Root of the problem? What Can Be Done To Make Banks Lend?

Several comments made by employers and businesses today have confirmed that the problems with the economy are nothing to do with economic performance and everything to do with the refusal of banks to give credit. Even CB said they have people who need machinery and want to place orders, but can't, due to lack of credit. It seems bizarre to me that perhaps the entire world can be brought to its knees due to lack of credit... what will it actually take for the banks to free up credit again? Simply once they have received enough deposits to cover their loans, or what?
Reply to
Maria

"Maria" wrote in message news:oOOdnQk8ipveC
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I don't know about banks, but Building Societies can only lend out money that investors have deposited, and with low interest rates there is not much incentive to save, particularly if the return, after taxation is less than the inflation rate. What's the point of saving for the future if you loose out on the deal and don't even get the real value of your capital returned when you want to spend the money. Which is why the Nationwide is trying not to drop its interest rates to borrowers in order to try to give better rates to its investors to ensure the money still comes in. If the Government didn't interfere the rate would be set by the law of supply and demand. B.
Reply to
Retired
"Retired" writes:
What about the money from repayments made by other borrowers? Is this not also available for lending out?
Reply to
Graham Murray

"Graham Murray" wrote in message news:
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But there are also investors who want to take out money, just as I will be doing when I want a new car. Its "new" money they want, and this isn't coming in. B.
Reply to
Retired

i don't believe that... i have no doubt anyone can borrow if they pay the going rate... and the banks believe you can service that rate...
but
consider a company wishing to buy capital equipment.... they have to consider the profit they believe they can make from that machinery.....minus the interest they have to pay.... that is (among other matters a risk calculation in a tight market)
if the figure comes out too much risk....or even the interest requested is above the profit...they won't borrow.... meanwhile many companies are/have-been funding cash flow from borrowings....similar calculations and risk assessment is relevant....
more meanwhile the banks may not be able to find good bets or their balance sheets are now not showing the required reserves....
there is nothing mysterious going on.... the main confusion is a lying government that has screwed up monumentally....and leftist fossil media who are innumerate or are repeating lying government hand-outs
regards
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Reply to
abelard

You're a businessperson, so you will know that there are two main reasons for businesses to borrow money.
First: expansion. While a small percentage of businesses are still doing quite well, we can probably rule this one out.
Second: businesses other than one-person-bands have wage costs which are pretty much the same regardless of the level of trading. Downsizing a business is difficult and expensive, so expensive that many businesses simply cannot be downsized, the costs would be immediately terminal. Literally, their only option is to borrow and hope that hard times pass quickly. If 'difficult trading conditions' last more than a short time, the credit line dries up and bankruptcy follows, along with a total loss to the lender.
We can assume that the banks are at least as aware of this as I am, and won't touch the businesses who clearly need to borrow to survive. There will be many stories of businesses going broke because they couldn't get credit, but you won't hear about the ones that got credit and went broke anyway, just a bit later, leaving their lender poorer.
There's no good answer. The economy has been continuously 'growing' (though I think much of that was due to increasing taxation and therefore double-counting of wages) and had gone well beyond the point that was sustainable without a continuous increase of consumer borrowing. Eventually, that had to stop, and we'll see the economy shrink to a size that is sustainable without rising borrowing. I don't know how big that is, but we will find out.
Good old Gordon is trying to stretch the borrowing binge until the next election, but I think he will not manage it. A shame really, because a Labour win would extend the pain only a little longer, and make Labour unelectable for a couple of decades, at least. They might well even go the way of the Liberals. I think Dave's playing to lose, without being too obvious about it. The public hates tactical electioneering.
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Reply to
Joe
On Mon, 12 Jan 2009 19:13:06 +0000 'Maria' wrote this on uk.politics.misc:
Adding to what abe's said ... what we are seeing is risk aversion by the banks. Low risk borrowers can still get the loans they want, the higher the risk the less likely. The number of high risk customers has increased in Brown's recession. I would do the same thing as the banks...but I'm not a money lender.
It isn't the banks who are the root of the problem, it's Brown.
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Reply to
aracari

"Joe" wrote in message news:cXOal.86345$ snipped-for-privacy@newsfe23.ams...
...and increasing population.
Reply to
DVH

Always is, according to you. It's strange though that many business people take responsibility for their mistakes and take pains to put things right, but not the banks eh! seeing none of this of course is their fault.
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Reply to
John Stubbings

John Eatwell explains in the FT
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Nutshell. If a bank lends cash goes out the door. If the bank is then short of cash normally it can borrow it back from whatever bank it has gone to - for a fee. But the banks are harbouring cash to be on the safe side. So no one wants to lend in case they are left short and can't borrow..
Reply to
MikeinCamden
On Mon, 12 Jan 2009 21:51:03 +0000 'Joe' wrote this on uk.politics.misc:
Not sure I agree with this. If the Tories win the GE, the rewards for sorting out Labour's economic/social shambles are substantial.
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Reply to
aracari

Once a credit bubble bursts, there's going to be a lack of credit as the levels of credit available return to normal levels. Businesses built up to service excess demand in the bubble will find demand dropping and those overborrowed will run into trouble.
The recession will end when available credit (most likely from deposits rather than securitisation) again matches the demand for it. No doubt this will mean that asset prices built up by excess credit will return to their pre-bubble norms. Unfortunately for housing, that would be some way towards 1984 prices.
FoFP
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Reply to
M Holmes

Not if it's securitised mortgages - then the cash gets passed through to the owners of the loan.
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Reply to
M Holmes

Spot on analysis!
I think perhaps they may become unelectable for a generation anyway and the fate of the Liberals may indeed lie ahead for them.
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Reply to
M Holmes

Also the debt-deflation may destroy the Euro. The Tories may want to be in power when the chance to renegotiate with or leave the EU arrives.
FoFP
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Reply to
M Holmes

I don't believe that! 6 months ago the minimum cost for a 3 bed house around here (low cost area) would have been around £100k - now they are £50-60k. There is no queue in the Jobcentre, the roads are still packed with traffic, the shops are still full of people, supermarkets are packed. Everything else appears as normal. What doesn't appear normal? Big companies unable to get credit and closing - house prices at *unexpectedly* low prices. I don't believe that suddenly the people around here can no longer even afford to service a £50k mortgage when 6 months ago they were deemed able to afford a £100k - I don't believe that demand has fallen that sharply. I don't believe that there is any good reason why people have not bought the flats around the corner in a lovely converted factory - they go from £19k 25% shared ownership and are still empty. I do know that there are many lenders who have simply withdrawn many of their products and demanding massive fees and deposits. Maybe the banks are lending less than you think they are. Is that information recorded anywhere?
As ever.
they cannot borrow because the banks won't lend. It was also the business response to Brown's internship project and unemployment help - that they cannot offer to take on employees even for a bounty because they are struggling due to the banks, not anything else.
I don't think it is mysterious - I know that anyone with a business, or trying to start one, is struggling to borrow any capital to start up or expand, as well as those who need to borrow in the short term to keep afloat. The anecdotal evidence for this is overwhelming - I have no idea if the statistical evidence is or not. What is the point of any kind of government funded restructuring or stimulation of the economy if even the 'normal' economy cannot function normally due to lack of credit?
I don't see that government has any bearing on the levels of lending - isn't that why darling is squealing?
Reply to
Maria

Is that actually true though? How do we know that? I don't know where the figures are recorded, or even if they are, but do we know what kind of businesses, of any, are still able to borrow money?
See, I've been through three recessions now - this does not resemble any of them so far. I've not seen people spending money like this for a long time, if ever. In the recesssions I went through previously, bsupermarkets were half-empty, shops were empty, the roads were empty. I'm still inclined to believe that this is the market adjustment (down by around 30%) I was blathering on about months ago, but I'm wondering if the lack of lending by banks *will* tip the adjustment into a full-blown recession.
As much as I loathe Brown, how did he cause this, and what could he do to rectify it?
Reply to
Maria

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That is the impression I have also - so what would induce them to lend? I am not into banking so I have no idea what conditions would actually threaten the banks existence themselsves, meaning that I have no idea how much they can withdraw their credit facilities before they choke themselves to death (presumably it will be after they have choked the rest of us to death...).
Reply to
Maria

Are there any numbers to go with this? What levels are 'normal' and at what level has it been/is it now?
And new business that can't seem to borrow? (As I've said elsewhere, I have no idea how much they are and aren't lending to who, just anecdotal evidence). I know I got worried a couple of months ago because banks were calling in small business overdrafts for seemingly viable businesses, until Natwest (my business bank) promised not to do this to anybody for a year...
That does seem bizarre - it means you would be able to buy two-thirds of a cheap 3 bed property here for one year's average salary...
Reply to
Maria

Sooner or later they decide they want to lend more to make more money and it's mutual so they are 'coordinated' again. Probably when the hue and cry about 'banks bust' dies down. It needs a period of stabilisation and government cash beginning to be repaid plus a restoration of dividends. A year or 18 months.
Example the Lloyds merger is finalising this month. Uncertainty will be gradually reduced.
Reply to
MikeinCamden

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