Neither a borrower nor a saver be

Publication this week of the Bank of England's latest Credit Conditions Survey (you can find it on the Bank's website) has led a lot of commentators to declare the Government's bank rescue plan a failure. Not in the sense that it's failed to rescue the banks, but in the sense that bank lending is continuing to decline. Now there's talk of a further injection of taxpayers' funds being needed, if banks continue to turn a deaf ear to the Government's entreaties to resume lending. (It's worth mentioning -- since the Government certainly won't -- that for all the bluster about injecting £37 billion into the banks and "deserving" something in return, only RBS has so far received its share of the Government's cash).

There have been inherent contradictions in the bailout plan from the start. The Government stridently asserts that irresponsible lending caused the crisis, then promptly urges the banks to maintain their pre-crisis lending levels even though the economy is weakening and asset (collateral) values are slumping. And the banks are supposed to keep lending while at the same time rebuilding their balance sheets. (Or, as a leader in today's Times puts it "improve their loan to asset ratios" -- it's to be hoped that Alastair Darling takes advice from someone who knows left from right in balance sheet terms, rather than from leader writers).

What does the BoE's survey tell us about all this? It's true that the headline numbers for credit availability are grisly, with a threat of worse to come in the current quarter. However, it appears that demand for credit is also falling, both from the household sector and from businesses. Demand for loans for both M & A and capital spending has fallen. Credit availability for corporations was actually slightly better (or at least less worse) in Q4 than in Q3, except for commercial real estate. In the mortgage sector, loans for high loan-to-value borrowers are being restricted much more than for low loan-to-value customers. Default rates are rising, for both corporate and personal borrowers, and spreads are widening. If you ignored the clamour from the government and the media, you'd welcome the fact that bankers were acting like bankers again, after a decade of making like Santa Claus.

Interestingly, it's not just in the UK that banks are coming under pressure to lend more. There are similar calls in both the US and Germany -- and even in Canada, where the big five banks are well capitalised and have largely escaped the worst effects of the credit crisis (though you wouldn't guess that from looking at their share prices). A key reason we are facing such a major correction in global credit markets is that central banks, especially the Fed, were unwilling to allow even minor corrections over the past decade - the good old "Greenspan put". Governments have to allow the rebalancing and repricing of credit to take place, but there are worrying signs that they lack the patience to do so.

Meanwhile, the media are warning that a further cut in the Bank of England repo rate next week could result in interest rates on individual savings accounts falling close to zero. I always thought that one reason for Japan's "lost decade" was that that country's aging army of savers was impoverished by the BoJ's zero rate policy. Brits are not nearly as good at saving as the Japanese, but even so, there are more savers than borrowers in this country. The Government needs to keep their interests in mind as it tries to find a way to nurse the financial system back to health.