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“What launched as the Bank of England’s great white hope risks looking like a white elephant.” That is the assessment of Christopher Shaw, CEO of Platform Black, commenting on the Funding for Lending Scheme (FLS) taxpayer bailout of flailing and failing UK banks. I know that “white elephant” is not a circus animal, but this is my column, so I get to mix the metaphors the way I want. After examining the facts, I think we will all agree that Shaw’s “white elephant” and my “circus” are both appropriate.
The scheme is simple. Loan the banks money at a low rate of interest to help them offer consumer and commercial loans cheaper and, therefore, more attractive. The problem with the plan is that it was a band-aid, and band-aids don’t heal anything. Band-aids are quickly applied without adequate diagnosis of what needs to be done to stop the bleeding and heal the wound. Sometimes a band-aid only slow the bleeding.
So, we have an elephant and we have a band(-aid). What else does a circus need? We’re about to find out.
Apparently no one thought about a cure for the problem, except the banks. Their approach to stopping the bleeding was to tighten the restrictions on lending. As my friends in lending explain their suicidal depression, “I have all kinds of people lined up looking for loans. I’m swamped with applications, but the underwriting rules have changed so drastically, I can’t get anyone approved!” Let’s put that another way. “I’ve got great product, and I’ve got a quota to meet, but the bosses won’t let me sell the product.”
So here is the effect. The whole scheme is nothing more than a dog-and-pony show. The proof, as they say, is in the pudding. Here are the results so far for the FLS. By tightening lending, more loans were repaid than new loans taken out, so much so that RBS, Lloyds Banking Group, and Banco Santander sucked a total of £6.7 billion out of the economy, stimulating nothing, but in fact, worsening the situation. Thanks to other lenders like Barclay’s, Nationwide Building Society, and Leeds Building Society, the total sucked out of the economy was only a mere £1 billion. (Why is it that a billion sounds big, but when you place a “1” in front of it, it doesn’t sound so bad?) This lending scheme is like feeding a vegan tiger who eats money instead of meat.
The idea is for the banks to get more money into circulation. It doesn’t matter how low your lending rate is if you won’t loan money to consumers and businesses. By restricting access to loans the banks are compounding the problem instead of compounding interest. There is no telling how much damage has been down, how many homes have not been purchase, how many businesses have not been able to open or expand, how many building projects are still blueprints rolled up and stored, or how many jobs could have been created for people who desperately need them. This scheme has taken taxpayer money, placed it into the hands of the banks to stimulate lending money at a time when the banks are not keen to loan money at all.
Adding a key element to the circus, in walks Paul Fisher, Executive Director for Markets at the Bank of England, saying it is “too early to use these data as a reliable indication of the impact of the FLS on lending volumes.” Hey, Paul, I love your clown outfit! Are you kidding me? If these data had been positive, you would have been effusive with praise. Quit clowning around and admit the truth.
It looks like we’ve got everything we need for a circus. We’ve got an elephant, a band (aid), a vegan tiger, a dog-and-pony show, and a clown. I like horses. I wish this circus had horses. Oh wait, there they are. I was laughing so hard at the clowns, I almost missed the horses. All I got to see was a bunch of horses’ petutes. How did I miss that? There was a whole bunch of them.
