The Government has now committed, on its own admission, £1.2 trillion to shore up the banks in order to get lending flowing again through the economy to protect businesses, jobs and homeowners. It has tried reducing interest rates to their lowest level since the foundation of the Bank of England in 1694. It has thrown gargantuan sums of taxpayers’ money at the banks in the form of special liquidity, credit guarantees, and asset protection schemes. It has provided a huge fiscal stimulus even when the deficit on the public accounts was already enormous. It has started to print money on an enormous scale, even at the risk of severe inflation in years to come. And still lensing in the real economy has not increased. In fact it has deteriorated sharply. In August 2007 when Northern Rock collapsed, lending by banks and building societies to businesses and homeowners was growing at an annual rate of 17%. In September 2008 when the Wall Street banks collapsed, the rate of growth had fallen to 9%. Last month, despite the eye-watering sums committed to the banks to get lending going again, it was down to a disastrous 4%. None of the policies are working. Is there an alternative? There certainly is, but despite this being the biggest crisis Britain has had to face for nearly a century, the Government won’t even contemplate it.

The first response after the Northern Rock debacle 18 months ago was to deploy monetary policy even to an extreme degree. Interest rates which had been set at a high 5.5%, were brought down, despite initial MPC resistance, to 2%. equal to the lowest historic level, and then to an unprecedented 0.5%. But bank landing (M4) continued to shrink. Then the Treasury last October underwrote all the demands that the banks were making for a vast 3-pronged package of special liquidity, credit guarantees and bank recapitalisations, amounting to £550bn in all. But bank lending shrivelled further, from 10% in Agust 2008 to 7% in October and then to 4% in December. So the Government went further still. The November PBR, despite acknowledging that borrowing would now reach the unprecedented level of £118bn, proposed a bold £20bn fiscal stimulus centred around a 2 1/2% cut in VAT. There is little evidence that it produced any significant increase in consumer spending, and could probably have been better spent at the same cost on building 100,000 social housing units. Either way, bank lending still slipped further. As a last desperate ploy, the Government has now resorted to quantitative easing, injecting £150bn of new money into the financial system, equivalent to 10% of national income. Last month however bank lending fell to its lowest rate yet of 3.6%, and unemployment rose by 138,000. By any standards this is a comprehensive failure of policy.
So why has bank lending largely stalled? All the policies employed have been based on the premise that banks are keen to extend credit and are simply being deterred by insufficient reserves. That may have been true initially, but it isn’t true now. They are reluctant to lend now because they fear they may not have enough capital to meet losses on their existing loans. Indeed, given the liquidity scares of the last year or two, they may prefer to hold more reserves in relation to their deposits. For that reason the latest boost via quantitative easing may prove rather limited in effect. And even if the supply of money were increased, the velocity of circulation might fall, which would leave spending unaffected.
We are now in a situation therefore where we have committed up to £1.2 trillion, a sum equal to 80% of our GDP and which, if called in in full, would almost bankrupt the country – a situation moreover where any further major fiscal stimulus is now effectively ruled out by EU leaders prior to the G20 meeting, let alone by Mervyn King – yet the State, on whom the banks now utterly depend, is still not requiring the banks to raise their lending to businesses to the level necessary to contain unemployment and save the real economy. Even when the Government holds a majority of the equity, as in the case of RBS, it is still allowing bailed-out banks in effect to dictate the terms. RBS merely agreed an increase in lending of £25bn, which is a mere 3% of total RBS lending to non-bank customers. Though Obama sacked the chief executive of GM as a condition of increased aid, nothing is being done in this country to remove failed or discredited bank executives. While the US Congress capped executive pay and imposed a 90% tax on bonuses, the Government’s latest quango, UKFI, merely pussyfoots around the bonus culture and the continuing scandal of the massive use of tax havens by bailed -out banks.
The Government has socialised the losses of the banks, but continues to privatise their control. The only way to stop this haemorrhaging of the nation’s finances is to take temporary control of the banks that either cannot or will not increase lending on anything like the scale required to halt the unfolding collapse of the real economy. Toxic assets which are virtually worthless should be written off, not underwritten at colossal cost to the taxpayer. Boards of directors guilty of gross mismanagement should be removed and replaced by new managers with a different governance and different set of goals, namely with the security of the backing of the State to give absolute priority to restoring lending to businesses and homeowners to 2007 levels.

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