The enormously expensive bank recapitalisation package has failed: it rescued the banks but it has not rescued the economy. The banks, despite the rescue, have ceased to behave like banks: they have stopped lending. Most particularly they have stopped providing essential credit to small businesses which are the engines of employment. I am not alone among members of Parliament who have been deluged by complaints from businessmen telling how their overdrafts have been withdrawn, loans called in, or new lines of credit refused. They are outraged that the banks, having been rescued by the taxpayer, are now in effect closing down their tax paying businesses by denying them credit.
If we are to shorten the recession and mitigate the rise in unemployment we must overcome the problem, we must get credit lines flowing to businesses again. There are two ways of going about this: either the Government can set up its own institution to lend to businesses; or we can make another effort to change the behaviour of the banks and get them lending once again. I favour this second course because I have a prejudice in favour of free markets and a suspicion of too great an involvement of Government in commercial decision making.
How can we get the banks to lend when, notwithstanding their vital importance, small businesses are amongst the most marginal enterprises and particularly exposed in a recession? Even when they have a healthy order book they are notoriously prone to cash flow problems because they are pressed for early payment by their suppliers but squeezed by long payment terms by their often much larger customers. This is why credit from the banks is so often absolutely essential to their survival. While, on the other hand, it is the very reason why banks are so reluctant to extend credit to them in a recession, they are the usual casualties. The Banks have already made enormous losses and are instinctively disinclined to expose themselves further to the small business sector and, on the contrary, are seeking to reduce the exposure by closing credit lines down
The way to change this behaviour is for the Government to guarantee repayment of loans by banks to businesses. The taxpayer must be rewarded with a fee sufficient to compensate us for taking on the risk by providing this insurance.
Clearly the banks cannot be allowed to suspend proper credit risk controls and make loans to businesses with no prospect of repayment, secure in the knowledge that the taxpayer will stump up. I think, however, that the present danger is from far too few loans rather than too many. If we are to succeed we will have to be bold. Providing credit to businesses is probably the most important thing that can be done to maintain employment in this recession. When he was asked about this the Prime Minister responded by saying that the Government was doing what it can to persuade the banks. Well it isn’t enough and it isn’t working. They need to step in and guarantee bank loans to business or countless enterprises will go down the plug taking hundreds of thousands more jobs with them.
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The bishops have been scathing in their assessment of the Government’s plan to spend its way out of the recession by borrowing billions of pounds and doubling the national debt to one trillion pounds, a sum so large it is beyond the understanding of ordinary people, save that they have the certainty of paying for it later in higher taxes. The bishops have taken the view that the Government’s policy is immoral because borrowing has been at the root of the problem in the first place, and the VAT cut -to be funded by even more borrowing- is an attempt to get consumers to go out and spend more money that they haven’t got, on credit. I happen to agree but I really wonder if it is the place of bishops to say it. Have they strayed into Caesar’s realm?
The prudence of different levels of government borrowing is an economic question to be decided by empirical evidence. I happen to believe that the policy is bound to fail but it remains for me a purely scientific question, facts will prove me right or wrong. Neither the collection of the data nor the assessment of it is a sphere where bishops have any expertise and I can understand the irritation of ministers and their desire to see the bishops return to their vestries. Of course, it is an entirely different matter if bishops were to challenge individuals about how they ought to spend their money or conduct their business affairs. For these are moral questions about values and priorities, not just questions of fact. It is, however, much more difficult and less popular to challenge individuals and condemn their choices, governments are always so much softer targets. It comes down to moral courage in the end.
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