"Funding for Lending" – Flogging a Dead Horse with a Different Whip

Since the financial crisis began, nef has called for more effective use of Quantitative Easing (QE) to support the real economy and fund investment in low-carbon infrastructure. In common with many other monetary experts, we see this as both eminently desirable and entirely possible, writes Tony Greenham in his excellent article published on New Economics Foundation website on 19th June 2012.

Governor of the Bank of England Mervyn King delivers his Mansion House speech during The Lord Mayor of the City of London’s annual Dinner to the Bankers and Merchants, Mansion House, London Thursday June 14, 2012. King say that an emergency bank lending scheme in an attempt to tackle a squeeze on credit is aimed at encouraging banks to increase their lending to the country’s businesses, amid caution sparked by fears over the fate of the eurozone.

The Bank of England and HM Treasury finally seem to be coming round to this view, according to last week’s announcement of ‘Funding for Lending’.

So why am I totally unenthusiastic about this scheme?

Because this is just flogging a dead horse with a different whip. Banks aren’t lending because:

1. Most firms do not have the confidence to invest, because the economic prospects are dire.

2. If they do, banks lack the confidence to lend to them, because the economic prospects are dire.

3. On top of this, British banks mostly lack the skills and incentive to lend to SMEs – this is a long-term structural problem about which we have written extensively and nothing to do with lack of liquidity or funds.

4. They know (but are yet to fully admit) how precarious their assets are, particularly in property loans and potentially in derivative instruments, and need to build up capital against the inevitable write-downs.

5. Consumers are overburdened with debt after years of stagnating real incomes, aggressive marketing of personal credit within a ‘have it now’ culture of materialism and a credit-fuelled house price (and hence mortgage) boom. The last thing we need is to encourage them to start borrowing more. They need more income, not more debt.

QE of £325bn – a staggeringly large figure – has delivered record low interest rates, easing the burden on some existing borrowers, including the government, but little else.

Increasing the stock of money does not help. What we need is to kick-start the flow of money.

[sws_blockquote align=”” alignment=”” cite=”” quotestyles=”style02″] Funding for lending will fail, because once again it is attempting to use a broken banking system to fix a broken economy. [/sws_blockquote]

Read the whole article here.