The Governor of the Bank of England in a doom laden speech told us that the Euro crisis leaves a “black cloud of uncertainty” hanging over us. This, he says, damages confidence. This leads to “lower spending” which “leads to lower incomes and a self reinforcing weaker picture of growth”.
He is right to say that the Eurozone catastrophe is bad for confidence. It does do damage to export prospects, and to wider confidence. However, if he wants to find out why spending in the UK has been depressed recently, he should also look at the big impact high UK inflation has had on real incomes. There has been a progressive squeeze on our real incomes. It began at the end of the Labour era thanks to their massive bust and the collapse of output. It has continued under the Coalition, thanks to the Bank’s singular failure to control inflation. Inflation has been running twice as fast as wage increases in the private sector, leaving people strapped for cash.
Will this latest scheme help? I have two main worries about it. The first is, it does nothing to relieve the squeeze the banking regulator is placing on the banks. Some of them will still lack balance sheeet strength to put more loans on their books. Second, they still are not breaking up RBS, our largest bank. This bank is not functioning well as disunited conglomerate. Why don’t they get on with creating some banks that work from amongst the assets and liabilities they hold in RBS? These very large banks do not seem very interested in lending money to individuals and small businesses. It appears that we are a nuisance, unable to pay the very high fees their senior executives expect. They can charge big business and governments these high fees, so they prefer to go that way.
The new scheme will need some detail on who takes the risk. If the Bank is to lend to the commercial banks against their new loans, the big issue is how much of a haircut or discount will the Bank apply to the loans offered as collateral for the borrowing, to protect the Bank and therefore the taxpayer? In addition, how will the Bank ensure the new loans being financed by the Bank of England are genuinely new loans? Commercial banks could offer exisiting clients new terms for old loans and present these for Bank money, unless there is an effective anti avoidance provision in the scheme.