Hamish McRae: Carney must take a sober approach to credit problem

Economic View: Should they attempt to compensate for past errors with painkillers and a suitably calibrated dose of the booze?

Should it be cold turkey or hair of the dog? William McChesney Martin, the chairman of the Federal Reserve from 1951 to 1970, is credited with the remark that the task of the central banker was to take the punch bowl away just as the party was getting good. But the world's central bankers failed to do that during the long boom and were complicit in creating the bubble that burst in 2008. I expect that economic history will be pretty harsh on them.

But to say that gives no guide to what they should do now. Should they do relatively little and just wait for the hangover to cure itself in the normal path of time? Or should they attempt to compensate for their past errors with a combination of painkillers and a suitably calibrated dose of the booze?

The broad thrust of central banking policy, certainly after an Italian, Mario Draghi, became head of the European Central Bank, has been to follow the second option. But while it averted catastrophe, and the central banks should take credit for that, it has not been particularly effective. They printed more money, they pushed down interest rates, they bribed and cajoled the banks to lend more, but not a lot has happened.

There has been a modest recovery in property prices in most markets – though not in those where the party was most chaotic, such as Spain – and recently there has been a recovery in share prices. The money has to go somewhere, and since people have realised that lending to governments at below the rate of inflation is not a great idea, that money is now going into equities.

But the principal aim of the policy – to get growth going again – has proved elusive. So now there are calls for yet more measures to enable economies to achieve lift-off.

Enter Mark Carney, governor-elect of the Bank of England, who faces the Treasury Select Committee today.

He was not complicit in the excesses of the past, and that is important. Canada, where he is head of the central bank, was one of the few developed countries that did not have a banking crisis, and though there were some elements of excess in the property market and elsewhere, the country came through the global recession in pretty good shape. Canada was lucky; but Canadians were wise.

Expect every word of the new governor to be picked over for implications for markets. That is how people make money. So some hints that he gave at the Davos forum that bankers should promote growth have already triggered some weakness of sterling and maybe some weakness in the gilt market. If the Bank of England is to seek changes in its mandate, perhaps to ease the inflation target, then expect sterling and gilts to go down.

Actually he is far too clever to incline toward the keep-the-drink-flowing school of central banking, partly because that approach is discredited, but more because to do so would be self-defeating.

Inflationary expectations in the UK are higher than in the United States and Europe, and that is already influencing growth.

But there is a problem with the supply of credit, and it will be interesting to see what hints we get about his approach to dealing with that. You can see the problem encapsulated in the two graphs.

The first shows official interest rates and the average cost of a new loan to the private sector. As you can see, a bit of the fall in the cost of money has fed through in cheaper loans, but most has been absorbed in wider margins. Why? There are a number of reasons, and it is hard to know how much weight to attribute to each.

One is that the cost of money to the banks has not fallen in line with official interest rates. People don't want to accept 0.5 per cent, or whatever their bank is offering, and they shop around for a better rate, maybe buying some short-dated bonds instead.

Another is that banks have to constrain their lending to comply with increased capital requirements, so there is little competition for new customers.

The foreign banks that used to be a big part of the UK lending scheme have gone home. And banks have so many bad loans on their books that they have to charge more to reliable customers to make up. Not only are loans not as cheap as they should be, or to put the point another way the very low official interest rates have become ineffective, but loan volume has collapsed.

You can see that in the other graph. Lending to individuals is just about positive, with more money going out than coming back. But lending to companies has gone negative: the net amount of money being paid back is greater than the net amount of new loans.

Again, there are a number of reasons for this. Some of it is falling demand for credit, typically because a company has heard of banks suddenly calling in loans and not wanting to be beholden to them.

Another is that banks have so many bad debts that they are twitchy about lending more. (They are particularly worried about lending more on property.)

As for individuals, a lot of people are paying down their credit cards and mortgages as fast as they possibly can, and who can blame them?

There is, however, a problem on the supply side, some of which is a result of the new banking caution – statistically loans to small businesses are among the most risky – and some which is not.

So efforts to clear blockages in lending, such as the funding for lending scheme promoted by the Bank, are welcome, and seem to some extent at least to be working. One of the interesting things tomorrow at the Select Committee will be to see how much further Mr Carney feels these unconventional ways of boosting credit can go.

But we should be careful about changing the mandate of a central bank. As Goldman Sachs argued in a recent paper, the Bank of England can do more to ease credit within its existing mandate. Keeping the present mandate would be a signal that when eventually the party does get good, it will indeed take the punch bowl away.

Sport
Brazilian fans watch the match for third place between Brazil and Netherlands
world cup 2014Brazil 0 Netherlands 3: Dutch pile on the misery in third place playoff
Sport
Robin van Persie hands his third-place medal to a supporter
Van Persie gives bronze medal to eccentric fan moments after being handed it by Blatter
Arts and Entertainment
books The follow-up documentary that has got locals worried
News
Ian Thorpe had Rio 2016 in his sights
people
PROMOTED VIDEO
Arts and Entertainment
Original Netflix series such as Orange Is The New Black are to benefit from a 'substantial' increase in investment
TVHoax announcement had caused outrage
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

News
Monkey business: Serkis is the king of the non-human character performance
peopleFirst Gollum, then King Kong - now the actor is swinging through trees in Dawn of the Planet of the Apes
Arts and Entertainment
Blackman: Landscape of children’s literature does not reflect the cultural diversity of young people
booksMalorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
News
One Direction star Harry Styles who says he has no plans to follow his pal Cara Delevingne down the catwalk.
peopleManagement confirms rumours singer is going it alone are false
Voices
Mrs Brown's Boy: D'Movie has been a huge commercial success
voicesWhen it comes to national stereotyping, the Irish know it can pay to play up to outsiders' expectations, says DJ Taylor
Arts and Entertainment
Curtain calls: Madani Younis
theatreMadani Younis wants the neighbourhood to follow his work as closely as his audiences do
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
Douglas McMaster says the food industry is ‘traumatised’
food + drinkSilo in Brighton will have just six staple dishes on the menu every day, including one meat option, one fish, one vegan, and one 'wild card'
Sport
Mario Balotelli, Divock Origi, Loic Remy, Wilfried Bony and Karim Benzema
transfersBony, Benzema and the other transfer targets
Life and Style
Once a month, waistline watcher Suran steps into a 3D body scanner that maps his body shape and records measurements with pinpoint accuracy
techFrom heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
News
Soft power: Matthew Barzun
peopleThe US Ambassador to London, Matthew Barzun, holds 'jeans and beer' gigs at his official residence. He says it's all part of the job
Sport
Joe Root and James Anderson celebrate their record-beaking partnership
cricketEngland's last-wicket stand against India rewrites the history books
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Day In a Page

Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor
Gavin Maxwell's bitter legacy: Was the otter man the wildlife champion he appeared to be?

Otter man Gavin Maxwell's bitter legacy

The aristocrat's eccentric devotion to his pets inspired a generation. But our greatest living nature writer believes his legacy has been quite toxic
Joanna Rowsell: The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia

Joanna Rowsell: 'I wear my wig to look normal'

The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia
Bill Granger recipes: Our chef gives raw ingredients a lift with his quick marinades

Bill Granger's quick and delicious marinades

Our chef's marinades are great for weekend barbecuing, but are also a delicious way of injecting flavour into, and breaking the monotony of, weekday meals
Germany vs Argentina World Cup 2014 preview: Why Brazilians don't love their neighbours Argentina any more

Anyone but Argentina – why Brazilians don’t love their neighbours any more

The hosts will be supporting Germany in today's World Cup final, reports Alex Bellos
The Open 2014: Time again to ask that major question - can Lee Westwood win at last?

The Open 2014

Time again to ask that major question - can Lee Westwood win at last?