Jeremy Warner: Lack of demand, not credit, is the problem now

Outlook: An economic contraction caused by too much credit is unlikely to be cured by providing even more of the stuff

First the banks were summoned in to explain why they are squeezing small-business lending. Now the Government is demanding explanations of big buyers, such as Tesco and Alliance Boots, both of whom have allegedly been toughening up payment terms to suppliers. Ministers can huff and puff all they like; the bottom line is that both these phenomena – the lending and supplier squeezes – are just the outward manifestation of a general absence of credit. Other than nationalise the banks outright and start lending itself, which would be a disastrous outcome for this country and more than justify the present collapse in the currency, there is not a whole lot the Government can do about it, or indeed should.

An economic contraction caused by too much credit is unlikely to be cured by providing even more of the stuff. Instead, the Government should focus not on trying to restimulate lending and borrowing, which increasingly looks like a lost cause, but on other ways of reviving demand. The economic crisis has now become so acute that even if the banks could be persuaded to reverse the deleveraging process, it's not clear there would be much demand for the credit that is made available.

Ambitious plans announced by Barack Obama over the weekend to spend hundreds of billions of dollars on public works look potentially a far more rewarding use of public money than continuing to sink it into the black hole of the banking system.