While the Chancellor’s direction of travel in relation to tackling Britain’s economic challenges is improving, his current approach will leave Britain feeling like Sisyphus, labouring hard to push a rock up a hill but never quite feeling secure that it won’t come crashing back down, destroying the hard work already undertaken.
But just as Sisyphus continued to focus on the mechanics of getting the rock up the hill, rather than indulge in any broader experiment to escape his predicament, Osborne toils at the seams of Britain’s economic malaise.
The Chancellor happily wallows in the Bank of England’s myth that giant infusions of credit from Quantitative Easing and the ‘Funding for Lending’ schemes, are any sort of remedy to Britain’s economic woes.
Britain’s businesses and banks in particular, are suffering from a crisis, not of credit , but of confidence. While the Chancellor obsesses on the short term , the actions of those who pull Britain’s economic levers are dictated by long term concerns.
These centre on the fact that Britain’s commercial banks are sitting on huge losses, estimated by the Evening Standard’s Anthony Hilton, at about 20% of their value, on their loan books. The banks are reluctant to foreclose, and the firms involved can just about make the payments now, though they are repaying loans on assets which have declined in value. The problem will come when the Bank Of England start to unwind Quantitative Easing. This will have to be done by selling off the central bank’s holdings of government bonds, which will push up interest rates, meaning those firms and families currently struggling to repay their loans will struggle even further.
In economics this is called the ‘negative feedback loop’, and at the moment Osborne ignores it, and buys into the popular hysteria about the lack of ‘growth’ being the biggest problem. Firms thus don’t want to borrow more, no matter how cheap the Bank of England make credit.
The banks know they face huge write downs on these loans in future, and so won’t be anxious to lend more. Unless this is addressed, Britain’s best hope may be that external forces push economy out of the Sisyphean path which it is currently on.
The Bank of England should stop buying government debt and use these funds to buy some of the bad loans from the commercial banks. This really will free up the banks to lend more, and deliver confidence and a degree of certainty. It also has the advantage that banks will has stronger balance sheets and will be more likely to preserve the current low interest rates to their borrowers.
Politically, it will be portrayed as the government ‘bailing out’ the banks once again, and will mean that the government’s borrowing costs will rise, restricting the Chancellor’s chances of delivering a giveway budget just prior to the next election.
Taking steps this radical, and this unpopular, with potential benefits more likely to be felt by the next government than this one is brave. But without these measures, the UK economy will continue to cough and wheeze to recovery, while all the time exposed to the danger of a second banking crisis, with the capacity too eclipse the first in its impact on the UK economy.
* David Thorpe is a member of the Liberal Democrats in Newham, and works for an economics publication.