Funding for Lending on steroids could have side effects

As Nick Clegg, George Osborne, Vince Cable and Ed Balls all scramble to find ways to boost the Funding for Lending Scheme politicians should educate themselves on the dangers of promoting lending further. As Nick Clegg likens proposals to beef up the scheme to putting it "on steroids" it is remarkable that the deputy prime minister does not recognise that steroids have side effects.

Promoting more lending could be dangerous writes Allister Heath:

It could encourage dodgy lending, given that the Bank of England will underwrite some risks. It involves trying to plan the volume of credit by private banks. It aims to boost all forms of credit – but since when is the UK’s problem insufficient credit card borrowing?

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Artificially cheapening access to credit might see lending increase in the short run, but in the long run that new business activity will be unsustainable. As costs of lending have to increase in the future (and they will) then these businesses will collapse in waves. The shock of many firms going bust at the same time will be far more painful a crunch for the UK than a slower but necessary restructuring of the market as entrepreneurs seek more productive ways to employ resources in the aftermath of the crisis. What is holding back is the UK is not a shortage of cheap money, but an excess of it.