28 Oct 2009

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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