Saturday, February 7, 2009

The truth about the UK banking and the credit crunch

Sometimes a single fact summarizes an economy.

In the case of the UK, that fact would be the following; for every one pound that commercial banks lend to the manufacturing firms, 13 pounds are lent to the shadow banking sector. Furthermore, that ratio has exploded during the Blair-Brown years. Back in 1997, the ratio was 5 to 1.

For UK manufacturing, the last decade has been one long credit crunch. In sterling terms, banks lend about as much today as they did back when New Labour was elected.

In contrast, the off-balance sheet shadow banking sector continues to suck up ever larger amounts of credit. As its appetite for credit has grown, the shadow banking sector has squeezed out housing and consumer credit finance.

This diversion of scarce credit has led to collapsing housing prices and declining personal consumption. In turn, this has pushed the remnants of UK manufacturing into possibly the fastest and most comprehensive contraction of output in almost a century.

However, the jokers running the show in Westminster have always favoured finance over manufacturing. The last ten years has been the final chapter in a sorry tale of industrial decline and a misplaced faith in banking services. Therefore, it is somewhat ironic that as the destruction of the UK's industrial base becomes complete, that banking should also collapse.


  1. I wonder at what point it was that Brown and the BoE realised it was all starting to crash down on their heads. Surely to goodness it was pre-Northern Rock.. nobody could be that stupid. Could they?

    But they did nothing.

  2. I tried posting this at HPC but was told it was a duplicate link, I hope their webmaster approves it soon.

    A picture says a thousand words ...

  3. Just WHEN are these people going to be locked up for what they are doing to this country?!

  4. Manufacturing is dirty, smelly, dangerous and produces plenty of wastes and (in these green times) CO2. It also is predominantly a male oriented environment. Not many women clamouring to be engineers, lathe operatives or welders.

    Finance on the other hand takes place in nice clean, air conditioned offices, produces no wastes, and provides lots of office based jobs that appeal to both sexes.

    Its a no-brainer really for this govt. Put extra regulations on manufacturing of the 'elf n safety' and environmental type, and promote finance as the engine room of the economy. Lots of jobs for the girls, reduced carbon emissions (let the Chinese be responsible for them), extra tax revenue from those oh so profitable financial whizz kids, wonderful. We can all work in nice offices, drive our Minis, take 2-3 holidays per year and have expensive houses filled with electronic goodies. Why doesn't every other nation do the same? Its all so easy!

  5. Whilst the graph looks nice I am not convinced it shows a true picture. There's no reason to suspect loans would generally be required for a manufacturing company if the cash flow is good. Also you fail to show deposits from financial corporations which currently stand at 686 billion. So the graph is not as scary as it looks in my opinion.

    How about a graph that shows the profit being made by manufacturing Vs the profit being made by financial institutions? That would be more useful.

  6. A graph turning upwards on this blog at last ! That's good, no ???

    Industry. Well what defines it is a moot point.

    The last I heard was that we have a sex 'industry'. Seriously. You hear it called such on the Jeremy Kyle show and such like. "I work in da sex industree."

    Trade unions, apprenticeships, closed shops, protective clothing ... the lot !

    The smell of oil and burning rubber. Phew !

  7. Not quite right I'm afraid Alice.

    You said: "As its appetite for credit has grown, the shadow banking sector has squeezed out housing and consumer credit finance."

    Actually, 'other finance corporations' includes the likes of SIV's. So the shadow banking sector is integrally linked with the explosive growth in the provision of housing finance.

    Their even more explosive growth over the last year has been to replace overseas wholesale funds that are no longer available.

    In fact, according to the BoE lending to ofc's has risen 45% over the last year whilst that to private non financial companies (pnfc'c) has actually fallen in the crunch.

    A scandal in itself.

    Love hotairmail

  8. O/T: Is there some automated program multiplying links to The Financial Ninja and A Scooter in Turkey?

  9. I don't think that allowing more credit for financial sector automatically assumes having less money for manufacturing. Since it used to be very easy to obtain a loan, the manufactures would have got more credit, if they wanted so. All I read from the graph presented is that the manufactures had enough of cash-flow and simply didn't need to borrow more.
    Take care,