Directionless banking policy


"Pathetic." "Ridiculous." "Stage-managed." Utterly fake." "Desperate." "Absurd." "Utterly inconsistent." "Hypocrisy." "Disgraceful muddle."

Those are a few of the phrases Alistair Heath used to describe the government's banking policy in an excellent City AM editorial yesterday. He's right not to pull any punches: the Chancellor's demand that the major UK banks increase their lending really doesn't make a lot of sense, other than as a media stunt.

As Heath says, do we really want the banks to lend at the same levels they did in 2006-7, at the height of what is now recognised as a completely unsustainable boom? Surely it's a good thing that banks like Northern Rock are "no longer growing at a crazy rate by imprudently borrowing on the money markets"? 

Moreover, it's not just that the supply of credit has fallen, in part because "many foreign banks (such as the Icelandic lenders) have quit Britain". Demand has fallen too – a point made in our recent book, The Recession. As Heath points out, there's still plenty of mortgage credit available, it's just that people have finally developed more realistic attitudes towards investing in property (i.e. prices don't just go up). And that's a good thing.

The trouble is, ultimately, that the government doesn't know what it is doing. They can't decide whether stabilizing the banks is the priority, or whether more debt is needed to 'stimulate' the economy. So they attempt to require the banks both to sort out their balance sheets and hold more capital, and try to get them to lend more at the same time. In their desperation to paint the Tories as a "do nothing party", the government is running around doing anything and everything it can think of, without a rational set of guiding principles.

This kind of incoherent policymaking is not just ineffective, but actually damaging. Businesses and consumers don't know what to expect next, and economic activity slows as a result. What markets need desperately if they are to recover is stability. Sadly, this government seems singularly incapable of providing it.