The Chancellor forgets his own banking advice

On September 13th 2007 I posted a blog which was very critical of the Chancellor’s important remarks on banking. Mr Darling told us:

“Institutions have in some cases been prepared to lend to people without checking if they were ever going to repay it”
“Institutions themselves need to open their eyes and be more honest”
There needed to be a return to “good old fashioned banking”

This “Moral hazard speech” lasted just one day. Having warned banks there would be no bail out where they had made lending mistakes, the following day he began to go to the aid of Northern Rock.

This week Mr Darling has told the banks they must lend more to small business, or else.
Does that mean they should no longer consider if the businesses can repay it? Does it entail closing their eyes and lending regardless? What if they honestly think the small business concerned cannot get through the recession because it has too little revenue coming in?

Is this a case of different conduct for a nationalised bank from a private sector one? Do private sector banks still have to obey the dictats of the Moral hazard speech, and nationalised ones the requirement to lend regardless? Or has the latest requirement replaced the enthusiasm for good old fashioned banking?

As someone who does want the banks to help small businesses as much as possible, I understand they can only do so on a big enough scale if the government is more successful in offeirng the prospect of recovery from recession. The government faces a dilemma. If it does not start to lift us out of recession, lending too much to people and companies who cannot repay just weakens the banks more rather than saving the businesses we want to save. Weak banks and weak small businesses both need the same thing – more success from the economic policy.

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8 Comments

  1. Stuart Fairney
    Posted November 22, 2008 at 10:58 am | Permalink

    Do you mean to tell me the Chancellor is going from day to day without any clear idea of his actual objectives save for some Micawberish hope that something will turn up, whilst all the time making ever more contradictory statements and making himself look a bigger fool than usual?

    Okay then.

  2. Neil Craig
    Posted November 22, 2008 at 1:10 pm | Permalink

    Mr Darling himself seems to be about to ask the banks to lend him £100 billion without revealing exactly how he intends to repay it.

  3. Acorn
    Posted November 22, 2008 at 2:22 pm | Permalink

    (JR, your site is getting difficult to access at times, please consider upping your server capacity. The nearer we get to the election, the more traffic and posts you will no doubt get; being one of the few voices of salvation worth following. I suspect you will need a full time sub-editor soon, being as you’ve got the day job as well.)

    You are going to have a tough job on your hands to win the next election. It will be near impossible to explain to the voters that they are being well and truly shafted. The situation is far too complicated for them to understand. They do not understand that the private sector pays for the government sector and the household sector of the economy.

    They do not understand that paying £30k a year to the “five-a-day-community-outreach-officer” is £30k that is not being paid to someone in the private sector who makes something and sells it for dollars or euro or yen.

    Until your party’s marketing department gets this message across in simple terms, you are on a looser.
    For a starter, your party should listen very carefully to Shania’s words because the Tory party is currently represented by the guys in this video.
    http://www.youtube.com/watch?v=_SOh6mSEZss

  4. Span Ows
    Posted November 22, 2008 at 2:30 pm | Permalink

    JR "Does that mean they should no longer consider if the businesses can repay it? Does it entail closing their eyes and lending regardless? What if they honestly think the small business concerned cannot get through the recession because it has too little revenue coming in?"

    …isn't this exactly the starting point, pressed and 'enforced' by Clinton's Democrats, of the US sub-prime fiasco?

  5. evil g
    Posted November 22, 2008 at 3:33 pm | Permalink

    Is it not the case that it is bank capital requirements, and a lack of funding, that is preventing banks from lending to businesses, rather than banks simply deciding not to lend on a normal commercial basis?

    The government could lend directly to businesses, either through Bradford & Bingley or the Post Office, and do so using the same criteria and scoring that commercial banks use.

    Clearly this is undesirable in the long term, but can plug a hole in extremely unusual times when banks have no money to lend.

    Ideology need not get in the way. The government could even “securitize” and sell off its loan book in 5 or 10 years when the recession is over.

  6. Tom Knott
    Posted November 22, 2008 at 5:50 pm | Permalink

    They seek him here,
    They seek him there,
    They seek our Darling everywhere.

    Is he in Morningside,
    Or is he a sell?
    And waiting for the Closing Bell?

  7. mikestallard
    Posted November 22, 2008 at 8:49 pm | Permalink

    One thing is certain, the cash stimulus for the banks given by the Chancellor (do I remember £400,000,000,000?) has most certainly not worked. Banks think in trillions: the Chancellor thinks in billions. If there was that much capital sloshing round, they might be much more generous and, perhaps, even a little foolhardly.
    What is quite obvious is that they have not got the wherewithal to do that much lending.
    Just telling them they have got to lend to Mr Darling's voters isn't going to work. There is a blockage in the system.
    I think, John, that the difference between you and the lefties is that you quite like and admire the works the banks do, while the lefties think that all bankers are just fat cats out for another saucer of cream for themselves.

  8. John Robertson
    Posted November 28, 2008 at 7:37 pm | Permalink

    Hello John

    Was the failure of the Bank of England to act as lender of last resort to Northern Rock and the regulatory requirement for banks to increase their capital part of a plan to nationalise the banks or was it just plain staggering incompetence?

    Of the three options for the future, I tend to favour the third in the long run particularly as the ability for the economy to provide goods and housing has been severely damaged. Housing completions this year will be under 100,000 when it needs to be at 200,000 just to keep pace with the rising population and changes in social patterns. This will be the case over the next few years as well. Not only that, the only way I can see the government being able to sort out its mountain of debt is to print money which will debase the currency and cause an even bigger run on the £ than has already happened. The price of imports will then rise substantially.

    Finally, the front bench have really got to be a lot more vociferous over this and the way government is misusing anti terror legislation and politicising the police. No more nice party.

    I am now working on my Welsh accent in case people think I,m one of these idiots who are wrecking the country. Me, Scots, never.

    Reply: I think it was incompetence by the banks, but am suspicious about the motives of Mr Cable and some Labour Minsiters who were mad keen on nationalisation.
    You are right that the Opposition needs to be strong of voice and in deed in response to the continuing attack upon our civil liberties.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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