Margareta Pagano: Muddled analysis behind this new lending plan

Supplying more money to the banks so they can provide loans to small businesses and for mortgages is a gamble and potentially dangerous

Let's imagine that the UK's water distribution system is poisoned and, at the same time, we are suffering from a short-term shortage of water.

To solve the problem, would we start pumping new water through the same, poisoned system? Obviously not; it would be insane.

But I fear this is exactly what George Osborne, the Chancellor, and Sir Mervyn King, the Governor of the Bank of England, are doing with their latest plan to flush at least another £140bn or so of emergency, cheap funding through to the high street banks to keep them afloat and, supposedly, kick-start lending again to small businesses and for new mortgages.

There are two parts to the plan – the Bank will launch a new liquidity programme, worth at least £5bn a month for the banks. It will also provide them with £80bn of net new lending for firms and households to cut the cost of credit and boost its supply.

The first part is understandable because it's clear from Mr Osborne's warnings we are close to a second credit crunch. It's better to shore up the banks ahead of any new blow-up on the continent rather than wait until the money markets seize up completely.

It's the second part – the funding for lending – that is the bigger gamble, and potentially a dangerous one because it's based on a muddled analysis of the problem.

Mr Osborne and Sir Mervyn hope that by subsidising lending to the banks, they will feel more secure in their lending to small businesses and for mortgages.

To put the problem into context, only 2 per cent of the balance sheets of the UK's four biggest banks is lent to personal customers and small businesses. As Sir Mervyn admitted, everything bar the kitchen sink has been thrown at the problem and failed. If that's not an indictment of quantitative easing, Project Merlin and low interest rates, I don't know what is.

But now the Bank of England hopes it has come up with a more effective way of cutting borrowing costs for businesses and consumers by making it cheaper for banks to raise funds.

But will they? When you talk to small businesses, it's the cost of the loans banks are charging them which puts them off borrowing.

Like water, there is no shortage of money; businesses have £750bn cash and another £60bn or so in working capital that could be used.

Pension funds have billions for which they would love to find index-linked homes; there are business angels, entrepreneurs and family offices with money in the bank earning peanuts. But they are all in a state of stasis. It's the banks which are the problem; they operate in a cartel, they are uncompetitive and constrained by the new regulatory and capital requirements.

That's why we need to make them more competitive – with tighter controls of loan costs – as well as create new sources of funding: it's not too late to break-up Royal Bank of Scotland to create new banks, encourage crowd-funding and more direct contact between SMEs and business angels.

Pensions have a big role to play too. As pensions expert Dr Ros Altmann says, the pension funds should be encouraged to lend direct and to back infrastructure projects with bonds; the new bank set up by a Cambridge college with the city's local council's pension fund to fund SMEs is an inspiration.

More could also be done to stimulate the private sector to spend its cash in longer-term building projects; why isn't the construction industry – with the Government's backing – looking at long-term bonds to fund new projects?

Mr Osborne should have been given a plumber's manual instead of the GCSE maths text book.

WPP's Sir Martin can't stop Bell ringing the changes on Chimes

He was Baroness Thatcher's election guru in three brilliant campaigns so he knows a thing or two about votes.

That's why Baron Bell of Belgravia is not counting his chickens before they are hatched; which will be at noon tomorrow, more or less precisely, in Curzon Street.

For that's when Tim Bell will find out whether he and his team have succeeded in buying out their PR business – to be named BPP Communications – for £20m from its parent, Chime Communications, of which Bell is chairman.

However, barring a last-minute hitch, and, as we all know, voters can be fickle, it looks certain that Bell will cruise to victory at the annual meeting which is being asked to approve buying the Bell Pottinger branded businesses out of Chime.

So far, there has been only one proxy vote lodged against – and that is from Sir Martin Sorrell's WPP advertising group which holds a 21.7 per cent stake and has been against the buy-out right from the start.

Indeed, Sir Martin has raged against the management buy-out; arguing that it's good for Bell but not so good for WPP as it's being sold on the cheap.

He's right; both of them are equally canny operators and know a good deal when they see one. The Bell businesses are fruitful; operating income was £29m last year with profit before interest and tax of £2.4m: 8 per cent of Chime group's total profit before interest and tax.

So, the Catch 22 has always been which of them would get the better of the other. It looks as though Bell has trumped WPP on this one, although Sir Martin will keep a slice of the action because Chime will have 25 per cent of the new BPP. Suggestions that Sir Martin, who faced his own rebellious investors over his £12.9m pay package last week, might consider abstaining following his bruising defeat are wide of the mark.

WPP's proxy vote against the deal can only be changed now if a representative goes to the meeting in person.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Call Centre Debt Collector - Multiple Roles

£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Guru Careers: Financial Director / FD / Senior Finance Manager

Up to 70k DOE: Guru Careers: We are seeking an experienced Financial Director ...

Recruitment Genius: Junior / Apprentice Sales Executives - OTE £50,000

£11000 - £50000 per annum: Recruitment Genius: This financial company offer ma...

SThree: Recruitment Consultant

competitive + incentives + uncapped comms: SThree: Did you know? 98% of our di...

Day In a Page

Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

The haunting of Shirley Jackson

Was the gothic author's life really as bleak as her fiction?
Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

Bill Granger's seaside-inspired recipes

These dishes are so easy to make, our chef is almost embarrassed to call them recipes
Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

Tourists are limp, leaderless and distinctly UnAustralian

A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen