Last week in my analysis of the positioning of the parties in the economic crisis I suggested that the Tories were strongest on most issues but that Labour were in danger of ‘owning’ ‘policy activism’. Monday’s poorly-received PBR illustrates the dangers of the wrong kind of activism but conscious of not appearing to "walk on by" during the recession, David Cameron today advocated "monetary activism" to help Britain escape recession. Key sections of his speech to Policy Exchange are highlighted below.
Bank mistreatment of small businesses: "In recent months, I have been inundated with letters and emails from business owners. I want to read you just one. It’s from a married couple, in their sixties, who run a small computer consultancy business… They should have been looking forward to a well-earned retirement. But at the end of September, because of a combination of holidays and sickness, there was a delay in processing their monthly invoice. So they telephoned and wrote to RBS/NatWest to extend their overdraft temporarily – but nothing happened. Not even a reply at first. More calls were made, more letters written, visits to the local branch undertaken but still nothing. In the meantime, their direct debits – which they asked to be stopped – were rejected, incurring charges. They say: “As I write the overdraft is … well over £4,000; we continue to incur additional fees and interest rates on a daily basis, both by NatWest and by those whose payments we have missed”. To top it all off, their “winter fuel payments have been consumed by the ongoing fees and charges”. Their story is not unique. Talk to virtually any business owner right now and they all say the same: We can’t get credit or the loans to tie us over. Rates are going up. We’re incurring charge after charge and being effectively strangled into submission. It has to be said. What a disgraceful way to treat good, honest, hard working people who are simply trying to provide for themselves and their family. What a shameful way for banks to act towards the very same people – the taxpayer – who have supported them in their hour of need."
Today’s economic difficulties stem from monetary problems: "As I have consistently argued, it’s in monetary policy, not fiscal policy, where we have most to learn… and monetary activism, not fiscal stimulus, where politicians and economists must aim their firepower. And it’s not just me. Last week, the CBI said: ‘Getting the credit markets working properly is much more important than the fiscal boost.’ And on Tuesday, the Governor of the Bank of England, Mervyn King, agreed when he argued: ‘I am in no doubt that the single most pressing challenge to domestic economic policy is to get the banking system to get lending in any normal sense. That is more important than anything else at present.’"
What does monetary activism mean? "First and foremost, it means lower interest rates. Last week, the Bank of England themselves said that they had considered cutting interest rates by more but – in anticipation of a fiscal stimulus in the Pre Budget Report – had decided not to. I have made it clear that fiscal policy must support, not replace, monetary policy, and that government must not do anything that could make it more difficult for the Bank of England to deliver a sustained reduction in interest rates."
We advocate underwriting lending to British business: "We propose establishing a temporary new Government body – the National Loan Guarantee Scheme – to directly underwrite lending from the banks to British businesses. The focus would be on short term credit lines, overdrafts and trade credit – the lifelines that all businesses need to keep afloat. Our National Loan Guarantee Scheme would guarantee billions of new loans to any UK businesses, and it would do so for a commercial insurance fee, passed on by the banks, that would properly protect the taxpayer. Banks will be able to use the National Loan Guarantee Scheme guarantees to underwrite a significant percent of any new loans to business. And a similar approach should be taken with trade credit insurance, which has dried up dramatically over the last few weeks with worrying consequences for the day to day workings of our economy. The French Government has just announced a very similar scheme to tackle this problem – and we must act too. Our scheme is on a different scale to the Government’s much smaller and more bureaucratic Small Firms Loan Guarantee Scheme. But it has one important similarity. The guarantee will not cover 100 percent of the loan. Why not? Because it’s important that banks take a share of the risk to prevent reckless lending. And because they will have the right incentives, it will be the banks – not government – making the decisions about who to lend to."