10 3 mins 9 yrs

As you know, here on ATW we do not always go with prevailing economic wisdom. Such is the case with the media outrage today that Banks are “not lending enough” to small business. Let me give you a taste of what the MSM is saying;

The full scale of how the banks are still failing to lend to Britain’s desperate small firms emerged yesterday. Despite a series of public promises from senior ministers and bank officials, lending to business has tumbled in every single quarter of the past three years. Bank of England Governor Sir Mervyn King yesterday spoke out against the ‘harsh treatment’ of small companies which are still ‘suffering’ at the hands of the banks.

This is nonsense.

For starters, of course lending will have fallen from the historic highs that led us into recession! Banks would be crazy not to cut back their lending levels and they should ignore the siren cries of politicians who would as soon as hang them as praise them. The Banks have seen all the bad commercial bets for lending collapse and whilst that is unfortunate that is nonetheless a necessary part of economic  realignment. In my view lending should only be extended to those businesses that can make a coherent case for cash. I speak as one of those companies. My experience of the Banks is that they are demanding but also often sensible. Yes they made some VERY poor decisions as to who they lent money to during the property bubble boom and that has come back to bite them and us! But how Earth do we make things better by asking Banks to lend to bad risks? That is simply repeating the folly of the past.

Banks make MONEY by lending. That is their business so the idea that Banks do not want to lend is nonsense. Yes, I know for a fact some Banks have rather less money to lend than they want and this does cause restriction. But we should respect good lending practise and encourage Banks to adopt such sensible policies.

Small business may well need capital injection. This is available from Banks and other sources, sometimes at good rates sometimes not! But in the final analysis, a sound business can always get what it needs so long as it can make a coherent case for it.

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10 thoughts on “WHY LESS LENDING IS GOOD!

  1. Banks make money by lending but bankers keep money by pocketing the money created by the Bank of England and awarding it to themselves as ‘bonuses’ – that is actually what happens!! £50 billion created and given to banks under the latest QE measures, yet how much will actually end up in useful circulation? Besides, if the national bank, The bank of England, has created the money, why is it given to private banks to lend at usury? It should be interest-free.

  2. Yeah stuff things like lending criteria. If your a crack ho who can barely sign your own name, whammo, you too can be a homeowner. 125% Mortgage from Northern Crock anyone?

    Cheap Easy credit….can’t do any harm can it?

    Mr ‘No more Boom and Bust’, ‘I saved the world’, ‘It started in America’ Brown said it’s ok and so it must be.

    I know as a society we learn nothing from the mistakes of the past but I was hoping for a decent interval before we did the idiocy thing over again.

    Let’s ‘bail out’ Greece again shall we? After all we’ve done it twice and it’s failed every time so let’s do exactly the same thing over again right? Can anyone else see whats wrong with that? Or can you lot see clothes on that Emperor?

    Am I getting older? or is the ‘idiocy repeat cycle’ getting much MUCH shorter these days?

  3. It should be interest-free.

    Yes, banks should lend money interest free.

    And farmers should give vegetables away for free too. And British Airways should give all of yiz free tickets to Dubai.

    Banks charge interest for two reasons – to make a profit, and to account for the fact that some of the borrowers won’t pay them back, the risk factor.

    I’m not saying that the banks don’t deserve severe continuing criticism, but again here society is demanding two completely contradictory things – that they strengthen their balance sheets and that they loosen their lending standards.

    If you can figure out a way that they can do both at the same time, please enlighten us as to how.

  4. No Phantom – money should be created interest-free. Why is the money created then given to the private banks who lend it at interest when it is the nation which has created the money? Btw Pahntom, you forget to factor in that wonderful sleight-of-hand known as fractional reserve banking. I assume you know what it is and how it gears up debt?

    The newly-created money is given to the banks who then pocket some as bonuses for their enterprise and risk-taking, and what’s left is then loaned out at interest. The banks should simply be by-passed and the money should enter the economy through infrastructure investment (improved roads, rail) and the labour and products for this infrastructure would be native so that the money doesn’t benefit our foreign competition.

    So phantom – a question. Why should the newly-created money of QE be given to the private banks for their benefit?

  5. You can do what you like with the banks, but the fact is that you and the rest of society are asking them to do two things which are substantially opposites. They can essentially do one but not the other.

    That’s all I say here.

  6. Phantom – a bank should make its margins from accepted banking activities which are taking in money from savers and paying an interest to the saver, and then lending that money out at interest greater than that for the saver, and other services for account holders for service rates. Fractional reserve banking (which is NOT taught in the curricula of accounting and economics – it’s a dirty secret) must be abolished.

  7. But how Earth do we make things better by asking Banks to lend to bad risks?

    David

    No-one is asking the banks to do that. But what they are actually doing is reducing overdrafts for long-standing customers who have never breached the terms of their loan. And they are also increasing interest rates for existing borrowers. And they are refusing loans to perfectly sound businesses. And they are continuing to provide truly appalling service on the day to day transactions.

  8. Peter –

    Yes, banks are doing all of those things. Sounds like we need more banking competition! Unfortunately government has spent the last twenty years encouraging the merger of banks into global, dick waving mega-banks.

    That turned out well.

    Phantom correctly points out that banks are being commanded to do two contradictory things: both strengthen the balance sheets while lending more money. I don’t understand where government is coming from there, but I don’t understand much of what government does.

    Allan@Aberdeen is also correct. The BoE has created £325 billion since 2009. This has either gone into propping up government (via purchasing of treasuries) and into banks, who have stuffed it into their pockets and into stocks and commodities to keep assets prices high.

    If the aim was to “increase liquidity” in the economy, it would have been more efficient, transparent and less corrupt to have sent every adult £10,000

  9. Pete

    Yes, of course. QE is wrong on every count – it doesn’t help the real economy, it robs savers and it gives the banks easy money to speculate with.

    The ECB is about to lend another €300 billion to the banks in the eurozone at 1%. Most of this will be spent by the banks on buying government bonds yielding at least 3%, which will drive up the price of those bonds and make a nice easy profit for the banks within a few months. And of course the ECB is effectively monetising part of the sovereign debts in Euroland, whatever they say to the contrary. It’s a mirror image of the Fed and the Bank of England. Totally corrupt.

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