Cameron Urges Banks to Lend More

David Cameron has warned banks they might face new taxes unless they keep their side of a deal and start lending more to businesses, according to Financial Times, May 17 2011

Mr Cameron suggested he would regard any reneging on the lending agreement, known as Project Merlin, as a personal betrayal and that it could bring about a return to “war” between the City and politicians.

In exchange for the banks’ agreeing to lend £190bn to companies in 2011, including increasing gross lending to small and medium-sized companies by 15 per cent to £76bn, the government promised not to impose new bank taxes.

“It was a deal, it was an agreement,” he said. “They have to meet their side of the agreement or we don’t have to meet ours.”

Mr Cameron said that figures to March were “disappointing” but that he would judge the performance of the banks over 12 months. There was still time for them to get more “money out of the door”.

But why is Mr Cameron in his effort to “rebalance the British economy” so dependent on private companies, whose primary purpose of existence – at least according to the belief of most people – should be profit making financial services (taking money from savers and lending it to borrowers)?

The simple answer is that money – the foundation of modern society – is no longer issued by the government. It is issued by high-street banks, lent to the public as mortgages, business loans, overdrafts and credit cards (and must be repaid back to the same high-street banks who created this money). Nearly every pound in the economy today was created when somebody went into debt.

In other words, all the money that we need to trade, to buy food, and to run businesses, must be borrowed from the profit-seeking banking sector (at a huge cost to us, and a massive benefit to them).

If we did not rely on banks to create our countries money supply then they would be an ordinary business. And it would not be of interest to us how responsible their lending is and who they lend to.

One of the basic ideas of capitalism is that money will be naturally channeled to the most productive use – in other words, the best business idea or most talented entrepreneurs. But by allowing banks to create the nation’s money supply and then distribute it as suits them best, this principle is completely undermined.

We now have the situation where 75% of lending goes directly into fueling asset price bubbles such as housing, while only 25% is channeled to business and the productive sector. The banking sector is failing to fulfill its supposed role in a capitalist economy.

The conclusion is that significant growth or economic development is almost impossible as long as commercial banks have a monopoly on the supply of money to the economy.