Thursday 3 June 2010

Does Vince understand business?

Vince Cable is going to give his update today on how the new Government sees UK PLC developing. There are likely to be some very welcome developments, such as the stopping of Lord Mandelson's crazy idea of picking winners and throwing subsidies at private companies with no promise of any economic return.

One issue though is that Vince is very keen to get banks to lend more to small and medium sized businesses. However, this is very much an economist talking. In aggregate he sees the drop in money supply and a credit squeeze. This needs to be loosened to we get Quantitative Easing and pressure on the banks to lend more.

What it ignores is Reality. In reality the UK corporate sector is awash with leverage, this is one of the main reasons the recession was so painful. The UK as a whole is awash with private debt and public debt. The concept that somehow more debt in the system is the answer is ridiculous. The Government itself is about to start making cuts (therefore another fall in demand, hence economist Vince seeing that we need more private debt to cover this contraction).

What the UK needs is over time to reduce if private, personal and public sector debts. sadly, this entails years of retrenchment - on the plus side with debt, the sooner you start paying it off the easier it gets as the principles are reduced.

Finally, the UK banks re keen to lend, but not to throw good money after bad. Should we really be encouraging state owned enterprises to lend to risky business where the money lent may not be recovered, let alone with interest? How is this a sensible way of nursing the banks back to health and off the public sector balance sheet.

Anecdotally it seems that Barclays, a private sector bank, is more or less closed to new business and has been for a long time. HSBC loves mortgages but no SME lending. leaving RBS and Lloyds already making up more than their fair share

12 comments:

Anonymous said...

According to Naked Capitalism, we could only reduce government debt and private sector debt at the same time if we had a major currency depreciation:

http://www.nakedcapitalism.com/2010/05/the-eu-and-the-limits-of-the-austerity-hairshirt.html

So another reason to hold gold!

Tuscan Tony said...

Well put CU, agree with that. When was the last time state interference in business led to an improvement in the situation. Correctly second guessing owners of money is an impossible task.

p.s. typo? "This needs to be loosened SO we get..."

Jonathan said...

Is it better to be encouraging lending to house purchasers or small/medium companies?

I'd prefer to see much less mortgage lending and a bit more company lending as while deleveraging is very important so is strong growth.

Also, Vince talks alot about reducing regulation so hopefully that is a good sign.

Cotswolds BB said...

Further to comments above, if we did want to deleverage then a slow decrease would have been preferable rather than the banks shutting off supply in one go.

I may be misunderstanding this but cant the banks borrow currently at 0.5% and lend at 5% plus ? I woulds have thought that left a fair margin to allow reasonable lending to SME's at least.

Fingers crossed Vince falls on sword, and Laws returns soon.

Ratbag said...

Jonathan makes a point that greatly interests me.

House prices are the government's favourite wealth creation venture (must do ANYTHING to avoid house prices correcting) and yet it saddles the public with more debt secured against overvalued assets.

We seem to be returning to the 70s in so many ways, why not reintroduce a mortgage lending cap?

Antisthenes said...

Vince Cable is a very serious threat to what appears to be a very strong and able government team. He is a staunch socialist so his appointment is akin to putting Goring in charge of the RAF. Easing him out and replacing him with Laws cannot come soon enough. In the mean time I hope Cameron and Clegg recognise the danger and keep him well in check. His dubbing at the hands of Andrew Neill and others has exposed his weakness of character and his so called expertise in all things economic as being nothing but a complete sham. He is the governments Achilles heel which no doubt Labour will recognise and exploit in a way that will be embarrassing not only for him but for the government as well.

Budgie said...

Governments guessing what to back is always fatal. Gordoom's support for Fred and his RBS is one glaring case.

Moreover, the government using the motor trade as an economic regulator in the 1950s and 60s was as flawed as the Labour government's use of the housing market over the last decade.

Political interference gives the government the excuse of being able to blame "British Leyland" or "the Banks", when it was the government's fault that created BL and the housing bubble in the first place.

Anonymous said...

What we need is for the banks to close their casino operations, and for all the mathematicians and engineers to be put to use inventing useful things rather than devising more and more complicated ways of moving money around.

Jonathan said...

Vince's speach is here - http://www.politicshome.com/uk/article/9718/vince_cables_speech_to_the_cass_business_school_in_full.html

some highlights:

By bringing together university policy, skills policy, business, regulation and competition policy, science and research policy, it has become in effect, the department for economic growth...

It is, in any event, a major economic department, complementary to the Treasury...

The Department’s central task, and my central task, is making sure that Britain is a place where enterprise and innovation are made easier and can succeed. Where ideas are generated and are turned into jobs. Where people have the skills we need...

The basic reality is simple: government is no longer in a position to promote growth through fiscal stimulus...

And the reality is that sometimes that means standing up to business. Arguing for more competition instead of cosy cartels. Arguing for better protection for consumers from shady practice. Rejecting special pleading...

Radio 3 listeners – I believe they do exist – may have heard my recent lecture on Adam Smith, whose ideas I taught to economic students in Glasgow early in my career. Amongst his many wise words which have stood the test of time is this: “the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”. And the consumer is all of us.

Lola said...

Cotswold - yes HSBc is looking for spreads of at least 5% and more like 6% on its lending to SME's. I'm an HSBC SME and I know this to be true.

In re the main article shouldn't the answer be to cut state spending and taxes at the same time so that private spending and crucially debt repayment and investment accelerates?

james c said...

No, Vince has got it 100% right.

rinky stingpiece said...

There's no need for a mortgage cap; just an interest rate fixed range of 5%-10%.

If you had a rule that said interest rates can't move outside that range, then banks could turn a profit on a loan, and house prices would match incomes in a healthier way.

The current scenario is unsustainable. Interest rates *have* to go up to at least 5% to correct the house price bubble debt.
It would need legislation to stabilise the transition... I'd go for something akin to Cottar's Laws: homeowners become a special class of tenant... where the local authority or housing associations buy up the defaulting debt from the correction.