Sunday, 27 November 2011

Government should not subsidise bank loans.

It’s been announced in the last 48 hours that the UK government intends underwriting a few billion of loans by banks to businesses, which to the innocent will sound a good idea.

But why should government subsidise bank loans to businesses? There are alternative sources of funding for businesses: issuing shares or obtaining loans from non-bank institutions (or in the case of small businesses, loans from family members or friends).

Siemens in Germany are very much into the “firm to firm” lending business. Are they entitled to a subsidy, and if not, why not?

Moreover, the whole bank lending business already receives an ASTRONOMIC subsidy: that’s the too big to fail subsidy plus the £85,000 per account guarantee provided by government (i.e. taxpayers). The too big to fail subsidy alone was estimated by the Independent Banking Commission as being worth well over £10bn a year (about £150 per UK resident per year). See p.130 here.

As the ICB righly say (p. 8) “The risks inevitably associated with banking have to sit somewhere, and it should not be with taxpayers.”

Government should stop tinkering with the dozens of levers that they think control the economy and concentrate on approximately one lever. As advocated by Prof Werner, Positive Money, the New Economics Foundation, government should just create new money and spend it into the economy when needed (and/or cut taxes). Modern Monetary Theory advocates the same.

Or as Simon Jenkins put it, “Governments can worry about borrowing, lending, inflation, fiscal rectitude, whatever until the cows come home – but without demand there is recession.”


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