More doomed schemes for bank lending

I stood in the gallery at the Brighton Metropole during the Lib Dem conference last weekend, while my eight-year-old read a Beastquest book at my feet, and listened to Nick Clegg doing his Q&A on the economy.

I missed the kerfuffle about secret courts which came later, and I wrote yesterday how impressive I thought he was.  He has enough problems without me offering him advice, but his support for the Funding for Lending scheme was profoundly wrong, and I need to say why.

Politicians in power tend to think their efforts are somehow in proportion to the amount of money they are spending.  It must feel like that to them.  Because £68 billion has been made available to lower the costs of lending for banks, it must be hugely significant.  It isn't - it is a major irrelevance.

It is irrelevant because the big banks are no longer set up to lend to small, productive business.  

How can I put it more clearly?  They don't have the infrastructure, the managers on the ground who know the local economy.  They can only judge applications by national criteria which tell them not to lend.  The banks are set up to re-create the conditions for the last asset boom and ride the wave.  They are not useful infrastructure any more for rebuilding the economy.

Then, about 36 hours after I was in Brighton, the figures confirmed what I say.  The banks have drawn on only a fifth of the money and net lending has actually contracted by £2.4 billion.

I know serving politicians find it difficult to see outside the existing institutions.  But there is now no more important issue for the Lib Dems, politically and economically, than providing an effective lending infrastructure for small business.  What the political parties have to grasp - and I don't know why they have been so slow on the uptake - is that the big banks are not dragging their feet.  They are not somehow persuadable to lend more.  They are no longer geared up to do so.

Ever since they came into office, the coalition has invented more labyrinthine schemes to encourage them to lend, from Project Merlin onwards.  They don't work, but still the penny hasn't dropped and it is now almost too late for them to make anything happen in time for the election.

Even the Treasury is showing signs of understanding the basic problem, but the political will to tackle it seems to be lacking - because the politicians prefer to be cross with bankers than to understand the problem and do something about it.

This is what they have to do.  RBS has to be split up into effective regional lenders before it is privatised.  But most important, the banks have to be cajolled into creating the community banking infrastructure that can lend where they can't - as they do under the Community Reinvestment Act in the USA.  The community development finance institutions in the USA are able to get money to where it is most effective within weeks.

Here is the real point.  There is no more important economic issue than the need for local and regional institutions capable of lending.  Other European countries have it, but we don't.  Some of the basic work has been done as Susan Kramer explained recently. But ministers - and Lib Dem ministers in particular - need to understand the basic problem, and then it can be solved.

It would be a tragedy if our party had spent five years in power, endlessly reinventing doomed schemes to help the big banks lend more - then the real problem is they can't.