A recent Oxford University report points out that banks’ lending to the property sector ‘crowds out’ commercial lending to companies. Usually we are told that government spending ‘crowds out’ private spending. That is a fantasy, but this report shows that the private banks creation of money actually has effects.
Although this is no real surprise it is worth emphasising: Money creation orientates the economy.
But having privatised and ‘contracted out’ money creation, if we are not to follow on the coat-tails of private banking for profit, then we ought to be getting our government to direct where the money creation is actually oriented. The, pretty much continual, property price increases are clearly a direct result of private banks’ lending into the property sector.
Two things follow:
The first is that to suggest that lending on property is entirely and completely unproductive is not true. Lots of improvement work results from new ownership. Some of this – possibly most – will be productive, giving work to local builders, or even owners themselves, who buy local-ish materials. So that gives the UK economy a little improvement too.
Second, the poor level of commercial lending to companies (itself usually secured on property but largely as a second charge with the mortgage supplier having the first) is a major argument against banking solely for profit. Property is more profitable and less time consuming.
Something different is needed. One has only to look at Germany to see that a selection of co-operative, mission orientated, not for profit banks is urgently required. They can be directed towards regional prosperity rather than profit – albeit they will have to cover their costs. But if they are embedded in the locality they will have considerable local knowledge. No longer would commercial lending be reliant on big banks’ remote offices where everything is done by algorithms.
So it is fortunate that the RSA, in the form of Tony Greenham, combined with the core management of the sadly now deceased Airdrie Savings Bank, seems to have got the bit between its teeth and is starting the formation of a growing network of new, local not for profit co-operative banks. They will take a few years to be formed – but they are coming!
An advantage is that once these are established, they will in all likelihood cause the outlooks of the big four banks to adjust to a new banking landscape and the big banks’ UK lending policies are likely to improve towards real industry – as the big banks have been found to in Switzerland, for example.
And in current government terms a new bank or two over three years is probably pretty quick…