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Rule one of the lockdown is that all the usual conventions must be suspended – economic as well as behavioural.  There is no more vivid a demonstration than the story to date of the Business Interruption Loan Scheme.

The scheme was designed to square a circle.  On the one hand, it would be prudent.  It would be a loan scheme, not a grant one, so the taxpayer would eventually get his money back.  On the other, it would be generous: the Government was prepared to issue up to £330 billion of loans, a sum worth over a third of all public spending.

It was announced in what was effectively the second of three Budgets since March 11 (four, if you count the Chancellor’s later package for the self-employed).  Rushi Sunak was thereby recognising a unique aspect of this crisis – unlike even that of wartime, when the economy, however adapted, keeps going.

He understood that it was undergoing a form of cardiac arrest, and so needed emergency treatment just to stay alive.  The tragedy of the scheme to date is that while he grasped this intellectually (and emotionally), the banks have not understood it culturally.  And the Treasury is not in a good place to get them to do so.

Imagine yourself to be a smaller business confronted by a slump in sales, because of the economic seizure, with no forseeable prospect of resuming them even when the lockdown is lifted, because that is bound to take place gradually.

The first question you would ask is whether it was best to take on a loan at all, given the uncertainty about when and how you could start beginning to pay it off.  Better perhaps to close down altogether; take the hit on the chin; save on office, staff and other costs, and re-open anew when the crisis abates.

But let’s presume that you are swayed by the rates and mortgage holidays, believe that your company can make it through, and apply to a bank for a loan.  What happens next?

First, you may not be able to get through to a bank at all.  The staff at the call centre may be off sick or self-isolating.  Or the centre may be based abroad, together with back office functions, in countries where lockdowns are being strictly enforced, such as India.

Next, when you do, you may well find that the attitude of the bank concerned is “business as usual”.  It will ask for business plans, accounts, cashflow projections, collateral.  Opinion will forever divide on whether this is prudent lending or hidebound conservatism (in contrast to the relative willingness of, say, the German banks to lend).

One point, however, is clear.  What may make sense in ordinary times makes none in exceptional ones.  The business owner asked when he will be able to reopen, for example, will only be able to reply “I’m sorry, I haven’t a clue”.  Hence much of the frustration and pain that Allie Renison of the IOD reported recently on this site.

The Chancellor can confirm himself that the banks have been behaving in such restrictive ways: that’s why in early April he barred them from asking for homes and savings as collateral, and sought to prevent them from steering companies towards standard business loans instead.

And the figures tell the tale in any event.  The banks have nearly doubled the number of loans in a week, but only one in five of the firms that have applied have been successful.

The nub of the matter was demonstrated by ConservativeHome’s ringround of Tory MPs near the start of month. As we wrote then, “any financial support delivered through a third party…is support over which one has limited control”.  (Hence the mirror image application success of the furlough scheme which government manages directly.)

There are two potential ways forward.  Either Ministers can carry on trying, through the British Business Bank or directly, to push on the string, or rather the Gordian Knot – streamline credit checks, lengthen loan periods, increase overdraft limits, fiddle with interest rates, side-step EU rules and so on.

Or they can slice through the knot by guaranteeing not 80 per cent of the loans but the lot – at least for the smaller firms. That option now commands the support of an unlikely alliance of George Osborne, Ed Miliband, Sajid Javid and Norman Lamont.

This site believes that the last is now the better option, and saying so takes us back to where we started.  There will be different views of what government economic policy should be once the lockdown begins to be lifted.  Some will urge an austerity-flavoured package, on the ground that there is no ultimate escape from lower debt and deficits.

Others will want the opposite: a massive consolidation of the already massive statism of recent interventions.  We suspect that Boris Johnson will need to waive the usual norms, so unusual will be our predicament, and go for a Reagan-type programme of deregulation, infrastructure spending, borrowing and tax cuts.

But whatever happens later, that will be then and now is now.  The economy itself is on a ventilator and, until the patient recovers, the Chancellor’s main duty is to keep it switched on.

It’s tempting to conclude that since most of us helped to bail out the banks during the financial crisis, they should now help to bale some of us out during this pandemic.  For as others have noted, this looks like being a rare form of economic crisis: one in which the banks’ balance sheets are just fine, thank you.

None the less, the most practicable means of resolving this lending problem is by going not through the banks but round them, by ensuring that the taxpayer stands fully behind the loans, with all the risk of moral hazard that involves.  In normal times, this would be doollaly.  But these are not normal times.  Up is down.  Black is white.

108 comments for: The Government should stand behind loans to small businesses in full

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