The truth about the UK banking and the credit crunch

Sometimes a single fact summarizes an economy.

In the case of the UK, that fact would be the following; for every one pound that commercial banks lend to the manufacturing firms, 13 pounds are lent to the shadow banking sector. Furthermore, that ratio has exploded during the Blair-Brown years. Back in 1997, the ratio was 5 to 1.

For UK manufacturing, the last decade has been one long credit crunch. In sterling terms, banks lend about as much today as they did back when New Labour was elected.

In contrast, the off-balance sheet shadow banking sector continues to suck up ever larger amounts of credit. As its appetite for credit has grown, the shadow banking sector has squeezed out housing and consumer credit finance.

This diversion of scarce credit has led to collapsing housing prices and declining personal consumption. In turn, this has pushed the remnants of UK manufacturing into possibly the fastest and most comprehensive contraction of output in almost a century.

However, the jokers running the show in Westminster have always favoured finance over manufacturing. The last ten years has been the final chapter in a sorry tale of industrial decline and a misplaced faith in banking services. Therefore, it is somewhat ironic that as the destruction of the UK's industrial base becomes complete, that banking should also collapse.