We were told in advance of the budget yesterday that RBS and LLoyds are going to be made to lend more. We were given early warning of legislation to force all banks to offer basic bank accounts to anyone who wants one.
Maybe the government has been listening to those of of us arguing that the private sector is still being starved of reasonable lines of credit at affordable rates. Unfortunately the idea that you can simply instruct a couple of banks to lend more is not going to work. They have told them before to lend more. Just bellowing it across the media again, only louder, is not going to bring it about. The government needs to ask why lending to companies and individuals is depressed.
The first thing they should learn is that the Banking regulator wants private sector lending to be depressed. The Regulator is insiting on the banks holding more cash and capital relative to their lending. They are doing so at the wrong point in the economic cycle. Banks are reining in their credit and balance sheets to comply. If the government wants more private sector expansion, they need to tell the Regulator to back off.
The second thing they need to grasp is economic conditions are still quite hostile for many companies, so they are paying back debt rather than committing more money to investment. They do not see a strong recovery, so they are not spending more on facilities, machinery and stocks. There is a vicious circle in the private sector. A shortage of demand means no incentive to invest. A shortage of cash means no wherewithall to invest.
This vicious circle is reinforced by the speeding decline in living standards. Relatively high inflation by world standards is leaving many families worse off, as wages and salaries are going up by far less than prices. This means less home demand for domestic businesses. The public sector is taking too much of the limited national income. The private sector is further depressed by fears of tax increases to come to pay for it all. It’s going to take some tax cuts to boost spending power and some reductions in public sector waste and over spend to instill more confidence. Lecturing the banks will not do the job.
Bank accounts for all may not be as popular a policy as Labour like to think. Some people who do not have bank accounts may not like banks or bankers. The government needs to think through how it would enforce it. Are all banks with a licence under an obligation to give anyone an account who applies, regardless of their size and their specialism? Will they regulate the charges, or can banks put people off by charging too much for certain kinds of customers? How do you regulate the full panoply of charges? How do you avoid the regulation stifling competition?
This is all probably just more gesture politics. I am not sure even the government takes itself seriously any more. We need an election. Before that nothing sensible is goling to be decided.