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Friday, 7 October 2011

Quantitative Easing into Credit Easing

The Governor of the Bank of England was yesterday apocalyptic in his description of the present risk of a massive world financial crisis, when he announced another wave of money-creation that is euphemistically called Quantitative Easing
If this money simply goes to bolster wholesale banks' balance sheets - as the previous tranches did - this will do nothing for the 'real economy'. Only if the money is handed out as extended and increased funding of 'real' businesses can it help to stimulate demand and supply in the economic system that living people inhabit.

But there is a real problem here. Even if the Bank and the Treasury demand that some of the money is made available to businesses, they will hand it for allocation to the old lags in the retail banks who have been so cautious and cynical in lending to businesses in recent years. It is commonplace to hear from businesspeople that the only firms that can get money are those who don't need it. Business owners who want funding for small, often start-up businesses, have to offer their own homes as security, making the funding effectively a personal loan. In really hard times [such as the Governor expects to get worse] the risk for an entrepreneur of placing their house as well as their income into dependency on their business seems too great for many people to take. It is precisely these people and their ideas that should be funded: they are a large portion of the potential that exists as latent force in the economy that needs to be exploited.

Whoever hands out new money to businesses should be prepared to risk funding failures to an extent that bankers cannot comprehend. The greatest need is for an increase in activity and spending - and of productive potential - as soon as possible. Most businesses grow slowly; but they can be empowered to start spending quickly. There is no sure way of picking medium-term winners. The Bank and the government must accept that a significant proportion of properly-allocated easier credit will never be repaid. New methods are needed for getting it into the right hands. The Open Risk Exchange is one such concept: there should be many others: so where are they?

While I wrote this I paused to listen to an interview on the TODAY programme of the Chancellor. He spoke in obvious oblivion to the real current situation. He still argues that the multiply failed banks are the only agencies that could extend additional credit: oh dear!

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