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
Arts and Entertainment
filmPoldark production team claims innocence of viewers' ab frenzy
Life and Style
Google marks the 81st anniversary of the Loch Ness Monster's most famous photograph
techIt's the 81st anniversary of THAT iconic photograph
News
Katie Hopkins makes a living out of courting controversy
people
News
General Election
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
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

Guru Careers: Pricing Analyst

£30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Sales Team Leader - Wakefield, West Yorkshire

£21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...

Ashdown Group: Head of Client Services - City of London, Old Street

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

Why Mohammed Emwazi chose Isis

His friends were betrayed and killed by al-Shabaab
'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

Open letter to David Cameron

Building the walls of fortress Europe has had deadly results
Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

You don't say!

Tory candidates' election tweets not as 'spontaneous' as they appear
Mubi: Netflix for people who want to stop just watching trash

So what is Mubi?

Netflix for people who want to stop just watching trash all the time
The impossible job: how to follow Kevin Spacey?

The hardest job in theatre?

How to follow Kevin Spacey
Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

Armenian genocide and the 'good Turks'

To continue to deny the truth of this mass human cruelty is close to a criminal lie
Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

'Lou needed care, but what he got was ECT'

The truth about the singer's upbringing beyond
Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

This human tragedy has been brewing for years

EU states can't say they were not warned
Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

Women's sportswear

From tackling a marathon to a jog in the park, the right kit can help
Hillary Clinton's outfits will be as important as her policies in her presidential bid

Clinton's clothes

Like it or not, her outfits will be as important as her policies
NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders