You can’t make a horse drink

The right-wing conservative coalition government in Britain is worried.  Its commitment to ‘austerity’ is not working.  Every economic indicator suggests that British capitalism will achieve little or no growth in output of goods and services this year.  Unemployment will continue to rise and average incomes fall.  According to the Centre for Economics and Business Research, real disposable income will fall by over 1% this year and again in 2013, so that by the end of 2013 real living standards for the average household will be 5.7% lower than before the Great Recession began in 2007.  Corporate profits are still weak and there is no sign that businesses intend to increase investment, at least in Britain itself.

This time last year, the government forecast that UK real GDP would rise 2.5% in 2012.  The latest forecasts are around zero to 0.5% and for next year just around 2% (see my post, A weak world, 1 June 2012).  This poor growth means that the governments targets on the budget and on debt will not be met.  And the recession in Europe, Britain’s largest export destination, intensifies.

So we have a new move by the government in conjunction with the Bank of England to ‘stimulate’ the economy through monetary means.  This is characterised as an ‘expanded Plan A’ (i.e continuing with fiscal austerity but combining it more monetary easing) rather than ‘Plan B’ (where increased government spending aims to boost the capitalist economy as advocated by the Keynesians, although only half-heartedly by the Labour opposition) – see my post, UK; the best laid plans of mice and George Osborne, 29 November 2011. Using Keynesian terminology, Mervyn King said that a “black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead.”

The governor of Bank of England, Mervyn King is launching an £80bn “funding for lending” plan to cut the cost of credit and boost its availability.  And he also announced a new liquidity programme worth at least £5bn a month and the governor was as explicit as he could possibly be that more ‘quantitative easing’ (QE) is on the cards. QE is a programme of ‘printing’ money so that the BoE then purchases government bonds to try and get interest rates as low as possible and so allow or encourage banks to use the money to lend to the ‘real economy’.  

The Bank thinks that the best way to reduce businesses’ and consumers’ cost of borrowing is to make it cheaper for banks to raise funds – while simultaneously making this cheap funding contingent on them lending at a lower cost. Banks will be able to hand over any new loans they make to the non-financial sector – mortgages, consumer loans, loans to small business – to the Bank of England, which will use these assets as collateral against which to lend money to the banks. There will be a haircut to try and reduce the risk to the Bank if the value of the asset collapses. Borrowing against collateral in this way is currently done privately – but the Bank scheme will be designed to be cheaper and thus to reduce banks’ funding costs. The pricing will reward banks that lend the most and pass on low interest rates.

Unfortunately, now standing at £325bn, or 15% of UK GDP, QE has been a miserable failure in stimulating the economy and these new forms of cheap credit will have a similar result.  Britain’s large corporations don’t need credit.  They are already flush with cash, but just don’t want to invest.  Lowering the cost of credit to them won’t change that.  In contrast, Britain’s small firms cannot get credit because banks are worried about these small operations being unable to pay their loans back. And the banks are being told by the government that they must not take ‘excessive risk’ after the bursting of the property bubble and great credit crunch that brought the banks to their knees in 2008-9.

So bank lending in the UK has been shrinking, not rising, despite QE and near-zero central bank rates. On a 12-month basis, credit to business has been shrinking for three years and ‘broad money’ is still lower than in late 2010. It confirms the argument that credit is really demand-led and cannot stimulate the ‘real economy’ if there is no willingness to invest by companies or to spend by households.  You can lead a horse to water, but you cannot make it drink.

Instead, if the banks were fully nationalised and under state control, they could be directed to lend to small businesses and to fund employment-creating and skill-raising state projects to boost the wider economy.  But such a policy would be an outright threat to capitalist production and so is not on the agenda.

5 Responses to “You can’t make a horse drink”

  1. Ed Says:

    “… if the banks were fully nationalised and under state control, they could be directed to lend to small businesses and to fund employment-creating and skill-raising state projects to boost the wider economy.”

    — So you do believe capitalism can work then, it just needs greater state control.

    “… such a policy would be an outright threat to capitalist production”

    — Ok, it would be going against the spirit and letter of capitalism, and it certainly wouldn’t be socialism, or even a way to end capitalism (it might just raise people’s hopes pointlessly). Do you support the idea?

    • michael roberts Says:

      No I don’t believe capitalism can avoid slumps. But it can also get out of them – but only if profitability is sufficiently restored by the destruction of capital values. To do that requires high unemployment, bankruptcies and mergers and the loss of wage incomes – in other words, hell. If a government took control of the banks to direct funding towards state-run projects, it would create new jobs and incomes. But, as I said, that would make profitability for the capitalist sector worse, not better and so such a development would 1) be a threat to capitalist production and 2) delay any recovery on a capitalist basis. The government would have to go on and socialise production, so that profitability was no longer the dominant driver of the economy OR it would be forced to reverse the policy. Whether such a policy raises the hopes of people pointlessly depends on whether it is presented in the way I have done or not.

  2. Mike B) Says:

    “Britain’s large corporations don’t need credit. They are already flush with cash, but just don’t want to invest. Lowering the cost of credit to them won’t change that. In contrast, Britain’s small firms cannot get credit because banks are worried about these small operations being unable to pay their loans back.”

    Shorter work time, say a 20 hour week, combined with increases in the real wages of the proletariat, would create the markets that small and large businesses need to become profitable again.

    Of course, the ruling class and their politicians aren’t wise enough to see this. By instinct, they can’t think of anything other than sticking it to the working class.

  3. Gavin Says:

    I’m not sure it would be a threat to capitalist production Michael. A threat to the wealthy asset owning class, probably, but capitalism not so much. A core principle of capitalism is risk & reward and banks have been spurning that for years. All this bank lending that’s gone titsup wasn’t considered at all risky when they were at it.

    In my view the engine room of (true) capitalism is the small business people who want to be big business people and that group have been long starved of capital, perhaps deliberately. Capitalism needs competition for it to thrive and the most important sector of the market has been prevented from participating.

    Btw I got to the bottom of the endogenous lending thing, had to do a lot of reading. Seems a storm in a teacup really, mostly people arguing over terminology & a bit of a battle of egos.

    Thanks.

  4. plerudulier Says:

    Reblogged this on Things I grab, motley collection .

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