The party says the Government’s bail out is not working as banks are hoarding liquidity while businesses that need credit are going bankrupt.
The Liberal Democrats quote figures showing that over the last three months total secured lending by banks to individuals and housing associations fell by £22.6bn – the largest three month fall since the Bank of England started collecting data on this in 1993.
The party says the Government needs to have a “plan B” in case its current bail-out does not start to have the desired effect.
It suggests a Government buy-out of toxic assets from banks’ balance-sheets to create a “bad bank” as one solution.
The Liberal Democrats also suggest the Government could set up a temporary system of direct lending prioritising small to medium sized businesses and individuals.
This could be done by setting up a new Government-backed bank, extending the powers of the Post Office to money lending, via local councils or through the nationalised banks.