The Bank of England announced the results of Project Merlin on Monday. As you may recall, this was PM Cameron and Chancellor Osborne’s scheme, introduced in 2010, to increase lending (particularly to small businesses) after corporate lending took a hit in and after the 2008 credit crisis.
Project Merlin had a healthy, sensible goal—help businesses finance expansion and hiring, theoretically boosting GDP growth and employment over time. The government sought to accomplish this through lending targets. The UK’s largest banks signed a pledge to lend £190 billion in 2011, with £76 billion going to small businesses. The results? Banks exceeded the total lending quota by nearly £25 billion but fell short of the small-to-medium business goal by £1.1 billion.
Some are saying the small-business lending shortfall rendered Project Merlin an abject failure, but we’re inclined to disagree—it’s a very small miss, and the overall lending increase is a much bigger positive. Lending more to larger outfits might not have been the goal, but despite governments’ best intentions and efforts to foster certain economic activity, sometimes markets still behave otherwise.
Why’d that happen in this case? Remember, there are two sides to every loan: lender and borrower. Banks made credit available—there was sufficient supply. Small-business demand is what fell a bit short. Neither banks nor the government can force firms to take out loans; they’ll borrow if it makes sense in light of interest rates and borrowing terms. Otherwise, they’ll probably delay financing or find alternative means. And that’s likely what was at work over the last year: A few less small firms than hoped found conditions favorable, while more large companies found the lending terms perfectly palatable. Sometimes, that’s just how capitalism works.
