Credit isn't the Cure

Banks seems to have become a relatively hot topic again recently (or perhaps it's just me) as the media attempts to spin up more hatred for our financial service providers.  Whilst I don't hold the majority of these rent seekers in particularly high regard I am getting pretty sick of reading the bullshit being pedalled about economics and financing.

This week has seen the banking sector miss it's quarterly target of some £19billion in loans to be handed out to small business under the "Project Merlin" agreement (which is a hilariously apt name when you think about it).  Upon hearing the news Vince Cable unsurprisingly came out flinging criticism at the banks yet again.  This whole episode is based on the notion that lending will bring us out of recession, that without credit we will stagnate and may even enter a "deflationary spiral" where people hoard resources for a greater return later.  Which of course is just as rubbish as an inflationary spiral where wages keep rising to catchup with other peoples wage rises.

The idea that some level of credit is required to help an economy grow quickly is founded on truth, a loan is a much easier way to raise revenue than to save for decades, but it is far from the magic economic cure for our problems.  What worries me the most is that the '08 recession was brought on by easy credit, the boom in the US housing market which collapsed when the credit tab was reigned in, and we don't seem to be learning any lessons.  If anything the hesitation of the banks to lend so readily shows that they are slowly learning, although huge barriers to competition and taxpayer sponsored bail-outs are an obvious disincentive to act responsibly.  Meanwhile new regulations are imposing financial restrictions on banks which reduce their capacity to lend, so who really knows if lessons have been learned!

Anyway my point is that easy, incentivized & forced credit got us into this mess and certainly won't get us out of it.  What Vince and the rest of the political economists seem to ignore is that lending is fine providing you receive the return, I would even condone printing money to hand out to producers if you could guarantee that it would create more production than the costs.  But the point is there are no guarantees.  Encouraging/forcing the banks to meet lending quotas means nothing, they are just throwing money at businesses in a hope that there are more winners than losers.  This is little more than gambling, but with our savings and earnings put up as collateral if a bank hits the red line.

A far better solution in my opinion would be to let the markets find equilibrium again, lenders need to ensure they have hard assets to cover their loans (savings), interest rates need to adequately reward lending whilst discouraging poor investments (market prices) and we need an environment which encourages business to grow and invest (deregulation and less taxation).  Overall this is part of a much bigger problem where fractional reserve banking and government regulations are the key problems halting growth, not a lack of credit.

This whole easy lending issue becomes even more of a problem when we introduce low interest rates (further encouraging borrowing over saving), foreign bond markets and all the other regulatory & money printing tools the government, sorry I mean the Bank of England has at their disposal.  There has been no effort made on the part of government to facilitate sustainable growth, whilst forcing the banks to hand out money on their behalf and then criticising, heavily regulating and taxing them at every turn is totally hypocritical.  In my opinion this wreaks of desperation, when politicians don't know what to do just throw cash at the fools, blame somebody else and hopefully they won't notice who's responsible for our decline.