April 14, 2008 | posted by Michael Baxter in credit crunch |

During the weekend, Steven Crawshaw, Chairman of the Council of Mortgage Lenders (CML) made the headlines when he warned that net lending in 2008 could reach only half last year’s level unless additional funds become available.

His words all added to the tale of woe but, actually, the headlines were a tad misleading.   For Mr Crawhsaw added, “It doesn’t have to be that way.”

Speaking at the CML’s annual lunch he said, “I suggest there are several steps needed on the part of the Bank. It needs to realise that the underlying problem may not be the one it thinks it is. Compared to the actions of the Federal Reserve in the US, our central bank stands accused of having been cautious and slow.

“The Bank has diagnosed the overhang of assets as the disease. We see it as a symptom.

“It believes that institutions are hoarding liquidity because they do not trust other banks and so are reluctant to lend to each other. We think that lenders are hoarding liquidity because they’re concerned about whether they will be able to access future funding and are managing pipelines of business very cautiously. They’re worried less about the here and now and credit risk in the UK mortgage market, than the uncertainty about whether they’ll be able to get funds when they need to refinance their own maturing debt commitments and new mortgage offers they are seeking to make.

“If our diagnosis is right, then deeper and longer term repo facilities – extending beyond the 3-month facility to 12 months or perhaps even 24 months – would definitely begin to help to address lenders’ concerns.”

In short, the Bank of England needs to do more, a lot more.

In his speech, Mr Crawshaw said, “Sometimes, lenders are criticised for being too conservative and risk averse, unwilling to lend against perfectly good propositions. Other times we stand accused of being reckless, enticing poor credit risks into unsustainable borrowing. Some of you will have heard me say at our annual conference in December that I thought the first half of my year in office would be spent defending the industry against accusations of lending to the wrong people and the second half against accusations of not lending to enough people. I was of course completely wrong. It was actually during February that the industry was accused of doing both …..and simultaneously!”

The danger is partly one of over reaction. For years banks lent too much to individuals; the danger is they will now start to lend too little to business.  The backlash could create a new set of problems.

But, there is another challenge. Our saving is far too low and consumer borrowing too high.  If this imbalance was to be truly corrected, the economic effects will be nasty indeed.

The underlying problem has a cure that can only be painful.   But it is a cure that must be administered, without starving business of the finance it needs to innovate.