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Another growth plan falters

1 October 2012

It seems that yet another coalition growth scheme is falling flat on its face: this time, Sir Mervyn King’s ‘Funding for Lending’ brainwave. The theory was that the Bank of England would lend money at below-market rates to the financial institutions: sub-prime loans, in other words. Not without its risks: chiefly, what if the banks just use this cheap cash to lend more to their safest borrowers, rich guys with big deposits? Don’t worry, Sir Mervyn said, the Bank would monitor every month and report back. It just has, and Citi Research has chewed the results (PDF).

Rather than ‘get the banks lending’ the first four weeks of Funding for Lending has seen consumer lending drop by £400 million, and mortgage growth is now the lowest since data began almost 20 years ago. Lending to companies has done no better, falling £2.2 billion in August. Supply of credit to British companies has now been falling for 40 consecutive months. As for mortgages, they’re actually getting more expensive. The average fixed rate mortgage rate rose by 0.03 percentage points and is up 0.52 points this year so far. That said, a few well-paid people I know have reported getting brilliant fixed rates. Those with sufficiently large deposits seem to be doing very well, but these are not the people who need help.

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It fits a depressing trend. Nick Clegg’s ‘regional growth fund’ saw just 2,442 jobs created for the £470 million spent so far out of the £1.4 billion set aside — much of the cash has ended going to up big companies, who see a great scam for getting cheap money. The BoE’s own assessment (PDF) says Quantitative Easing may have ended up making the richest 10 per cent of households better-off by six-figure sums, while making the poorest tenth worse off. It’s still very early days for Funding for Lending, and things may get better. But the earliest indications suggest that yet another policy intended to help the strivers may end up subsidising the rich.

UPDATE: A friend whose opinion I respect emails the following criticism:-

It’s absurd to judge FLS on one month of data. It was always going to take a bit of time to feed through and all the indications (eg the Bank’s credit conditions survey) are that it is beginning to. It’s a straightforward piece of monetary policy responding to rising bank funding costs due to the eurozone crisis, not some crazy subprime scheme. 

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  • David Trant

    UPDATE: A friend whose opinion I respect emails the following criticism:-
    absurd to judge FLS on one month of data. It was always going to take a
    bit of time

    to feed through and all the indications (eg the Bank’s
    credit conditions survey) are that it is beginning to. It’s a
    straightforward piece of monetary policy responding to rising bank
    funding costs due to the eurozone crisis, not some crazy subprime

    UPDATE: A friend whose opinion I respect: George Osborne?

  • Daniel Maris

    I think we need a whole new set of financial institutions to spend the money wisely:

    A Green Energy Bank. To help develop our energy independence and move to electric vehicle transport.

    A Housing Construction Corporation. To deliver sufficient good quality housing for our fast expanding population.

    Housing and Social Co-operatives. To enable people to afford housing and develop work opportunities.

    Productive Employmnet Corporation – to provide paid work as an alternative to welfare for those who cannot find work in the established sectors. This would not compete with existing sectors but would undertake productive work not currently being undertaken.

  • don logan

    What possible reason is there not to sack Mervyn King?

  • michael

    banks are approaching customers on a credit rating basis presumably they are separating their goodwill into assets or liabilities dependent upon their ability to pay and the relevant ‘charges’ and personal guarantees that the banks have over any businesses . I think that banks are still probably seriously over leveraged so wont go near any thing involving even a modicum of risk. Especially when they need to cover the risks of their all-consuming investment gambling .

  • Dan Grover

    I’m confused about why the governor of the Bank of England is making up credit distribution plans in the first place…

  • Archimedes

    This doesn’t necessarily mean what you’re implying. We know that UK businesses hold a lot of cash at present, so the decrease in overall business lending could be mostly made up of those businesses continuing to de-leverage – it doesn’t necessarily mean that credit isn’t being extended to those that need it.

    Secondly, if average interest rates are rising, that could just be a reflection of credit being extended to individuals with a higher risk of default – while wealthier individuals are de-leveraging or getting credit at lower rates.

    Of course, both scenarios mean that the governments’ desire for individuals to start binging on credit again is being rejected, which is a positive.

    • HooksLaw

      Ah? Some sensible independent thought. BMW are currently investing hundreds of millions in Britain at the moment. Other overseas car companies ditto. This will not show in the BoE figures.

  • AR

    Disagree: (a) corporate lending volumes may have been lower without the scheme in place (b) we need consumer lending to decline; UK consumers are significantly over indebted (c) mortgage lending is sluggish because house prices are falling outside of the capital (and need to fall to sensible levels)

    • TomTom

      Usually people Roll-over Debt but you prefer to see them default……brilliant !

      • HooksLaw

        Thats not whats implied. When you say roll mover debt what you really mean is take out another credit card to pay off the last one. brilliant.

  • Frank P

    “The same defect may be happening with Funding for Lending: yet another
    policy intended to help the strivers may end up subsidising the rich.”

    Frasier, sorry to be pernickety, but you forgot to enclose the phrase ‘intended to help the strivers’ – as I have just done – in single quotation marks.

    Many readers of this magazine know that intentions of the ruling classes of all stripes, are first to protect their own investments, then those of the people who put them there (of course I don’t mean the electorate) and their political/financial puppeteers in Brussels. And to extract tax revenue from the proletariat until the pips squeak, in both direct and indirect daylight robbery.

    But the previous administration killed the goose that laid the golden eggs and the current mob simply don’t know WTF to do, or when to do or not to do it. So come 2015 we shall shuffle the pack and, as always, get a worse hand than we had last time.

    In the meantime KIssinger says that Israel will not exist in ten years time, a commie front man not only currently occupies the Oval Office, but looks more than very likely to remain there after the November jamboree – and the Islamic jihad moves inexorably toward creating the chaos that the Left hope to exploit in their pursuit of international communism; moreover, as they have already captured the levers of global capitalism and thereby created a new cultural hegemony, the Gramsci game-plan is now almost complete. Now stand by for the bloodshed that inevitably follows such totalitarian success.

    And of course keep propagating, on their behalf, the bullshit and subterfuges various of your mates in the Westminster bubble and the banking bureaucracy. And getting occasional tips from ‘inside the circle’ about where to place your dosh before the shit hits the fan.

    • HooksLaw

      I would not vote for Obama but how you expect to be taken seriously when you talk of ‘commie front man’ is anybody’s guess. Safe to say the rst of what you spout is rubbish as well.

      • Nicholas

        Communism in the West re-invented itself after the collapse of the Soviet Union and burrowed deep into establishments, local and central but the left in Britain was always full of its adherents, overt and covert. They have invented a whole new language for what they believe in, far less threatening although no less dangerous to the freedom of the individual. As for Obama you will find he has the same communitarian, “leading beyond authority”, post-democratic background in political activism. Carry on sleeping and believing in urbane wysiwyg politics where everyone that matters is a lovely moderate and middle ground chap (or chapess) if that comforts you. The reality of the rise of the left is quite different but tyranny has always depended on fools to prosper.

  • Ian Walker

    Does anyone have any idea why the government doesn’t just use the fund to directly loan to businesses? The problem is that even under the scheme, with the banks borrowing money at 0.5%, they are still asking their customers for 20%, and the real killer – asking directors to use their personal assets as collateral, completely ruining the point of having a limited company.
    Until the de facto cartel of high street banks is broken up, the problem won’t go away. Either loan directly to business to break the cartel, or use one of the facilities which is pseudo-public, e.g. Northern Rock, to do it.

    • TomTom

      Limited Liability seems to protect Bank Directors when they get huge loans from the taxpayer to stay afloat

    • alexsandr

      see above re zopa/funding circle

    • Daniel Maris

      I presume the government’s rationale is (a) to keep the banking system afloat as well as provide investment funds and (b) to use the banking sector’s “expertise” (if you believe they have it) in making wise investments and avoid having to set up a parallel public bureaucracy to assess loan applications.

      Incidentally someone somewhere is creaming off huge commission on this QE exercise.

      Personally I think the money would be better spent on for example pensions and universal credit because analysis suggests that money ends up in your domestic economy (e.g. poorer people will tend to do things like have a cup of coffee and a sandwich in a cafe, rather than go on holiday abroad or import materials from abroad for their business) – and it’s the lack of demand in the domestic economy which is the big issue now . Also, we need to address the population related crises e.g. housing, schools and so on.

  • Robert Taggart

    Not wishing to sound ‘green’, but, can we go on growing our economy – forever ?
    Surely the issue should be one of fairness – a fairer share for all of what we already have ?
    This scrounger does not ‘aspire’ – period – no home / mortgage, car / loan, sprogs / headache ! Benefits be just fine, but, they do require more effort now – to claim, appeal, reclaim, re-appeal, counter claim – one has no energy left to work !

    • Ian Walker

      growth can come from more efficient use of existing resources just as well as it can come from higher consumption. So growth can be ‘green’ if you structure the markets correctly.

    • TomTom

      Well I don’t know how you intend to get National Debt down from 950% GDP without growth

      • HooksLaw

        Debt is about 60% of GDP

      • Robert Taggart

        Slash the International Development budget – just for starters – charity begins at home. Blighty, at this moment be a ‘charity case’ !

  • TomTom

    Hardly surprising. We need a NEW Bank to do the lending to take market share from the oligopoly. The concentration of banks after 2008 has made it non-competitive with so few banks. It needs a NEW Bank to start lending rather than stuffing Zombie banks with more pork barrel. Why are they so stupid ? Or are they simply focused on looking after their friends ?

    • HooksLaw

      Where does the new bank get the funds to lend?

      • alexsandr

        check out mebbe vince should put his cash there. or zopa.

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