Vince Cable: 'We must get credit flowing – or face another crunch'

The new Secretary of State's warning is all the more chilling because he prophesied doom before, and he was right. Here Vince Cable talks of his plans to avoid disaster, and to rebuild business, innovation and skills in Britain. Expect some radical thinking

The man who became Britain's poster boy of the credit crunch for his prescience and wit, Vince Cable, is now warning us about the next disaster.

In his first major interview since taking office, the new Business Secretary says that his greatest fear is that Britain could be heading for another crunch because the banks are not lending enough to the real economy. "We could have a second credit crunch if we don't get credit flowing; there is a real danger that growth in the economy could be undermined," he says. "It's what I hear most from the businessmen and women I speak to, that the flow of credit and lending to business is still weak. Demand is already depressed, and the danger is that the lack of lending could depress it still further."

Banks have never been Cable's favourite institutions, and it was the way he so brilliantly skewered them from the opposition benches for taking such feckless risks, while paying themselves bumper bonuses, that endeared him to Joe Public as much as to Jeremy Paxman. Clearly it's easier being a Cassandra when you are in opposition, but being at the centre of the new government has not dimmed Cable's knack for shooting from the hip. Getting to know the banks better in his new role doesn't seem to have improved his respect for them either.

Now, he says, banks are "misleading" us by claiming that they are meeting some 80 per cent of the loan requests they receive, defending themselves by arguing that if they met all requests they would not be making money on the loans. "This is misleading," says Cable. "I think they are raising the hurdle. All the evidence from business, from the Institute of Directors and other bodies, is that banks are not lending as much as is needed."

As head of the revived Small Business Finance Forum, he is hearing first-hand how tough it is for small- and medium-sized businesses (SMEs) to raise new credit and capital. "The system is still biased towards debt, and we need to find ways of getting more equity funding into business, maybe through something like the old 3i, to help growth with tax breaks or tax incentives without it being a way of avoiding paying tax. We are working on all these issues," he says.

We meet in Cable's new offices on the eighth floor of the Department for Business, Innovation and Skills (BIS), with a bird's eye view over Westminster. He is nattily dressed in a smart black suit, his famous dancing feet neatly hidden in well-polished black shoes, which he must hope will waltz as lightly across his new empire as they did while dancing with Alesha Dixon of Strictly Come Dancing on This Week. Young assistants buzz around. The mood is fresh, a start-of-term feel. His diary is packed with visits from tycoons such as the boss of India's Tata car maker and Dragons' Den entrepreneurs, as well as college principals. They come to tell him straight what should be done to grow the private sector, as well as to improve education and training to nourish that growth.

It's an extraordinary turnabout from even six months ago when pundits said that the maverick Cable – once a Labour Party member – was the best Chancellor that Labour never had, or even in May when mischief-makers were sniping that he could never work with the Chancellor, George Osborne, about whose economic prowess he had been less than charitable. If there are any differences today, they are hair-line, and one of his closest advisers rubbished any notion that he's uncomfortable in his new position: "Like everybody in the coalition – Lib Dems and Conservatives – we are facing some really tough decisions and it's a stressful time for all of us."

For now, Cable is working closely with Osborne's Treasury team on the joint Green Paper on business finance, to be published in the next two weeks. This will set out some of the new measures aimed at keeping credit flowing and include getting the banks – not just those owned by the Government following the rescue – to agree on lending amounts, as well as extending the Enterprise Finance Scheme which guarantees funds to SMEs. "We are still identifying new measures, but it's important because the effects of quantitative easing will soon be wearing off, and next year the guarantee insurance scheme comes to an end, so we need to look at replacing this," he says. Giving back banking supervision to the Bank of England, combined with the Bank's new macro-prudential tools to oversee any build-up of risk, will protect against the cycle.

"Unfortunately, many of the UK's big banks have grown their investment banks so big globally that they no longer do the retail lending that they were supposed to do. That's why new banks are being encouraged." He is still in the splitting camp, a view he advocated early on in the crisis, arguing that separating the retail and investment banking functions would mitigate future risk. So he's pleased with the process of the new banking commission set up to investigate whether the structure of the UK's "oligopolistic" banks should be reformed.

Most crucial, though, is Cable's role in rebalancing the UK economy away from the financial sector, and getting us making things again. So what is his Business department – a ministry that he declared in opposition should be abolished – doing to get the ball rolling? "Even though the outlook is gloomy, we are taking many steps to make the UK more competitive; lower corporation tax and deregulation – 17 of the 78 quangos have gone, and we should have cut a third by the end of the year – are part of this. The message I hear from business – and the college heads – is 'let us get on with it. Keep government out of the way and cut down on bureaucracies'. One college head said she had 12 different sources of government funding and audit trails."

So how do we break the vicious cycle – Britain's constant swings between boom and bust, between manufacturing and not?

"Yes, we've got to break the cycle: Britain lost three times as much manufacturing in the last decade than it did in the 1980s – dropping from 20 per cent share of GDP to 13 per cent today. Partly this was due to economics, but cultural factors like neglect and defeatism also had a big impact. Labour's lazy reliance on banking proved catastrophic. Now we must encourage manufacturing in high technology industries, even creative industries. The new green bank will help fund low-carbon technologies which will cross over into other areas too."

Let's not get too down, though, he says. "We do have centres of academic excellence and fantastic engineers, especially in the automotive industry. Ratan Tata was telling me the other day how British engineers are among the best – but there's no doubt we still have much to do to improve training in the workforce."

Some 70 per cent of the BIS's £22bn budget goes on education and science; split roughly between science and research, higher education, and further education and skills. Cable is in the hot seat, and can now champion his causes. Expect some radical thinking. As he showed last week with his controversial idea for a graduate tax, he's more than capable of shaking things up.

Pushing the benefits of further education and vocational training is one route Cable is serious about, even more so after a recent visit to car-maker Bentley's factory in Crewe where he saw for himself just how dynamic apprenticeship training schemes can be. "There was the most amazing atmosphere there," he says, "from the factory floor to the board."

He's also given the go-ahead for government funding for another 50,000 apprenticeship places, and hopes to do more. He's conscious that private industry is deeply unhappy about the "employability" of school and college leavers, and has taken on board recent warnings from the CBI that the UK needs 775,000 workers with higher-level skills in maths, science and engineering by 2014 if it is to fill current demand. More work will be done with colleges to run courses close to specialist centres of work. He also hopes to encourage new innovation centres, as well as to extend existing ones, so that research and commerce can be brought together in a more systematic way – akin to Germany's successful Fraunhofer Institutes.

"We have to show that vocational training is as valuable as academic courses, although we must avoid snobbery, and inverse snobbery. But we have to improve stem skills in our schools, particularly maths and physics because there is such a shortage. Did you know that nearly all pupils doing double maths – which you need for physics – are at independent schools?" The look of horror on his face when he throws out this nugget suggests he will be lobbying Michael Gove, the Education Secretary, to make changes.

One minister he's working with closely is Iain Duncan Smith, the head of welfare and pensions, to find ways of helping the unemployed and those on benefits break out of Britain's "poverty ghettos", possibly by moving to find work. "He [Duncan Smith] was sitting just where you are only an hour ago. We're looking at how we can improve training for the unemployed, particularly the Neets – those not in employment, education or training – and how to move people back into work, particularly in regions where people are more vulnerable because they depend so much on the state."

Promoting growth by encouraging even more inward investment is a top priority and he's confident that this can been done without Labour's incentives and grants. He's always been a free trader, having worked with Labour's then industry secretary, the late John Smith, as a special adviser some 30 years ago: "I remember the controversy when we allowed Japanese investment into the UK for the first time. It was a big political decision and the unions didn't like it one bit – but's it's vital."

But taking British trade overseas is just as crucial, he says, and is one of the reasons why the Prime Minister, David Cameron, made India one of his first ports of call, and why Cable is off to Brazil later this year. Opening our doors to overseas investors doesn't mean, though, we should allow British firms to be taken over, a sensitive issue highlighted by Kraft's takeover of Cadbury last year. Cable, an economist by training, says it wasn't the fact that Kraft was American that we should worry about, but whether takeovers enhance value. "There was a big misunderstanding: the question to ask is whether takeovers enhance value for shareholders and the evidence shows most takeovers do not. We need to be more sceptical and that's why the machinery is being looked at more closely by the Takeover Panel," he says.

On the bigger picture, Cable is cautious. "Of course there are ways to get the economy moving again; you could do it artificially, pump more money, encourage another housing bubble; but that would only lead to another disaster.

"What we are doing is tricky; we must encourage growth and rebalance the economy in a healthy way and geographically. It's going to be a difficult trick to pull off."

Not enough people listened to Cable when he first warned – nearly a decade ago – that we were heading for catastrophe. He spotted then that an over-heated housing market, soaring personal debt and cheap credit were dangers just waiting to explode. Now he's in the mainstream, let's hope he stays as outspoken – money from taxing bankers' bonuses will not pay our nurses for much longer.

CV: Vince Cable

Education: Nunthorpe Grammar School; then natural sciences and economics at Cambridge and a PhD in Economics from Glasgow University.

Career: After lecturing at Glasgow and London School of Economics, Cable worked as treasury finance officer to the Kenyan government. In 1968, married Dr Olympia Rebelo, who died in 2001. Remarried, to farmer Rachel Wenban Smith, in 2004. In the 1970s he was a special adviser to then industry secretary John Smith; then worked for the Commonwealth Secretary-General; and for Shell (1995 to 1997).

Political career: After joining the Liberals, he switched to Labour, and then in 1982 joined the SDP. Became LibDem MP for Twickenham in 1997. Cable warned of an impending credit bubble as early as 2000. He wrote The Storm: The World Economic Crisis and What it Means, and famously described then PM Gordon Brown as morphing from "Stalin to Mr Bean".

Pastimes: Ballroom dancing – he'd love to appear on, and win, TV's Strictly Come Dancing.