It’s like putting your foot on the accelerator but because the transmission mechanism isn’t working properly, the car wheels don’t respond.
Actually George, that might be because the car is on fire, and the wheels have blown off.
UK chancellor George Osborne on Monday, on the so-called “credit channel”, in simile form above, and credit easing (Please excuse. The short. Political speech. Sentences.):
We’ve got to get credit flowing in our economy.
Credit means investment. Investment means jobs.
We’re making sure that British banks are strong enough, holding enough capital to cover loans in an emergency.
We’ve expanded loan guarantees.
We’ve struck a deal with the big high street lenders to increase lending to small businesses by 15 per cent this year.
But all this may not be enough.
Of course the Bank of England have their own independent judgement to make on quantitative easing.
I’ve said many times before I will follow the procedures of my predecessor and give Treasury approval if they ask.
But there is more the Government itself can do to get credit flowing and encourage investment.
David Cameron and I have always said we would be fiscal conservatives and monetary activists.
Everyone knows Britain’s small firms are struggling to get credit and banks are weak.
So as part of my determination to get the economy moving I have set the Treasury to work on ways to inject money directly into parts of the economy that need it such as small businesses.
It’s known as credit easing.
It’s another form of monetary activism.
It’s another round of secondary market purchases.
To try and revive banks lending to SMEs in the first place.
Which is going to be very hard.
Because they want to keep hold of their pennies.
Because we are in the middle of a recession. The car is on fire.
As Robert Peston writes, the current — sketchy — plan would be to indeed purchase corporate debt in secondary markets. Even further on, when the government would be buying asset-backed securities (Backed how? Collateralised loan obligations? Tranches? Structured to appeal to institutional investors?) of SME loans from banks, it still appears to be secondary and focused on making a market for these securities.
Which is fine if that’s what you want! The last time the Bank of England eased the corporate bond market it set out to aid market-making, since spreads were blowing out in early 2009. Judging by where Tesco’s debt trades above gilts (just to take an example) the corporate bond market isn’t blowing out in the same way at the moment, although credit risk has risen a bit.
The problem with smaller SMEs however is that they’re the victims of bad debt overhang on bank balance sheets.
Again, fine. We’ve always understood credit easing as a way to transfer toxic assets from bank balance sheets. But that doesn’t mean banks will make new SME loans because of that, if they still face the same capital environment throughout. There are just so many technical questions outstanding here which might sink the entire enterprise, such as the structure of the SME securities or whether smaller SMEs would see issuing bonds as efficient.
In short this is why, if it’s heading into the business of propping SMEs, the government may as well set up a SME investment bank to make those new loans (and to drill down to overdrafts, credit lines, etc.) as well as using another agency to allow for the greater securitisation of SME assets. The kind of thing Adam Posen argued for recently. That clearly involves the government taking on even more credit risk from SME exposure than with Osborne’s “credit easing” plan however. It’s why banks aren’t demanding new SME exposure in the first place of course.
Related links:
How would credit easing work? - FT Westminster
When a government bond becomes a Giffen good – FT Alphaville