Folk are choosing to pay off their mortgages for the same reason they are holding off spending. They see darker days ahead and stagnating wages now, and are using the opportunity to pay off their debts. It is a similar story with banks. Having amassed vast debts before the bust, they are reducing their exposure to debt now. Hence the decline in lending. Lending to non-financial companies has fallen nearly 5% on last year; it fell nearly 5% the year before that.
For the British government this is maddening. People are still heaping up savings; banks still don’t want to lend more to businesses. We still hear that giant gurgling noise as demand drains away. All ministers’ plans—to goad banks to lend more, to reinflate the economy, to boost confidence—have all failed and failed utterly. Hence their desperation. What to do? Nationalise RBS? Force lending? Try something more radical?
I am reminded of what a former chancellor, Denis Healey, said about pay policies in that other bleak period in British economic history, the 1970s. Replace his first four words with “nationalise RBS” and you hear the voice of desperate Cabinet ministers.
Adopting a pay policy is rather like jumping out of a second floor window: no one in his senses would do it unless the stairs were on fire.