VINCE Cable was at it again yesterday, bashing the banks, calling for bonuses to be capped and for a new tax on their profits if they don’t lend more. It was a case of business as usual for the business secretary – or so we thought until we actually read Cable’s consultative green paper, on which his comments were supposedly based. The document is strikingly at odds with what Cable was telling journalists, including at a press conference. For a start, the green paper makes no mention of a tax on banking profits, an astonishing mismatch given the business secretary’s endless threats. To add insult to injury, the green paper only mentions the word “bonus” twice, in close succession; and the language used is moderate, unlike Cable’s populist rabble-rousing rhetoric. The document repeats a claim in the Bank of England’s financial stability report, making the theoretical (and pretty useless) point that if UK banks limited bonus and dividend payouts, they could generate more capital and lend more. This is arithmetically true but economically and practically irrelevant.
So what is the coalition, which was supposed to have banished the spin of the Labour years, playing at? As one Whitehall source told our political editor (see page 4), “I’m not sure where Cable is coming from. He seems to be arguing against his own green paper.” An official at the business department told us Cable was “floating some ideas off the back of the paper.” The green paper actually admits that “conditions have improved since the financial crisis, and… the majority of businesses can now raise the finance they require.”
The real danger to the sustainability of the recovery is that some politicians seem to believe that lending is good in of itself and that if only we had more of it all would be well. Given that this crisis was one of over-borrowing, and that the Bank’s credit conditions survey shows that credit availability to business is increasing again, such thinking beggars belief. The main reason credit isn’t easier is that the authorities have (sensibly) forced banks to hike the amounts of capital they retain as protection against the risk of future losses; this automatically reduces the availability of credit. The authorities also keep urging banks to reduce the size of their balance sheets; that also implies cuts to loan books. One can’t have it both ways: either banks are smaller and more sensible, or they take excessive risks and lend too much. Why can’t Cable understand this?
The implication of his thinking is that banks should never make a profit, shareholders deserve to suffer, staff should have their incomes forcibly reduced and bankers should be incentivised to lend, regardless of whether there is demand for credit or enough projects that deserve financing. It is astonishing that any cabinet minister can think in this way, especially given that 50 per cent of bonus payments are collected in tax, shareholders are already suffering from low returns on capital, making them less likely to want to provide more funds to the banks (and hence further pressurising lending), and that it is in taxpayers’ interest for RBS and Lloyds to be privatised at a profit, not destroyed.
The good news is that Cable is clearly losing the power struggle in the cabinet. Despite his still extreme rhetoric, the government is becoming more pragmatic, while credit conditions are loosening of their own accord. The City should be thankful for such small mercies.