"Hier liegt der Hund begraben"

In Britain, the politicians are putting pressure on the banks to start lending. The public pressure and the media are also adding to it. It has been going like that, on and off, for some months, well over a year. Yet the banks whose primary business is to generate income by lending money are not doing so. Why something that was banks "raison d'être" and "modus operandi" for hundreds of years until the outbreak of the current financial crisis in September 2008, became so problematic. Is it not bizarre?

The public perception of the banks is that they are nasty. That it is all down to greedy irresponsible bankers that act against the national interest. Whilst it looks like a reasonable assessment of the state of the banking, it does not explain the root cause. If the banks had had money they would have lent it: this is the business they know very well for centuries and it is very profitable.

The crux of the matter is that by creating a massive pyramid scheme the banks pumped out the massive amounts of cash from mainstream banking to shadow financial institutions, hedge funds, offshore, SIV, etc. The money multiplier (in a simplified way called the leverage) is far too big to allow for further meaningful lending. The money put by taxpayers rescued the system but it was not enough to fill the liquidity hole sufficiently enough so as to reduce money multiplier to manageable level. In fact the government does not know what the size of liquidity hole is. In fact, due to the nature of the OTC market and off balance sheet practices, it appears that it is impossible to assess it but strong indications are (e.g. figures by the Banks of International Settlements in basel) it is massive: globally hundreds of trillions or even quadrillions of dollars. Many times over the world's GDP. Any lending, even very conservative, increases money multiplier still further.

The banks are caught in a "damn if you do, damn if you don't" situation. If they start lending as politicians and the public expect, they will deteriorate still very fragile liquidity situation, with a high risk of another massive credit crunch. If they don't, the economy recovery is very seriously impeded which also has a very serious impact upon the financial markets liquidity. "Hier liegt der Hund begraben."

No politicians' appeals are going to change any of that. They are, in fact, quite populist and rather incompetent. Or maybe bankers are expected impossible, to create a pretext to get them by the throat and sort them out? Politicians becoming more clever than bankers? "Exitus acta probat." Banks do not lend because they cannot. The solution is a reduction of money multiplier: "Prime Minister, sort out this mess, please".