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Britain’s banks aren’t lending, which is strangling the economy. The package of measures to support lending to smaller businesses which the government announced yesterday will do some good. But it is not enough.

As I have argued previously, the government should direct nationalised Northern Rock to step into the breach. Anatole Kaletsky endorses this position in today’s Times:

the
quickest and least costly emergency response would be to reverse the policy
of running down Northern Rock and Bradford & Bingley. Both these banks
are now fully owned by the Government and could be turned into rapidly
growing state-guaranteed lenders.

The plans to run down their lending were right in the circumstances in which
they were nationalised last year, when other private banks were functioning
more or less normally. But things have completely changed and it now makes
sense to reverse their policy of credit contraction. Northern Rock is
ideally positioned to re-expand the supply of mortgages to first-time
buyers, while Bradford & Bingley could revive the flow of finance to
commercial and social housing. The Government could also be much less shy
about exerting its majority control over the Royal Bank of Scotland and its
40 per cent stake in Lloyds-HBOS, by far the biggest commercial and mortgage
lender in the country.

Posted 15 Jan 2009 in Blog, Britain, Economics, Finance

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