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?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?