Mpc Is Completely Clueless About Zirp Distortions

[richc]

The BBC is running an article in which Adam Posen criticises banks for not lending to small and medium sized businesses, but why would a bank take the risk of lending to SMEs when they can make a perfectly acceptable return by borrowing at subsidised rates thanks to the central banks and then investing in lower-risk corporate or sovereign bonds? Is he really that clueless, or is this just another one of the Bank of England's PR stunts?

[porca misèria]

The BBC is running an article in which Adam Posen criticises banks for not lending to small and medium sized businesses, but why would a bank take the risk of lending to SMEs when they can make a perfectly acceptable return by borrowing at subsidised rates thanks to the central banks and then investing in lower-risk corporate or sovereign bonds? Is he really that clueless, or is this just another one of the Bank of England's PR stunts?

Demand. Or lack thereof.

Profitable companies aren't investing but building cash pots, returning cash to shareholders, or paying down debt. They don't want loans in the zombie economy!

Unprofitable companies are going bust.

Companies which fit neither of the above descriptions are those who could use new loans, but they're fewer than in boom time!

Though interestingly Venture Capital is seeing lots of opportunities and at the same time making profits, which could be considered to support the thesis that banks could be lending more to small biz.

[exiges]

Banks are bad.. they lent recklessly to businesses.

Banks are bad, they've stopped lending recklessly to businesses.

[koala_bear]

This isn't particularly about ZIRP, Posen is talking long term and is saying some of the most sensible stuff an MPC member has ever said.

Posen is saying that the UK banks have not been doing enough SME lending for decades (since WW1 not just since the start of the recession) having gone away and done his own research. This is in comparison to our competitors internationally Germany etc.

This mirrors my own experience at work (manufacturing firm t/o £220m), we use continental banks as they are much happier to finance industry than UK banks that only like innovative finance and flogging you dodgy financial products you don't actually need as a condition of banking /lending with them.

UK banks have been allocating too much of it to residential property lending (and hence HP inflation) since WW2 instead.

Edited February 2, 2012 by koala_bear

[RichM]

This isn't particularly about ZIRP, Posen is talking long term and is saying some of the most sensible stuff an MPC member has ever said.

Posen is saying that the UK banks have not been doing enough SME lending for decades (since WW1 not just since the start of the recession) having gone away and done his own research. This is in comparison to our competitors internationally Germany etc.

This mirrors my own experience at work (manufacturing firm t/o £220m), we use continental banks as they are much happier to finance industry than UK banks that only like innovative finance and flogging you dodgy financial products you don't actually need as a condition of banking /lending with them.

UK banks have been allocating too much of it to residential property lending (and hence HP inflation) since WW2 instead.

+1

[interestrateripoff]

Why would banks mess about lending small amounts to small businesses when they can take part in lending money for mega mergers and really boost that bonus payout!

It's not really profitable to lend to small businesses.

http://uk.reuters.com/article/2012/02/02/uk-xstrata-advisers-idUKTRE81114B20120202

Advisers on the potential 50 billion pounds merger of Glencore and Xstrata are facing a reduced fee pot of up to $140 million (88 million pound), based on estimates from Thomsonreuters/Freeman Consulting.

Banks what this type of work.

[interestrateripoff]

http://uk.reuters.com/article/2012/02/02/uk-britain-boe-posen-qe-idUKTRE8111WY20120202

Bank of England policymaker Adam Posen looks set to vote for another cash injection for the faltering British economy next week, and expressed some confidence that other central bankers may join him.

Posen suggested on Thursday that he might vote for an extra 75 billion pounds of quantitative easing next week - at the upper end of analysts' predictions - as forecasts suggest inflation will fall sharply.

..

Asked if another injection of 75 billion pounds would be needed, Posen responded: "If you're looking at what the market rate projections are, that seems reasonable. I thought 75 billion was a good slug last time and I think there's a case to do it again."

I love a good slug!

[Venger]

Though interestingly Venture Capital is seeing lots of opportunities and at the same time making profits, which could be considered to support the thesis that banks could be lending more to small biz.

Until some of them crash out with spectacular losses.

HSBC to snub Chancellor's £20bn loan plan

HSBC is considering walking away from George Osborne's plans to inject £20bn into the UK economy in what could prove to be a major blow to the Chancellor's hopes of reviving growth.

18 Feb 2012

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9090918/HSBC-to-snub-Chancellors-20bn-loan-plan.html

[evetsm]

This isn't particularly about ZIRP, Posen is talking long term and is saying some of the most sensible stuff an MPC member has ever said.

UK banks have been allocating too much of it to residential property lending (and hence HP inflation) since WW2 instead.

The property ponzi has destroyed the country. It took capital away from production and locked it into non-productive housing. For decades. That I still see people on these forums still waiting for the chance "to get onto the property ladder", makes me want to tear my hair out. Have these people not had enough of this destructive gambling !?

However, you seem to want to absolve the banks of responsibility, when I am quite sure that it was the banks who lobbied for the legislative climate that enabled the property ponzi. The govt and the banks have 100% of the responsibility, for without the means to issue loans , the ponzi would never have started.

[Gigantic Purple Slug]

Why would banks mess about lending small amounts to small businesses when they can take part in lending money for mega mergers and really boost that bonus payout!

It's not really profitable to lend to small businesses.

http://uk.reuters.com/article/2012/02/02/uk-xstrata-advisers-idUKTRE81114B20120202

Banks what this type of work.

This is part of the problem.

Why does the government allow the banks to occupy their priviliged position in society re the control of money ?

To my mind it is so that the government is politically isolated from banking decisions. It's bad for the government when people start complaining that the government closed down their business or kicked them out of their house, so they want an intermediary to take the flack (aside from stuffing the wallets of their mates and their pension funds down the line).

The problem is that the banks are not fulfilling this role. Most of the big banks are less interested in retail and more interested in investment banking. This is hardly surprising. Investment banking offers bigger profits for shareholders and larger bonuses for directors. So they go where the money is.

The problem is that these banks have retained their retail arms, which is necessarily backed by a government guarantee. The government guarantee therefore backs the investment as well as the retail arm, which is clearly nonsense.

So the issues to me that are of importance are :

i) Banks are supposed to channel money in the economy on behalf of the government. If they are not doing this adequately then they are dysfunctional, and their priviliged position of holding control over how the money is channeled needs to be reviewed.

ii) The government should separate out retail and investment banking. I beleive there is an agenda to do this long term. But that's not going to help businesses which need access to funding now.

iii) Retail banking should be boring and of relatively low profit. nevertheless it should be a viable business that produces solid and largely risk free returns. The government should encourage the start up of new retail only banks and penalise banks that are involved in investment banking. If banks want to participate in both retail and investment, their reserve requirements should be larger.

iv) Novel ways of funding small business should be promoted. Stuff like the funding circle should be given additional tax breaks IMO.

To my mind this is far better than forcing the current retail/investment giants to commit to specific amounts of retail lending, which IMO isn't really solving the problem.

[Hat]

Demand. Or lack thereof.

Profitable companies aren't investing but building cash pots, returning cash to shareholders, or paying down debt.

Nail on the head amigo. Japanese companies are awash with cash.

Same with the housing market. Demand isn't low because of a lack of lending. Demand is low for lending itself.

The government would love an M4 expansion in any way possible, but there is nothing they can do. The deflation is setting in.

[Venger]

iv) Novel ways of funding small business should be promoted. Stuff like the funding circle should be given additional tax breaks IMO.

Someone with a good business plan, decent credentials, for something with good prospects has no problem getting finance. Let private money lend at its own risk.

i) Banks are supposed to channel money in the economy on behalf of the government. If they are not doing this adequately then they are dysfunctional, and their priviliged position of holding control over how the money is channeled needs to be reviewed.

What some people seem to want is banks to keep financing businesses which are struggling and failing. Rather than let them fail and new money pick up the assets at lower prices. Or for banks to fund new businesses which only have short term prospects and are ultimately going to fail, leaving lenders, and private shareholders if you remember them, with more big losses.

It's the government being dysfunctional trying to order banks to lend money out in circumstances which will likely see the banks lose the debt extended within a few years.

[winkie]

Banks are bad.. they lent recklessly to businesses.

Banks are bad, they've stopped lending recklessly to businesses.

Banks could do more by reducing their fees and interest rates to small businesses...banks have never lent recklessly to SME only to reckless corporates.

[Gigantic Purple Slug]

Someone with a good business plan, decent credentials, for something with good prospects has no problem getting finance. Let private money lend at its own risk.

What some people seem to want is banks to keep financing businesses which are struggling and failing. Rather than let them fail and new money pick up the assets at lower prices. Or for banks to fund new businesses which only have short term prospects and are ultimately going to fail, leaving lenders, and private shareholders if you remember them, with more big losses.

It's the government being dysfunctional trying to order banks to lend money out in circumstances which will likely see the banks lose the debt extended within a few years.

Lending money to start-ups is one issue. There are a few things. Firstly, you can't get funding from banks without putting your own assets on the line. If the country wants to encourage people to start small businesses this is a bad thing, as it is an additional barrier to entry. Often it is scary enough to leave your job, without having to put your families home on the line. Why do banks do this ? Well there are a few issues. Firstly you could argue that if the business owner is not willing to put his assets on the line why should the bank ? But I think there is more to it than that. In todays banking environment the banks just simply aren't bothered about lending to start ups. They don't want to allocate resources to properly assessing a business plan. They'd rather go for the computer says no approach, completely hands off and remove the risk to themselves completely and go and do something that will pay the CEO a bigger bonus, such as investment gambling/banking. Now taking on that risk to facilitate business growth to me is part of the reason why society is willing to offer them so much control of the money supply. Without it they are worthless. Our model is diffferent to the German model, where the bank is a partner in the business and carefully assesses the business plan from the start, monitors the progress of the business and gains confidence in the business operators as the business grows. Here its a completely hands off approach until something goes wrong, then all of a sudden the bank is round trying to repo your house.

You can of course go to other sources for funding, stuff like VC's. Now my experience of these guys is that it is all about boom or bust. There is no halfway. They want you to borrow a lot of money and turn a business from something small to something very large in a small amount of time. They are not interested in small sustainable businesses, they want growth into large or huge entitties. Nothing wrong with that you might say. But it doesn't address the issue that many small unexciting businesses that are perfectly sustainable and profitable and employ people, and whose owners don't wish to leverage themselves up to the eyeballs lose out to funding because VC's aren't interested.

Then you can look at the small sustainable business that has been running ok for years but runs into a short term funding crisis. It happens. The business can be perfectly viable, but the owner can make a mistake. Does the bank help ? No - it knows nothing about the business. Does not have confidence in the owner because it knows nothing about them. The computer says cancel the load and all of a sudden the business has to fold. Another example of this is credit facility withdrawl where the bank having been happy to supply credit for years decides to suddenly remove it, even though the business is profitable and looking good.

In general I am against market intervention. Look at how badly governments have screwed up the housing markets. I would rather they just left them to themselves.

But my feeling it that something needs to be done about this. Society grants banks powers and benefits re control of the money supply in order that they do a job. If they are not willing to do that job then their powers and benefits need to be taken away.

[Venger]

Then you can look at the small sustainable business that has been running ok for years but runs into a short term funding crisis. It happens. The business can be perfectly viable, but the owner can make a mistake. Does the bank help ? No - it knows nothing about the business. Does not have confidence in the owner because it knows nothing about them. The computer says cancel the load and all of a sudden the business has to fold. Another example of this is credit facility withdrawl where the bank having been happy to supply credit for years decides to suddenly remove it, even though the business is profitable and looking good.

That often happens when the long established business has been sold a lot more money by the bank during the boom, to expand. The business drooling at all the extra money they could make. Whether it be expanding to open another warehouse, or buying business after business like Irish Quinn, or even Serpico with his Honda, Yamaha and BMW motorbike franchises. Not content with 1 and being safe and well off, he had to expand to 3 franchise during the 1980s boom.

Mistakes need to be paid for. If the business has put itself in to a desperate situation, then the business owners shouldn't be able to fully rely on a banks generosity to see them through years of rough times.

It allows younger fresh minds and new entrants to take over businesses at lower costs. Break up businesses which have grown too massive during the boom. A new crack at wealth for others. Not isolating the previous winners from their mistakes and preventing them from failure by propping them up with lots more loan money.

And preferably opportunity to new entrants who've saved and having long been preparing to take advantage of the mistakes of other businesses. With no competition from people who've not put any savings away and who refuse to put any of their assets on the line. People who would likely outbid the prepared for business assets with their easy lending bank loans as some people are calling for.

People joke that a bank is a company that lends umbrellas when it's not raining. There's some truth, perhaps, in that. To be fair, if it was my business to lend umbrellas I wouldn't lend one to a person running in flames towards the cliff edge. OK, it may slow their descent a little, but it only marginally delays the inevitable, and I would have lost my umbrella which is my business. *Geoff Burch (followed by warnings about avoiding banks who want to sell you money to expand when things are going well.)

Edited February 19, 2012 by Venger