The Banks and Lending to Business in 2009

The old Keynesian saying that 'when times get tough, you should pay a man to dig a hole and then pay another to fill it in' makes for good press but the whole point about the little parable is that the hole no longer costs you money after it has been filled in.
The current spending plans of the government seem to be turning this on its head. The huge array of regulatory, testing, planning, box ticking, form filling, NHS, Education, Social Security infrastructure is now pretty much set in stone. This is now the hole in the public finances that will not just require filling in now but will have to be filled in again next year (plus inflation and pay and pension rises). And the year after ad nauseam.

The Tory party remains completely in thrall to the idea that you only get elected in the UK if you continue to back the public sector spending plans of 'New Labour'. This is not helped by the fact that the leader of the Conservatives is an ex-PR man, a job which practically sums up the saying 'Style over Substance'.
The favourite pastime of virtually everyone these days is to blame the banks for just about everything. You can understand the Government doing this. If they repeat it often enough, maybe they can fool the electorate one more time.
However commentators should beware hammering too much on this point. If I was lending my own money, would I lend to a company that was running into difficulties now?

With another 12 months of a probably contracting economy, I would look with a pretty jaundiced eye at a small business that required money to survive right at the beginning of the down turn. I might ask, 'when times were good did you lay down funds to take you through the bad times, or did you just pay it to yourself to fund that holiday in the Maldives?'
As many banks are indeed surviving on the back of 'our money' then I want them to lend and invest those funds responsibly. Not just hand out cash to any sob story that comes in through the door. This is what is meant by harsh business decisions.

If banks prop up all failing businesses then, yes, some may survive but in the medium to long term they would endanger their own survival and maintain the downturn for far longer than would otherwise be the case.

Wounded businesses limping on with ever larger overdrafts would damage better run companies who would have to compete with basket cases on an even playing field. Recessions run their course and we come out of the other side with the weak and plain 'out of date' gone and the survivors leaner but better placed for growth.

Investing huge sums now on the mortally wounded is not good use of either the bank's or the public's money. Identify the walking wounded and fund them.

About the Author:

Dan Jones is a respected spread betting professional and commentator for some of the leading spread betting companies.