Some have pointed to a paradox in what I argue. I both agree with the government that you cannot get out of a state borrowing crisis by borrowing more, and propose that more credit in the private sector would be a good thing to get the economy moving. These statements need not be contradictory.
It is true that some individuals and companies overdid the private sector borrowing in the heady years of 2004-7. Some banks clearly went too far, building huge portfolios of risky debt and other financial instruments. I am not advocating that these individuals or companies shoulod borrow more. They are having to cut their borrowings and sell off some of their assets to repay debts. That is a necessary process to get over the inflation of assets and asset prices of the pre Crash period. The banks have now slimmed down their balance sheets considerably, and are in a position to expand a bit if only the regulators would let them.
The private sector, however, remains larger than the public sector and includes a large number of credit worthy individuals, families and companies who could take on more debt for sensible projects and purposes. The aggregate level of private sector debt got too high by 2007. It has come down a bit since then. The totals allow scope for the unborrowed and those with little gearing to borrow some more.
That is where the role of the banks needs changing. Today credit worthy smaller businesses cannot get credit at all, or only at a very high price. Larger companies are put off epxanding, partly because they are concerned about demand, and partly because even they may be worried about working capital facilities needed if they do expand. If people cannot get mortgages for new homes, housebuilding suffers. If people cannot get mortgages for second hand homes, all sorts of activity related to home improvement and buying and selling suffers. If people cannot get loans to buy new cars, the motor industry suffers.
Some say that too much credit in the past has greatly extended house prices, and these should now be allowed to fall further. It is true that mortgage banks lent far too much prior to 2007, extending higher multiples of joint incomes and allowing a fast appreciation in home prices. There has been quite a big adjustment outside London since 2007. Central London has stayed high owing to strong foreign demand, often based on cash not mortgage money.
Whilst I agree that home prices are still high relative to income, I am also conscious that falling house prices puts people off making other purchases and makes them less adventurous with their other capital where they have some. We need to establish a sensible clearing price in the market for homes soon to foster recovery. It may not be as low as some would like, but allowing further large falls with a very restricted supply of credit will undermine banks further, leave homeowners feeling bruised and lacking confidence, and may not even in the short term help the first time buyers. They may, after all, delay as they see prices falling.