Even bankers don't always get it wrong

SOME reports last week made much of a statement within the Bank of England's latest Quarterly Bulletin that falling house prices and the resulting emergence of negative equity may have speeded Britain's slide into recession.

In doing so, they invited the inference that the banks were at least to some extent - and as some of their former bosses have since tried to claim - somehow innocent victims of an unforeseeable turn of events.

In fact the bulletin suggests nothing of the sort. The relevant passage reads: “By increasing expected bank losses, negative equity may have amplified the slowdown by further constraining the supply of credit to households and firms, thereby reducing aggregate demand and supply. That impact of negative equity on credit conditions may have been somewhat stronger than in the 1990s' recession because of elevated concerns over banks' capital positions at the start of the slowdown.”

What the authors refer to as “elevated concerns over banks' capital positions” is, of course, the underlying issue which provoked what most of us know rather more succinctly as the “credit crunch”.

The reason that negative equity “amplified” the slowdown is, as the bulletin makes clear, that the banks were already losing confidence in each other as a result of their imprudent (to put it no more strongly) lending practices. The authors of the report are perfectly correct in making this point, but it should not be misunderstood as suggesting that the banks are somehow deserving of sympathy.

That said, the high street lenders do perhaps now have some genuine grounds for feeling that they are getting a “bad press”. The widening margin of fixed term mortgage rates over the Bank of England base rate is, however unwelcome in terms of supporting economic recovery, an entirely rational response to the inflation which will inevitably occur, eventually, as a result of the billions being pumped into the economy through quantitative easing.

Besides, it is better for all concerned just now - the banks themselves, their customers, the economy and the Government - for banks to be lending money, albeit at a relatively high margin, than for them to be offering cheaper borrowing but providing less of it.

The Government's talk last autumn about how the lending practices of the banks being bailed out by the taxpayer should revert to those of the previous year was utter nonsense even at the time, since lending practices were at the root of the problem in the first place.

It is yet more obvious now. The banks have got the message about lending money at rates they can afford to offer and to people who can afford to pay. The job of government now is to stop lecturing and to implement the necessary regulatory changes to make sure that things stay that way.