In recent months, I have been inundated with letters and emails from business owners.
I want to read you just one.
It’s from a married couple, in their sixties, who run a small computer consultancy business.
They don’t want me to tell you their name.
That’s understandable, they’re in a really difficult situation, and they don’t want to draw attention to their plight as it could further damage their business.
They should have been looking forward to a well-earned retirement.
But at the end of September, because of a combination of holidays and sickness, there was a delay in processing their monthly invoice.
So they telephoned and wrote to RBS/NatWest to extend their overdraft temporarily – but nothing happened.
Not even a reply at first.
More calls were made, more letters written, visits to the local branch undertaken…
…but still nothing.
In the meantime, their direct debits – which they asked to be stopped – were rejected, incurring charges.
They say:
“As I write the overdraft is … well over £4,000; we continue to incur additional fees and interest rates on a daily basis, both by NatWest and by those whose payments we have missed”.
To top it all off, their “winter fuel payments have been consumed by the ongoing fees and charges”.
Their story is not unique.
Talk to virtually any business owner right now and they all say the same:
We can’t get credit or the loans to tie us over.
Rates are going up.
We’re incurring charge after charge and being effectively strangled into submission.
It has to be said.
What a disgraceful way to treat good, honest, hard working people who are simply trying to provide for themselves and their family.
What a shameful way for banks to act towards the very same people – the taxpayer - who have supported them in their hour of need.
And, ultimately, what an utterly counterproductive way to behave.
Businesses are the lifeblood of our economy.
With their products and services, they keep Britain growing.
And by providing jobs and opportunities, they keep Britain working.
It’s their ingenuity that will get us out of this recession and on the path to recovery.
And we need action – right now - to help them not just to survive…
…but to thrive in the years to come.
LABOUR
The question is: precisely what action is required?
In recent weeks, this Government talked up the need for a fiscal stimulus to kick-start our economy.
And despite the IMF, OECD and ECB warning that such measures should only be taken by those countries with sustainable public finances – which we do not have…
…and Chancellor Merkel warning about falling “into a race of billions” – which we cannot afford….
…they pressed ahead in this week’s PBR.
Why?
Partly because that is the natural instinct of the Labour Party – to borrow, spend and tax without second thought.
But there is another reason – and it goes to the core of New Labour.
Always a communications strategy rather than a proper governing one…
…it’s the Government of “eye catching initiatives”….
…it’s the Government of creating ‘dividing lines’…
…it’s the Government not of “doing something” – but “saying anything”….
…it’s government of the short-term, by the short-term, for the short-term.
So we get crime strategies that fit a news bulletin nicely, but don’t actually do the things that make our streets safe.
And we get an economic package that doesn’t fit the economic cycle, but fits the political cycle – that doesn’t address the recession in our economy, but tackles the recession in their polls.
Temporary tax cuts before an election. Permanent tax rises after it.
But as ever, Labour may think they’re good at the politics…
…but they’re terrible at the policies.
And the substantive importance of this fiscal stimulus lies not just in the dreadful cynicism of playing politics with people’s jobs, homes and livelihoods…
…but in the fact that as an economic strategy, it is not well targeted…
…may actually do more harm than good…
…and is a complete distraction from what we should be focusing on.
It’s not well targeted because cutting VAT by 2.5 percent at a time when shops around the country are already cutting prices by twenty to thirty percent is hardly very stimulating.
It may do more harm than good because our unprecedented borrowing levels and the prospect of permanent tax rises could prolong the recession and delay the recovery.
They’re doubling our national debt to one trillion pounds.
And they want to pay for it by leaving everyone earning over £20,000 worse off…
…and that’s even before their secret plans to raise VAT to twenty percent.
They’re leaving an unexploded tax bombshell timed to go off underneath the future economic recovery.
But worst of all, Labour’s focus on a fiscal stimulus is a complete distraction from what we should be focusing on.
Because of this political obsession with a fiscal stimulus, the Government has taken its eye off the economic ball…
…and we’ll all be paying the price. .
MONETARY ACTION
This crisis was triggered by a credit crunch…
…and the story of the couple I spoke about at the beginning shows that if we’re going to lift ourselves out of recession, it’s vital that we focus our energies on getting credit and money flowing through the veins of our economy.
As I have consistently argued, it’s in monetary policy, not fiscal policy, where we have most to learn…
…and monetary activism, not fiscal stimulus, where politicians and economists must aim their firepower.
And it’s not just me.
Last week, the CBI said: ‘Getting the credit markets working properly is much more important than the fiscal boost.’
And on Tuesday, the Governor of the Bank of England, Mervyn King, agreed when he argued: ‘I am in no doubt that the single most pressing challenge to domestic economic policy is to get the banking system to get lending in any normal sense. That is more important than anything else at present.’
But what does monetary activism mean?
First and foremost, it means lower interest rates.
Last week, the Bank of England themselves said that they had considered cutting interest rates by more but – in anticipation of a fiscal stimulus in the Pre Budget Report – had decided not to.
I have made it clear that fiscal policy must support, not replace, monetary policy, and that government must not do anything that could make it more difficult for the Bank of England to deliver a sustained reduction in interest rates.
But simply cutting interest rates and appealing to banks to pass on the cuts is not enough.
It is not just the price of money - the interest rate - that is the problem.
It is the quantity of money too.
And here we are seeing real problems.
The Bank of England says that the growth of the money supply in the economy has fallen close to zero which is the lowest level in nearly 30 years- and the lack of credit is having a “pronounced effect” on company investment plans.
The FSB says one in three businesses is unable to obtain finance.
And the CBI says it’s even worse.
According to them, the number of firms reporting reduced and withdrawn lines of credit has risen from one-third to over forty percent in the past month – a simply astonishing figure.
What’s more, the market for credit insurance is drying up – with at least 12,000 British businesses having had vital insurance cover withdrawn in the past week.
This winter, we face the deeply worrying prospect of fundamentally sound businesses going under because they can’t get short term credit…
…taking with them jobs, livelihoods – and our prospects for a lasting recovery.
BANK RECAPITALISATION
It must be said: it was not for all this that we supported the recapitalisation of our banks.
We supported that policy not to save the banks and bankers…
…but to save the real economy.
Not to boast about it abroad…
…but to re-start lending to businesses at home.
And on those tests, we must all agree that the bank recapitalisation is failing.
The priority today must be, as Mervyn King has said, to get banks “to a position where they feel confident enough to resume lending”.
And for that to happen, I believe it’s time for radical action.
As Mervyn King has said, it wouldn’t be wise to rule anything out at this stage.
This is a huge problem, and no single solution can solve it, but there is radical action that we could and should take right now.
George Osborne and I have made suggestions in recent weeks.
In a speech last Tuesday, I argued that we may need “radical new approaches that recognise how existing banks are still suffering from the trauma of toxic assets and massive over lending.”
At Prime Minister’s Questions the next day, I asked Gordon Brown if he was prepared “to consider more direct measures to get lending to business restarted, including the establishment of new institutions to underwrite lending, so that businesses can get the money that they need?”
In an interview with the Financial Times last Friday, George Osborne re-enforced the message…
…while in Parliament on Wednesday he said “The Government should establish a new state institution that will directly underwrite lending from the banks to British businesses.”
And today, I want to say more about the Conservative Party’s proposal.
THE PROBLEM
But if we’re going to come up with the right radical solution we need to understand the problem.
The wrong solution, like the VAT cut, could end up costing a fortune without making anything better, and actually making the recovery worse.
The truth is that the problem is still fundamentally the same.
The banks don’t have enough capital, and they are shrinking their balance sheets instead of lending to businesses.
That might be the obvious thing to do from the point of view of an individual bank.
But if everyone does it at the same time it’s a disaster.
It forces businesses to the wall.
It means more people losing their jobs and their homes.
And it means a deeper and longer recession.
That’s not in anyone’s interests, even the banks.
SOLUTIONS
If that is the problem, what is the solution?
Our guiding principle should be to use radical government action to get lending moving, but as far as possible for lending decisions to be made according to market incentives.
This is a credit crunch, and it needs credit solutions.
That means using the government balance sheet to back new lending.
But making sure that banks still have the right incentives to assess risk.
That combines the best of both worlds, and means that we would maximise the chances of having a viable banking system to help lift us out of recession.
CREDIT GUARANTEE SCHEME
So we propose establishing a temporary new Government body – the National Loan Guarantee Scheme – to directly underwrite lending from the banks to British businesses.
The focus would be on short term credit lines, overdrafts and trade credit – the lifelines that all businesses need to keep afloat.
Our National Loan Guarantee Scheme would guarantee billions of new loans to any UK businesses, and it would do so for a commercial insurance fee, passed on by the banks, that would properly protect the taxpayer.
Banks will be able to use the National Loan Guarantee Scheme guarantees to underwrite a significant percent of any new loans to business.
And a similar approach should be taken with trade credit insurance, which has dried up dramatically over the last few weeks with worrying consequences for the day to day workings of our economy.
The French Government has just announced a very similar scheme to tackle this problem – and we must act too.
Our scheme is on a different scale to the Government’s much smaller and more bureaucratic Small Firms Loan Guarantee Scheme.
But it has one important similarity.
The guarantee will not cover 100 percent of the loan.
Why not?
Because it’s important that banks take a share of the risk to prevent reckless lending.
And because they will have the right incentives, it will be the banks – not government – making the decisions about who to lend to.
But crucially, they won’t need as much capital - the very thing they are so short of – in order to lend.
Because of the sums involved, the National Loan Guarantee Scheme should be chaired by someone appointed by the Chancellor of the Exchequer with the agreement of the Governor of the Bank of England…
…and staffed by secondees from the private banks, the Treasury and Bank of England.
The benefits of this solution are clear.
This is not a new spending program financed by more borrowing.
It is like the secured guarantees for a fee that the Bank of England has already put in place for inter-bank lending, which we supported.
And, most important of all, by guaranteeing credit to our businesses…
….it gets to the heart of the credit crunch and goes a long way to solving Britain’s credit problems.
The CBI has said our proposal “would be warmly welcomed by business”.
And the FSB have said “we welcome this tranche of measures to improve lines of credit for small business”.
So I now call on the Government to take them up, get the British economy back on track and stop businesses going to wall and jobs being lost unnecessarily.
SMALL BUSINESS PLAN
Monetary activism, and the National Loan Guarantee Scheme, goes with other immediate help we can give to businesses in this recession.
As I have consistently said, we are not going to stand aside while good businesses go bust and jobs are lost.
So we would allow small businesses to delay their VAT payments by six months.
That’s a £10bn boost to help small firms with cashflow problems.
We will cut the small companies tax rate to twenty pence and the main rate to twenty five pence.
We would cut employers’ national insurance by one percent for the smallest firms.
And we would introduce a £3 billion tax breaks for jobs scheme to reward companies who take on new staff.
Not walking on by…
….but offering sensible, practical and costed help to get businesses through this difficult time.
CONCLUSION
We’ve heard a lot about Keynes in recent months.
But perhaps one of the most telling things he said in the 1930s was this:
“there cannot be a real recovery… until the ideas of lenders and the ideas of productive borrowers are brought together again; partly by lenders becoming ready to lend on easier terms … partly by borrowers recovering their good spirits. … Unless we … find a solution along these lines, then… the slump may pass over into a depression… with untold damage to the material wealth and to the social stability of every country alike.”
Keynes was right about that - jump-starting lending and borrowing is key to staving off a longer slump.
For that we need monetary activism, not fiscal tinkering.
It’s this kind of action the Government must focus on now.
Not boasting about the bank bail-out abroad, but getting credit flowing through the real economy at home.
Not setting a tax bombshell under our small businesses, but helping business get back on its feet with properly funded help on tax bills and employment costs.
Not spinning endless announcements that unravel within hours, but setting out serious, thought-through strategies for the long-term.
This is the help that Britain’s businesses urgently need.
They’ve seen the Government spending billions on bailing out the banks, to little effect in the real economy.
It is right and it is critical that small businesses now get some support too.
Thousands have already gone to the wall…
…and if those remaining don’t get the credit they need, thousands more healthy and hard working businesses will follow them.
For their sake we’ve got to act now.
Act to mobilise the powers of government…
…to get the credit markets moving…
…to throw a lifeline to businesses that are suffering…
…to save our real economy.