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December 4, 2012 11:27 pm
From Sir Adam Ridley.
Sir, Robert Skidelsky’s attack on the government’s economic policy (December 3) is fundamentally mistaken in treating today’s banking system as if it worked as it did before the war. He writes as if banks can attract deposits and make loans without limit; and implies that the critical constraint they face in so doing is market expectations.
Your own reporter’s story on the same day (“Syndicated bank loans in eurozone slump to 10-year low”, Companies & Markets) illustrates clearly why he is wrong:
“Syndicated bank lending has fallen by 45 per cent so far this year compared with 2011 ... banks just do not have the capacity to lend as they did before ... banks have scrambled to delever their balance sheets to meet Basel III and other regulatory ratios ... large European banks are expected to shed £2.6tn or about 7 per cent of their total assets by the end of 2013, according to the International Monetary Fund.”
With further tightening of capital and liquidity controls to follow in years to come, this “deleveraging” – which means substantial further reductions in bank lending – is set to be a crippling constraint on growth throughout the industrial world. We and most of the rest of the Organisation for Economic Co-operation and Development have made the mistake of combining fiscal austerity (sometimes desirable) with monetary austerity which was imposed, in effect, unwittingly in a hasty response to the crisis, with no awareness of its impact on activity in the longer term.
Adam Ridley, London SW6, UK
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