You can’t make a horse drink

The right-wing conservative coalition government in Britain is worried.  Its commitment to ‘austerity’ is not working.  Every economic indicator suggests that British capitalism will achieve little or no growth in output of goods and services this year.  Unemployment will continue to rise and average incomes fall.  According to the Centre for Economics and Business Research, real disposable income will fall by over 1% this year and again in 2013, so that by the end of 2013 real living standards for the average household will be 5.7% lower than before the Great Recession began in 2007.  Corporate profits are still weak and there is no sign that businesses intend to increase investment, at least in Britain itself.

This time last year, the government forecast that UK real GDP would rise 2.5% in 2012.  The latest forecasts are around zero to 0.5% and for next year just around 2% (see my post, A weak world, 1 June 2012).  This poor growth means that the governments targets on the budget and on debt will not be met.  And the recession in Europe, Britain’s largest export destination, intensifies.

So we have a new move by the government in conjunction with the Bank of England to ‘stimulate’ the economy through monetary means.  This is characterised as an ‘expanded Plan A’ (i.e continuing with fiscal austerity but combining it more monetary easing) rather than ‘Plan B’ (where increased government spending aims to boost the capitalist economy as advocated by the Keynesians, although only half-heartedly by the Labour opposition) – see my post, UK; the best laid plans of mice and George Osborne, 29 November 2011. Using Keynesian terminology, Mervyn King said that a “black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead.”

The governor of Bank of England, Mervyn King is launching an £80bn “funding for lending” plan to cut the cost of credit and boost its availability.  And he also announced a new liquidity programme worth at least £5bn a month and the governor was as explicit as he could possibly be that more ‘quantitative easing’ (QE) is on the cards. QE is a programme of ‘printing’ money so that the BoE then purchases government bonds to try and get interest rates as low as possible and so allow or encourage banks to use the money to lend to the ‘real economy’.  

The Bank thinks that the best way to reduce businesses’ and consumers’ cost of borrowing is to make it cheaper for banks to raise funds – while simultaneously making this cheap funding contingent on them lending at a lower cost. Banks will be able to hand over any new loans they make to the non-financial sector – mortgages, consumer loans, loans to small business – to the Bank of England, which will use these assets as collateral against which to lend money to the banks. There will be a haircut to try and reduce the risk to the Bank if the value of the asset collapses. Borrowing against collateral in this way is currently done privately – but the Bank scheme will be designed to be cheaper and thus to reduce banks’ funding costs. The pricing will reward banks that lend the most and pass on low interest rates.

Unfortunately, now standing at £325bn, or 15% of UK GDP, QE has been a miserable failure in stimulating the economy and these new forms of cheap credit will have a similar result.  Britain’s large corporations don’t need credit.  They are already flush with cash, but just don’t want to invest.  Lowering the cost of credit to them won’t change that.  In contrast, Britain’s small firms cannot get credit because banks are worried about these small operations being unable to pay their loans back. And the banks are being told by the government that they must not take ‘excessive risk’ after the bursting of the property bubble and great credit crunch that brought the banks to their knees in 2008-9.

So bank lending in the UK has been shrinking, not rising, despite QE and near-zero central bank rates. On a 12-month basis, credit to business has been shrinking for three years and ‘broad money’ is still lower than in late 2010. It confirms the argument that credit is really demand-led and cannot stimulate the ‘real economy’ if there is no willingness to invest by companies or to spend by households.  You can lead a horse to water, but you cannot make it drink.

Instead, if the banks were fully nationalised and under state control, they could be directed to lend to small businesses and to fund employment-creating and skill-raising state projects to boost the wider economy.  But such a policy would be an outright threat to capitalist production and so is not on the agenda.