Douglas Carswell's Blog

Why banks miss their credit targets

Imagine if we were to run the agrarian economy the way we run our system of money and credit.

First a team of central planners fixes the price of food stuffs very low "to stimulate consumption".

Sure you'd get lots of consumption short term as consumers ate up all that cheap produce. But in setting the price of food lower than suppliers were will to sell at, there would be a shortage of food.

That is pretty much what has happened to credit. With rates set low, there aren't the incentives to supply credit. Hence a credit shortage.

Then the cry goes out that "something must be done".

So like collectivised farms, the banks are taken over and / or set production targets. Which because they are still not free to supply to customers at a rate they are willing to buy, they invariably miss.

Credit is then rationed by the state directly, on the basis of graft and pull, rather than as a free contract between seller and buyer. See government plans for "credit easing".

Suppliers reluctant to sell at the low price get accused of hoarding credit the way farmers were once accused of hoarding grain. See media stories today.

Like hoarding farmers who fail to appreciate that their social responsibility is to supply cheap grain, bankers then make a cheap target for politicians keen to curry favour with credit starved mob. See media stories for several weeks.

If we tried to supply cereals the way we do credit, we would see that state control is the problem, not the answer. At least I hope so. But the way our intellectually bankrupt elite is carrying on, perhaps they might end up trying to ration cereals the way they do credit before this crisis is over.

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