Why the banks have stopped lending
The figures are dry – the information, to the layman, even boring. “Lending to the private sector in the Eurozone shrank last month year on year for the first time ever” – even as the zone’s economy was returning to growth.
In other words, in common with Britain’s banks, Europe’s bankers have scaled back on making credit available at an unprecedented pace.
This bland piece of information discloses the reality of the times in which we are living. Having tipped truly vast amounts of public money into private bankers’ pockets, not only are those self same bankers paying themselves vast bonuses, but they are most specifically NOT lending the stuff to keep the economic wheels turning.
Short-term loans - those under a year - are almost 10 per cent down. Those are the loans that enable companies to buy forward raw materials and stock to enable them to participate in the renewed growth across Europe’s economy.
Although these figures affect those countries inside the Eurozone, the UK is in no different place.
That’s why it is so instructive to look at how both the investment and the retail banks are working across the world. There is no better example than Goldman Sachs, whose gigantic “profits” and consequent bonuses appear to have played little role whatever in productive economic activity.
The UK shadow chancellor, George Osborne, wants bankers’ bonuses “purified” and turned into shares, so that the cash they would have taken can go into lending to make widgets.
It’s a brave though empty call. If after chucking £1.3 trillion of taxpayers’ money at the banks in Britain alone, the availability of credit has actually contracted, what on earth will persuade the bankers suddenly to lend their erstwhile bonuses?
The Governor of the Bank of England, Mervyn King, last week demanded the break up of the mega banks. His call represented a lone warning by a central banker. The banking system that got us into this mess has not changed.
We are effectively stoking up another disaster with precisely the same ingredients as the last one. That’s why today’s boring figures from the Eurozone are so instructive.
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There are 22 comments on this post
I couldn’t agree more. But who will listen? Not this Government certainly. Head in sand syndrome.
Bang on Jon.
It’s scandalous that these publicly funded institutions can get away with this. Yes, we need the banks to make profit, and we can’t operate a healthy economy without their success. But goodness me, they really are taking the mickey out of all of us who paid for their bonuses.
Labour has presided over an overwhelming increase in big government. It’s time the state got some backbone and intervened. The US has shown this sentiment in their dealings.
People say that if we stop them from paying themselves such large sums then they’ll go elsewhere. Well if all the G8 concert and coordinate their efforts, then where are these ‘invaluable contributors’ going to go?
They claim that we get the money back in tax, but with all the off-shore fiddling and tax write-offs against loss of profit, the taxpayer is really being taken for a fool.
How can they have such little foresight? We can’t afford to bail them out twice.
Something must be done. Right now.
This is truly scandalous that the banks can be allowed to get away with making mega profits through taxpayers money and not a bit of it going into the real economy. As you mention Jon, it again goes to show that the financial sector has learned nothing from the recent debacle.
The government must force those banks who have taken public money to start supporting business and the public with loans, or pull the plug on them.
There is no point in saving them from going under if the only result is that bankers continue to make a personal fortune.
Secondly there must be more regulation of the stock exchange etc. We seem to have lost sight of the idea that people invest in a company so that the company can do business and the investor share in the profits of that business. It’s a long term thing.
Nowadays, the investors seem to be only interested in gambling on which way the share price is going and that based not on results, but perception of results.
The profit from shares should come from the dividend paid by the companies.
If things don’t turn, this Country may be subject to the same sort of rich/ poor divide as some African Countries, where the few are dripping with riches and others are fighting in tribes purely for survival.
Then again in the realms of fantasy, we could put resources together ,live off the land in a cooperative and begin again from the start .We would have our own rich supplies of everything and ensure a healthier, better existence for all in a ‘ commune type existence ‘ but who would want to cooperate and share in general …the hedonist stance comes first.
However if this sort of life happened generally and diffusely , the reserves of money wouldn’t have any sway at all.
A good way to think of these things is to expect the very nature of banking regulation to modulate in radical ways (as radical as the bail-outs etc) in response to the sum of recent events. Mervyn King pretty much lambasted the banks’ imminent bonus habits, but stopped short, as I recall things, of addressing the important differentiations that comprise regulation. The FSA is not the BoE is not the government. Rather like the climate crisis (indulge me in the width of analogy, please), reaction is as slow as suggestions for systemic adjustment. There’s a lot that has too give, well short of everyone becoming perfervid socialists.
There is no way that this government is going to take bankers to task. Brown is not so dumb as to fail to realise that most likely he’s out come the election – at the latest.
He’s keeping the bankers onside so that he’ll be offered some cushy, astronomically salaried, sinecure when he does go.
That’s why MPs expenses row still rumbles intermittantly – it provides good cover for the far larger problem with the financial sector.
Well strictly speaking it was the uncontrollable lending to anyone who would ask for a credit, regardless whether they could afford it or not, that precipitated the crisis. If the same crisis is to be avoided it is surely by only lending to people who are likely to repay the debt. This of course means lending to fewer people, surely..
BTW, Jon – I hope you are leading with this tonight!
F- E – E – L the rage!
Jenny
You make a good point but banks should be able to tell the difference between companies who need to fund raw materials in order to function and someone who just wants a new car/kitchen/tv they can’t afford.
I’m staggered by the number of people who seem to think that things will go back to the way they were fairly soon. Particularly in the property market. Recently I was talking with a fairly prominent marketing person here in the north-west. He seemed to think that all the redevelopment and regeneration would soon be back on track. But most of it depends on building and selling city centre apartments. There seem to be thousands standing empty already and the crazy mortgages are never coming back, so I don’t see how it will happen.
And, as your article points out, the banks aren’t even agreeing to the more sensible loans.
I see the problem as being one that will never go away.
Money means power and power means evil.
All humans living on this planet should have clean food and drinking water.
Why do the people who eventually get into decision making political positions not want that? Because they would loose too much time and money making it a reality and if all developed countries got together then the underdeveloped countries would have the basics from one year to the next..just like that, at the drop of a hat…
adzmundo CND
No one is sure whether this may turn out to be a ‘double dip’ recession in Britain. Could that be one reason why the banks are being ultra cautious? Some of the supposedly positive signs may not be what they seem at first glance. On his blog Faisal has written about how the housing ‘mini boom’ may have been created by ‘government sponsorship’ of the banks.
For most of us it’s hard to get an overall picture. We can only talk about our own experiences. Part of my income is from ads on websites. Last March was the worst month for almost six years and then things recovered somewhat. However September was poor and October is only marginally better than March. Winter is almost here, fuel bills haven’t gone down, maybe a critical mass of people have reached the limit on their credit cards and the loan money to continue funding unsustainable lifestyles has dried up finally?
every pound in your pocket is someones else debt morgage credit card loan so as interest so low the more people pay back the less credit in the economy
the crisis was undoubtably caused by banks irresponsible lending, ably assisted by an incompetent and profligate chancellor and noe prime minister.
If the call is for banks to return to that feckless lending then we are just heading for total disaster.Too many people have borrowed what they cant afford and been encouraged to do so by the banks now in debt to the public purse for billions.That they dare even think of bonuses on top , they deserve to be imprisoned
yet it is the Public Setor who somehow are blamed for all the Banks crimes – a con job – and with the help of politicinas – so who owns the politicians .?.
What do you think the thumbs up want to get their hands on?
I suspect that planet-wide there is now more money owed than actually exists. Can anyone confirm or refute this? If it’s the case or even close to the case then another worldwide recession is an inevitability within the next 2-3 years.
Why? Because humans are the only dysfunctional species on the planet – bankers and politicians amongst the most insane – and are incapable of acting responsibly and/or logically. Self interest has always ruled and only a mega-disaster will wake people up. Catch 22: it’s then too late.
Prince Wao: exactly. I’ve always wondered how, if everyone’s got a National Debt, the IMF’s got loads of money. Who’s paying who???
All economics is ‘voodoo economics’.
The simple answer to your question is, the banks have stopped lending to small businesses (among others) because they realise that all SME’s are slowly going bust because of the terrible state of the economy and the fact that their customers / clients are going bust too.
Now I wonder why that is? irony incarnate!
Back on your socialist hobby horse.
It is \not the banks that hqave made Greece and Italy near bankrupt. It was not the banks that made the outgoing Treasury minisTer leave anote for the incoming minister saying : “There’s no money left. Good Luck. Those thre examples and all the rest are due to Government Overspend.
What you do not seem to understand – and wouold rather not know, is that the western world’s overspend and consequent excessive borrowing (of simple savers banked money)is the inevitable consequence of universal suffrage on a one individual one vote basis. There will always be people who buy themselves seats in parliament with the promise of bene.fits bought with other peoples’ money. In that the lefties (Snow please note)lead the way, and the righties have to folow suit, so as not to be outbid. That truth is not palatable, and therefore it is ignored, until the roof caves in.