Why Funding for Lending will not work in the long run

The Funding for Lending Scheme (FLS), introduced by the Treasury and the Bank of England at the start of this month, aims to encourage banks and building societies to lend to UK households and businesses by allowing them to borrow from the Bank of England for up to 4 years at lower rates. These rates would be based on the amount that the banks lend out. In theory, this would allow many entrepreneurs to start new businesses that would be unviable without these lowered rates, as well as getting first time buyers on the property ladder.

The scheme has been coolly received by lenders, largely because of the track record for bureaucracy involved in previous government schemes of this nature. There have also been criticisms from the media, namely, that there have been no stipulations as to whom banks can lend to in order to receive their reduced fees, meaning some banks are aiming the savings towards trusted borrowers rather than new investors. To the libertarian, this seems more of a cushion to further market distortion, as the government backing banks to lend to anyone regardless of their ability to repay is what got us into this mess in the first place.

History and the Austrian school of economics tell us that when interest rates are artificially lowered below the market rate, people will simultaneously save less and invest more, but do so with false information about the market, as price signals become relatively distorted. Business schemes that would have been unviable with the higher borrowing rates now seem attractive, and so time preferences (i.e. whether one should spend now or save now) change to favour increased spending. This has a knock on effect on those whom the increased capital in the economy is spent on, usually those who work in the capital goods industries, who also start spending and stop saving. Sooner or later it becomes clear that bad investments have been made based on artificially altered interest rates and nobody has any savings to fall back on.

Our state financial institutions continue to prolong this depression because they refuse to see that it is their continued inteference that is keeping us here. The FLS scheme is the latest in a long line of projects, seceding the National Loan Guarantee Scheme (NGLS), that hope to realign their fundamentally flawed Keynesian cross to boost output. The policymakers pat themselves on the back as economic activity increases, not realising that it is leading those members of society that could bring us out of recession into ruin based on the false information that they send out. As such, regardless of their good intentions, policymakers need to realise that these schemes are not the solution to our problems.