the future) of the costs coming through due to the effects of global warming, other environmental problems associated with energy-intensive development, and demand for essential commodities outstripping supply with world population growth and the rapid expansion of the emerging economies.
The answers to the crisis are not fiddling with banking and taxation or even radically cutting public expenditure, which will just have to be increased again in the future to sort out the problems created by the current round of cuts. The answers lie in sustainable development, particularly reducing reliance on fossil fuels, better, more efficient planning of society (not a laissez-faire "business always knows best" approach), reviving manufacturing industry, engineering and science, the activities which genuinely create wealth, as opposed to speculation, which does not, making people skilled and productive in areas that genuinely benefit society, making society fairer, more democratic, equal and hence better-satisfied, and above all, controlling global warming and developing a climatically stable and fair development path for the whole planet.
Not easy. The hardest thing will be to convince people that they have to get used to the fact that growth, as defined in the past, will have to stop. There may never be a "recovery". That does not mean that peoples' lives will get worse however. They will have to change. The big challenge for politicians is explaining the difference.
I agree, and to me the government's announcement that they will guarantee 95% mortgages is even worse. Forget about affordable housing, it is all about maximising the amount of debt people take on in order to put a stable roof over their heads.
ReplyDeleteWell said, especially the penultimate paragraph!
ReplyDeleteAs you say, for supposedly small Staters Dave & Co are sure sticking their fingers in a lot of pies, and their attempts at housing and loans interventions are laughable.
The problem of why banks are chickening out of lending to SMEs is not down to SMEs being "too risky" though, by many accounts. The real problem is that for the last 30 years or so banks have over-centralised as well as deskilled and disempowered their managers to the point where the essential grassroots knowledge that local bank managers used to have about their particular geographical area has been all but wiped out.
Banks have thus rendered themselves incapable of evaluating risk at the level of small local businesses - that's why they're now too scared to lend.
It's not SMEs that are to blame for local economies seizing up for lack of cash-flow, if anything SMEs are the victims of the banks and poor bank management.