Business still being crunched by banks
The chief executives of our biggest banks have been summoned to the headmaster's study on Monday morning.
Alistair Darling, Peter Mandelson, Shriti Vadera and Paul Myners will grill the bosses of Royal Bank of Scotland, Lloyds, Barclays, HSBC, Santander and Nationwide about whether they are lending enough to support an economic recovery - and, in the case of Royal Bank of Scotland and Lloyds, whether they are lending what they promised when kept alive by a massive injection of public funds.
Those who run our banks tell me that they're doing their bit, that they're supplying the credit to businesses and households which is being demanded. And if the official and unofficial statistics show that there hasn't been a great surge in lending, well that's because (in case we hadn't noticed) there's a recession on and there isn't a great demand for new loans.
Here's an extract from the Bank of England's summary of business conditions compiled by its agents, which was published yesterday:
"The Agents' sense was that contacts' experience was becoming increasingly polarised as lenders sought to focus their activities on the least risky credits. That would be consistent with ongoing reports of tight limits being applied to banks' exposures to some sectors - notably, the property and construction sectors and some retail activities. There were further widespread reports that spreads and fees were being increased sharply on renewal or review of facilities."
To translate: there's less credit for business and it's more expensive.
And this anecdotal evidence was supported by the Bank of England's statistical analysis of lending by our biggest banks (published on Monday), which showed that net lending to British businesses remained negative in May: the three month annualised contraction in the provision of loans was a non-trivial 5.4% (or growth of minus 5.4%, for those who think in that way).
In fact for business, the statistics show that 2009 has been the year of the credit crunch rather than 2008. Last year, lending to business continued to grow, albeit at a much reduced pace. It's only this year that there has an actual shrinkage in lending.
The other absolutely vital point is that in 2007, well over half the growth in lending came from foreign-owned and specialist lenders - which have disappeared from the market completely. So companies are now wholly reliant on the old-established British banks, which are - or so the Bank of England reports - lending considerably less.
To state the obvious, there isn't a great sense of common cause or national purpose between the banks on the one hand and the government and Bank of England on the other on how to revive the economy.
There remains tension in the relationship, reflecting the banks' need to return to what they see as a sustainable level of profits and the authorities' fears that any recovery - as and when it comes - could be choked off either by the inadequate provision of credit or by the excessive cost of borrowing.
You might well ask (as Stephanie Flanders has been doing so eloquently in her recent notes) what all this tells us about whether the Bank of England's ambitious quantitative easing programme to inject new money into the economy - by buying gilt-edged stock - has had any significant positive effect other than to help the Treasury finance its yawning public-sector deficit.
That said, it would be wrong to say that there are serious credit constraints on all businesses. Big companies have been by-passing the banks and raising billions in new equity and loans - in the form of bonds - from institutional investors. And the very smallest companies also seem to be treading water reasonably well in choppy conditions.
It's the medium size businesses - those with a few tens or a few hundreds of employees - for whom the credit crunch remains a very harsh reality.
They are too small to disintermediate the banks and go directly for finance to investors. And they are too big to be considered by banks as a relatively modest risk.
Anyway, I would imagine that Darling and Mandelson will bellow at the banks that they have to do more for the important bedrock of our economy, those middling size companies - by at least advertising a little bit more effectively that they remain open for lending.
That said, there are some huge intractable problems here, which Monday's meeting won't go anywhere near to solving.
The first is whether the price of credit matters.
As I understand it, the governor of the Bank of England thinks it does, and is tearing his hair out that banks have taken advantage of the fall in funding costs that he's engineered by widening the gap between what they pay for money and what they charge for it.
The Banks think he's exaggerating the problem and misunderstanding what's going on.
They would argue that the cost for them of raising funds - from retail depositors or in the form of state-guaranteed finance - hasn't fallen by nearly as much as the reduction in the Bank's policy rate.
Also, they'd point out that they were charging far too little for finance during the boom years; that, as Mervyn King has pointed out many times, that they stupidly underpriced the risks of lending, and that all they're doing now is trying to put a proper price on risk.
But what if the Treasury mandated those banks wholly or partly owned by the state - Royal Bank, Lloyds and Northern Rock - to cut the cost of loans?
Well, the banks' disheartening reply is that if the independent banks, the likes of HSBC, Barclays and Nationwide, were being undercut, they'd simply quit the marketplace, and then we'd really know the meaning of a credit crunch.
Then there are the final, final points, which I've been belly-aching about for two years and are the most troubling of the lot.
Which are: first, that households, business and the public-sector have borrowed far too much; and, second, that the banks themselves became far too dependent on unreliable wholesale credit which - when that disappeared - was replaced by loans and other forms of support from taxpayers.
Just take households for a moment. They (we) have borrowed a record-smashing sum equivalent to around 175% of our disposable income, up from 100% in 2000.
We'd had eight years of continuous economic growth in 2000 - a long stretch by any standards - so a one-to-one ratio of debt to disposal income might well be a sensible, sustainable ratio.
But just think what that implies about how much more households will have to save over the coming few years, and how much less they (we) should borrow, if we're going to return to some kind of stable equilibrium.
In that context, what we should be hoping for from the banks - in the case of mortgage finance, for example - is not that the banks massively increase net lending, but that they provide what little credit there may be to those widely perceived to be in most need (first-time buyers, for example).
What's more, if we were to take the contrary view, that current levels of lending to households and businesses are perfectly reasonable and in fact should be increased, there is only one potential source of incremental lending: that's us, taxpayers.
Much of the growth in lending to households and businesses in the three or four years before the credit crunch began in 2007 came not from the accumulation of stable retail deposits but from the repackaging of debt into bonds plus other wholesale sources.
After securitised bond markets closed down almost two years ago and other sources of wholesale funds became difficult to procure, we the taxpayer filled the breach - with a mixture of direct loans and guarantees for borrowing by banks.
The Bank of England estimates that the gap between customer loans and deposits reached £800bn in 2008. It has also confirmed that the increase in taxpayer support for our banks since the crisis began has been £1.26 trillion or 88% of our economic output, GDP (compared with 73% in the US).
As I've said many times before, if we want to our banks to be weaned off the life-support machine provided by us, by taxpayers, then banks have to borrow less - and that means the amount they lend will shrink, very significantly.
Right now we appear to be as far from ever from reconciling the conflict between the short-term imperative that banks lend more, in order that the recession isn't too prolonged, with the equally important long-term imperative that they lend considerably less.