Yet more banking conspiracy

Today the Bank of England Financial Policy Committee is preparing to encourage banks to lend more money in an effort to boost the economy by reducing the requirement for the banks to hold large reserves of cash. Now the first thing to bear in mind is that this comes on top of earlier quantitative easing by the Bank of England. Now, I'm no expert on the banking system and its processes. My formal schooling in economics only went as far as a bachelors degree, and I've never worked in a bank, but I'm pretty certain that there are some rather more familiar terms for what is being proposed that are conspicuous by their absence. I'm pretty certain that quantitative easing used to be called “Printing more money” and was pretty much universally frowned upon by economists because it essentially devalued the currency and caused price driven inflation. Guess what? Yup, the UK is experiencing price inflation. Funnily enough, on this same thing, isn't reducing the need for banks to hold large buffers of cash also called fractional reserve banking? And hang on a second. Didn't we decide that was a pretty bad idea because if there is a run on a bank and it doesn't have reserves the bank collapses? Um, and doesn't a drive to fuel the economy on credit actually make the debt crisis worse?

You may remember my recent article on why I think a second banking crisis is inevitable. Well folks, this has just made it an awful lot worse. Moodys have just downgraded UK banks, reducing public confidence in them, and now the public is being made aware that the banks aren't going to have to keep their money in the safe. That sounds like an exercise in seeing just how far you can push the public before they snap. Aside from the whole issue of dishonesty from the Bank of England in suggesting that the reason banks aren't lending is because they have no liquidity, an obvious nonsense, you really have to question the motives here. Banks have plenty of liquidity to lend far more than they currently are, but are choosing not to simply because they don't see an adequate return on their investment/ Don't believe me? Try and get a loan at less than 10% interest. I used to be offered loans every time I went into my local branch at 6% but not any more. What this tells me is that banks are able to make more money on higher return investments than loans, and are quite happy to do that rather than lend to drive the economy.

What this also tells me is that as far as the banks are concerned the economy is tanking and only getting worse. Why do I say this? If the banks were confident of the economy picking up they would be far more ready to invest in businesses because the investment would be relatively safe. If banks believe that businesses will continue to fail and unemployment will rise then lending has a poor risk to return ratio. So, based on what the Bank of England are saying, and what the banks are doing, I'm sticking my neck out and making a prediction. Things may be bad now, but they are going to get a lot worse yet, and don't expect to hear about it anywhere else. The language of economics has been changed. Think Orwells 1984 doublespeak, and remember, nothing it what it seems, but if you want to know the truth, follow the money. Look at where the banks are investing, and more importantly where they are not, and tell me where you think the risks of calamity are too high.