Two Absurd Claims About Lending And The Great Crash

The Observer’s business editorial really outdoes itself today with two fallacious claims about bank lending and recessions, crashes and even the Great Crash. It manages to make the opposite statement to the one they normally complain about and then also get the cause of and reason for that Crash wrong.

They wanted companies to borrow and grow, but not like this. Last week, this concern was visible in the minutes of Bank of England’s financial policy committee. They show that the committee, which overseas bank lending and is chaired by governor Mark Carney, likened a rapid growth in lending to indebted companies around the world to the US sub-prime mortgage market, which triggered the 2008 financial crisis.

For a sober, usually reticent group of regulators, comparing today’s corporate borrowing boom to the reckless years before 2008 is a sit-up-and-take-notice moment.

No, 2008 wasn’t caused by lending. It was caused by the method of lending. The actual loss of wealth from that US property crash was some $8 trillion. Some 10 to 15% of US household wealth at the time. That would cause a recession, most assuredly, as Dean Baker has been valiantly pointing out all this time. But that’s a recession, not a Crash trembling upon the lip of a Depression. For that we need the banks to be massively geared, having to mark to market and thus in imminent danger of all going bust.

So, are banks financing this lending with gearing of 30 times, as they were then? Nope. Are they marking loans to market, in the same manner they had to slices of bond securitisations? No, they’re not. Do we have some thin layer of capital supporting such a house of cards? We don’t, no.

So, we’re just fine with the idea that companies which borrowed to excess fail, go bust, renege upon their debts. Because the circumstances which led to the banking system falling over just aren’t there. We’re not in 2006 Toto.

Yes, sure, we’d rather we didn’t have a recession but that’s not the point. We’re not going to have a Crash, which is.

But then one stage further:

The financial crash was so big that it caught out good businesses and bad. To prevent a calamity, the bank cut interest rates, and expanded the money supply, which saved the bad firms and the good.

That banks are lending to businesses that have done little with their previous borrowing is a worry. The debt just piles up, and too often continues to be used to pay off old debts. Not just once, but on a rolling programme of debt funding.

That the money pumped up property prices is not much better. That has obvious consequences too.

As the committee points out, this is a global trend and not just part of the UK narrative. Maybe that makes UK policymakers feel better. Yet it just means that when the crash comes, it will be more bloody.

Well, no, not really, For as The Observer tells us on alternate weekends, British banks don’t actually lend to companies for productive investment in the first place. Which is the very scandal of the British financial system, isn’t it. Which it might be – we use markets, bonds and equity not bank loans but don’t spoil a good worry for them – but if that’s true then the banks cannot have some vast exposure to zombie companies, can they? The proof of this is that retailers are falling over left, right, centre, but we’re not hearing worries about bank exposure to them, are we?

Full swing or not, high street banks cannot help themselves when it comes to reckless lending, which leaves regulators contemplating more direct intervention. Given the potential for another calamity, direct intervention should be an option.

That is, give the bureaucrats the power to insist that you will lend to this company. Or you won’t, either way. And no, that expansion of the power of the incompetents who regulate rather than do isn’t a good idea. As with the success the bureaucrats have made of Britain’s housing market, telling people what they may or may not build where and when.