In the post below, Michael Jennings writes, “Capital has been far too cheap, and much investment has gone to all kinds of stupid places where it cannot generate a genuine economic return.”
But politicians have not got it into their stupid heads, hence credit easing, a scheme in which the government guarantees loans to small businesses so that they can get an interest rate discount.
The BBC’s business editor Robert Peston writes:
The Treasury is not forcing the banks to take greater risks when lending to businesses. So there is no reason to assume that the total volume of lending to small businesses will increase much as a result of the scheme.
Apart, that is, from the reason that the interest rates are lower, so there will be more demand for the loans. And the risk to the banks is lowered, so they can make riskier loans without increasing the risk to themselves.
So lots of businesses will borrow money and it will increase GDP and the government will look good, but, as usual, the money would have been spent more usefully had it been left in private hands.
As a businessman who taken several bank loans in the past I cannot feel that a 1% discount off the already extortionate rates is likely to swing me one way or another.
If your business needs finance you get from the cheapest source available when you need it, if they will lend, because you need it at that time. If you do not need to raise finance a 1% discount is not going to make you decide to borrow money now to take advantage of a ‘great offer’.
These initiatives have less to do with helping small businesses than to giving politicos sound bites and I think that the effect on GDP will be negligible. Businesses that need finance will borrow anyway if they meet the bank’s lending criteria.
May I suggest some other considerations:
What entity (or entities) are the “users” of the greatest proportions of “credit” in the U K.?
That is to say: “Where in the U K economy does the greatest proportion of borrowing occur?”
What would be the effects, and how expressed, if that borrowing were not “accommodated”?
Businesses (when in a rational mood) borrow to seek a return on capital. What is the rate of return on capital in the U K economy currently?
What are the objectives of Public Sector borrowing?
Do they seek a rate of return that will “justify” the costs of credit?
You may make your omlets after breaking those eggs.
So many issues lurking here, it’s hard to know where to begin.
“Capital has been far too cheap, and much investment has gone to all kinds of stupid places where it cannot generate a genuine economic return.”
Yes and no. In the US, anyway, banks are not lending to small businesses, so to the extent investment has gone to “stupid places” (which it has) it’s only when made by governmentally-favored enterprises (as in the ongoing scam of “green energy” loans) or by those firms which are politically connected (GE, etc.). Mostly the former; I have no great love for GE but they’re not stupid.
And even when small businesses can get loans, the terms are poor. Banks these days can borrow at nearly zero interest (that’s the Fed’s discount rate, and it’s just about what they pay on Certificates of Deposit these days, too), yet the US Prime Rate is at 3.25%, unchanged since 2008. And no bank I know actually lends at the Prime Rate, they merely use it as an index off which to price their loans (with a margin added), and usually with a floor of around 6%. In this economy it’s hard to find an investment which will give you that kind of a return to even justify looking for a loan.
One would think that a bank making a spread of 5% or so would be falling all over itself to make loans, but they aren’t because the regulators won’t let them. This isn’t the story you hear out of Washington, but talk privately to any small banker out in the heartland and you’ll learn the truth. If any bank really wanted to make loans it would simply cut the interest rate (narrowing its fat margin a bit) and it would have all the business it could handle. But because the regulators on the ground (and in the board rooms) are so strict they can’t make the loans, so the rate stays high as a means of deterring applications. (Better not to receive an application at all than to have to say “no”.)
Note that this UK “credit easing” program is not a guarantee of the loans made by the banks to their customers, but rather a guarantee of the bank’s borrowings to drive their cost of funds even lower than it already is. It’s not a subsidy of small businesses, it’s a subsidy of the biggest (and weakest) banks.
Guaranteeing a loan sounds a lot like co-signing a loan. I did that once. It was a bad idea, and I’ll not do it again.
“Paul gets on his hobby horse…..”
The fact that politicians do not learn from experience – even the the most blatent and obvious expernience (such as the credit bubble collapse – although the worst of this is STILL TO COME) is not an accident.
The ruling politicians were carefully educated (brainwashed would be a better term) in the false ideology of “monetary stimulus” (an ideology that the Keynesians and the Monetarists share).
Of couse someone can undergo years of university (and other) brainwashing and still keep control of their own minds – but I am reminded of a bit from an old horror film.
“Can he not recover? I survived the Vampire’s bite….”
“He is not a man [or a women – we would should say] such as you”.
“Paul gets on his hobby horse…..”
The fact that politicians do not learn from experience – even the the most blatent and obvious expernience (such as the credit bubble collapse – although the worst of this is STILL TO COME) is not an accident.
The ruling politicians were carefully educated (brainwashed would be a better term) in the false ideology of “monetary stimulus” (an ideology that the Keynesians and the Monetarists share).
Of couse someone can undergo years of university (and other) brainwashing and still keep control of their own minds – but I am reminded of a bit from an old horror film.
“Can he not recover? I survived the Vampire’s bite….”
“He is not a man [or a women – we would should say] such as you”.