Banks are lending to other financial corporations but not to business. The Bank of England must buy bondsby Graham Turner / February 28, 2009 / Leave a comment
Published in February 2009 issue of Prospect Magazine
The second bailout for British banks was dead on arrival. The markets greeted the 19th January announcement with sharp falls in both bank shares and sterling. Investors fretted over the rapid deterioration in public finances. They should have worried more about the faulty logic underpinning the scheme.
The assumption that banks are not lending is wrong. They are, but only to other financial corporations, like leasing companies, hedge funds, pension funds, brokers and so on. These organisations have been unable to access the wholesale financial markets since the collapse of Lehman Brothers and the downward spiral in house prices. So they are borrowing from banks instead. Far from credit drying up, in the first 11 months of 2008 banks lent these groups £252.8bn.
The real trouble is that banks are still not lending to businesses or households. In the three months to November last year, lending to non-financial corporations fell by £2.4bn and to households by £5.6bn. Over the same period loans to financial corporations rose 42.7 per cent to £101.7bn. Meanwhile, normal businesses are being hit by a steeply rising cost of borrowing. In 2008 the average cost of borrowing on the corporate bond market peaked at nearly 29 per cent for riskier companies. The Bank of England (BoE) has too often ignored this critical barometer. It also doesn’t appear to understand that, at a time of uncertainty, issuing more “risk free” government bonds—in order to buy up toxic assets—will crowd out corporate borrowing.