By: Dr. Mike Campbell

It is the season of goodwill towards all men and I suppose that includes bankers. So perhaps one must be charitable when looking at the ECB’s end of year deal with banks since the intention is that a little of the economic Christmas magic should trickle down to the likes of you and me, eventually.

With the global financial crisis came the curse of loss of confidence. Having racked up huge piles of iffy debt, the banks became very jittery about lending – which after all is the core business of a bank – even amongst themselves. Money and its supply is what oils the wheels of commerce, so when supply becomes tight, recession looms, creating a self- perpetuating cycle since who, in their right mind, is going to lend money to businesses that may go broke? Bad debt, subprime mortgages in particular, was what caused the problem in the first place. Factor in the sovereign debt crisis and many banks must seem like recovering alcoholics who, whilst they may love the idea of granting a little loan know that were they to do so, it would be the first step on a very slippery slope.

However, unless the banks get back into the business of lending money and keeping the machines of commerce humming, we are all set for a long and gloomy future of austerity and minimal growth.

The ECB has stepped in to make money available to banks on a cheap three-year loan as a mechanism to boost liquidity within the EU banking sector and bolster confidence. The idea is that the banks will lend money to business – you can’t help wondering if the ECB couldn’t have cut out the middleman and made cash available to business directly, but that is economic heresy!

The ECB planned to offer €450 billion in three-year loans to Europe’s banks at 1%; in the event, it lent €489 billion to some 500 banks. The hope is that they will invest in government bonds and push down the cost of borrowing for nations such as Spain and Italy which have to pay between 6 and 7% currently.