It is astounding that some political leaders can be so wilfully blind. Osborne, faced with a collapsing economy and banks that are unwilling to lend because they have such lack of confidence in the economy that they don’t believe they’ll get their money back, has now in utter desperation bowed to banks’ demands to water down financial regulation even further in exchange for – what? The Treasury is opening up a new credit facility called (hopefully) ‘funding for lending’, allegedly around £80bn, which is designed to get money flowing to industry and getting the economy to turnaround from its vicious spiral downwards. But will this work? There are two fundamental flaws in this latest idea.
One is that the basic problem now is not simply banks’ unwillingness to lend, but rather companies’ reluctance to borrow because of the steady haemorrhaging of aggregate demand and their fear as a consequence that any future investment and job creation will not be profitable. The evidence for that is that the big companies are already sitting atop a colossal stockpile of cash amounting to some £750bn because they prefer to save the money rather than spend it wastefully. Giving them still more won’t change that mindset.
The second thing that’s badly wrong with the latest Osborne escapade is that, in order to achieve his illusory prize, he’s thrown away an absolutely key measure needed to prevent another banking crash. The Vickers Commission, which he himself set up and whose conclusions he publicly announced he accepted, recommended a very modest increase in the banks’ capital ratio from its current absurdly low level of 2.5% to 4%. This really matters because it was this excessively low level of capital reserves that prompted the enormous, reckless lending binge up to 2007 which nearly derailed the global economy. If another crash is to be avoided, with all the future taxpayer bailouts entailed, lifting that capital ratio to somewhere around 10% is absolutely critical.
It really is utterly irresponsible to sacrifice the future stability of the financial system in order to try to achieve a short-term cut-and-run, above all when this latest Osborne wheeze is a slam-dunk loser. One has to ask: is Osborne thick, or is he so wedded to the ideological delusion that the private banks and companies, given enough money, will dig themselves out of a recession that he can’t see that this is not a supply issue (need for funding) but rather a demand issue (people don’t have enough money to buy)? How long can he go on lifting his telescope to his blind eye?