Tuesday, 27 March 2012

The establishment’s schizophrenia on the subject of bank lending.

Summary: Keynes said “look after unemployment and the budget will look after itself”. The theme of this post is “look after demand, and finance for businesses will look after itself”. Which itself is a variation on Mosler’s law: “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”


The British establishment continues to hyperventilate about the alleged shortage of bank lending to businesses. E.g. see here, here, here, or here.

But at the same time, other members of the establishment claim banks are subsidised, bloated and need to be cut down to size. For example, Lord Turner, head of UK’s Financial Services Authority said that much of what banks do is “socially useless”.

Second, Andrew Haldane of the Bank of England claimed that total bank profits are dwarfed by too big to fail subsidy that banks get. See 3rd paragraph under the heading “Implicit subsidies” here.

Third, according to Mervyn King, the bank industry has expanded by a whapping factor of ten relative to GDP over the last fifty years. That is, total bank balance sheets have expanded from 50% of GDP fifty years ago to five times GDP nowadays. But mysteriously, economic growth fifty years ago was perfectly respectable.

So contrary to claims of the above hyperventilaters, any difficulty that businesses may be having in finding loans, does not need to be a constraint on economic activity or employment. That is, inflation permitting, we just need to boost demand, the GDP and employment will rise.

The EXTENT TO WHICH such activity is based on bank loans may well decline. But that activity will be replaced (at least to some extent) by alternatives: e.g. activity that is equity funded, or funded by loans other than from banks. Plus there will be a move towards less capital intensive forms of activity. The free market is far more flexible and imaginative than the brains of politicians.

In case the above hyperventilaters hadn’t noticed, we’ve just had a credit crunch caused by excessive and irresponsible bank lending. That means it is probably DESIRABLE for total bank lending to decline!!!!

Unfortunately, politicians are complete suckers when it comes to lobbying and pleading by well financed special interest groups: like businesses claiming they cannot get bank loans.



  1. I take it you've seen Lord Sugar's comments on the issue.

    Moaning firms tend to be 'skint'

    That's my experience as well. The 'moaning' firms either actually need equity investment, or they really want somebody to lend them money for nothing to boost their leverage and profit.

    1. Neil, Thanks for that and for the link you gave to the Office of Budgetary Responsibility work the other day. Relevant links always gratefully received.


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