Central banks and other bank supervising regulators have advised banks to seek longer term funding-gap finance in the hope too that lending can be placed on longer maturities. The stability of the cost-of-debt-financing is as important as its price level, especially when government wants industry to invest in equipment, infrastructure, and stock building, and do so somewhat ahead of expected higher consumer demand when revival in consumer credit and residential property values return. 
That is a strategy in trade deficit countries that have been biased to credit-boom or 'endogenous' growth like UK, USA and notable others such as Greece and Spain, and where a restructuring is required to shift the bias to industry, to tradable goods and services.In export-led economies like Germany and China that are reluctant to encourage domestic consumer demand in the hope that world trade will revive and they can return to export surpluses as the mainstay of economic growth, banks are being supported to lending predominantly to manufacturing industry. In PR China, such a strategy has been spectacularly force-fed by massive deposits of foreign currency reserve securities into the banks (96% of banking sector is state-owned) to both boost lending to over-borrowed industry and to provide capital reserve support.
The order to the banks was to lend to enterprises for capital investment, and while enterprise deposits is high loans to enterprises is far higher. Below I present my own data comparing USA and China's banks lending and deposits at end of 2009.
China, like Germany, is an extreme export-led economy. That is its global brand, and therefore it is politically obsessed with the appearance (if not the actuality) of high GDP growth regardless of obstacles and constraints such as lower world trade, repressed wage levels, and low consumer demand. Wage levels are a market that covers domestic enterprise as well as exporters, and therefore when wages paid in exporting firms could have risen they were held down by low domestic consumer demand. The economy is severely strained by this distortion to maintain external competitiveness in the crudest manner.
Most PR China GDP growth is accounted for by capital investment valued at cost without depreciation or market price, by whichever is higher. Thus GDP is inflated compared to how other countries calculate this in accordance with UN accounting standards. PR China's GDP is most likely one third less than claimed and possibly 40% smaller than claimed. That aside, we see here a central bank and government fully prepared to finance growth in bank lending, much of this additional credit going to state-owned or state-controlled enterprises, roughly half of all enterprises.In better balanced economies and in trade deficit countries and where economic sectors are less state-controlled, there is also a need to shift bank lending to gain faster-paced recovery through higher capital investment. But, one sign of growing nervousness in EU/EA Europe is fears of value of loan collateral.
Business cash flow dominates collateral thinking among German banks. In the UK it is property collateral. The UK has an output gap, but more importantly a long run industrial capital investment gap. In the UK, gross fixed capital investment at 15% of GDP is less than one third that of PR China as a share of GDP, and far more of it in property infrastructure and far less in capital investment in manufacturing and other industry (except petro-chemicals).To encourage business investment to anticipate demand requires longer assured cost of financing i.e. for base rates to remain stable for a lengthy period. In my view central banks would do well to agree to forego monthly base-rate reviews in favour of quarterly meetings.
The FT LEX column takes a disparaging view of central banks, beginning with the idea that heads should have rolled; "...for central bankers the worst financial crisis and recession in a generation has not dented job security. They once downplayed the dangers of asset price inflation and ignored or even cheered the build-up of financial speculation. Now they are trying to undo the damage."The FT believes ECB and Bank of England are over-generous in maintaining a 'loose' monetary stance. Was the ECB wrong to extend liquidity to Spanish banks? Spain is where a quarter of Euro Area unemployment is. ECB should do all that it can to help fill gaps in Spanish banks' liabilities.
When central banks cannot directly order where banks should lend it takes a generous shotgun approach to hope that enough credit will trickle to where the economy needs it most. The FT reports that "...predominant thinking within the central bank fraternity of major developed economies is plausible: neither the economy nor the banks are in good enough shape to cope with policy interest rates higher than near-zero. If anything, the temptation is to go in the other direction, towards providing more support for troubled banks and governments through quantitative easing."The banks and property sectors are in such weakness, but manufacturing industry's weaknesses are not bank debt. In the UK, for example, debt servicing by industrial enterprises is only 10% of net operating profit. They could afford to invest more if the banks would lend them more or encourage them to borrow more for capital investment.
The easy money stance may appear defensible in the abstract, but easy or new credit is not getting through to small firms or to the SME sectors generally, that are expected to be our best bet for employment growth and employ about 40% of the engaged workforce.
FT Lex says grandly, "Central bankers’ natural preference should be to protect savers, not to give money away and help out reckless bankers and governments."
This is a moralising view that lauds savers while forgetting that bank savers cannot exist without bank borrowers.
The moralising view implied is that borrowers should borrow less and save more. In the real world borrowers and savers are mostly different people and different firms; let's not forget that deposits are not assets but liabilities.
However it is that banks borrow funds, via customer deposits or by selling medium term note securities, they are attracting liabilities. They need to shift away from funding gap wholesale finance which in Credit Crunch years become hard to get, expensive, often impossible to roll-over, hence short-term, not sticky, and not yet dependable or economic from the borrowing banks' perspective. Banks hope that household and enterprise deposits, even inter-bank deposits, are stickier, but these can only grow if the economy grows, and, in the absence of powerful net external demand, growth has to continue to rely on domestic demand, on borrowers getting loans and productively spending them.
FT 'Lex'ologists' accuse central banks of "...a comprehensive intellectual failure... that central bank independence, inflation targeting and output gap monitoring would lead to endless years of smooth growth. It seemed to work, until the economic train ran right over a cliff." I don't recognise this as how central bankers thought.
Banking regulations like Basel II was centrally concerned about encouraging banks to take account of economic and credit cycles - no suggestion of an endlessly smooth road ahead - that's how young people thought, or junior and middle managers, who were paid not to think, least of all about the factors driving cost of loan insurance that suddenly reared up like a the creature from the black lagoon.
Our problem was surely that board room bankers did not read what central banks were reporting and were not trained to understand it anyway while their juniors were all too aware of the mortality of message-givers reporting to senior execs (no bonus for being a risk manager) desperately preferring the role of message-takers - it was far better work, better security and many times better paid to be the galley slave driver or drum-beater in banks than the lonely look-out in the crow's nest!
