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The government is going to save the economy, film at eleven.

 Or rather, the government had decided there is a problem in that small businesses are struggling to gain access to capital.  Certainly the people I talk to seem to confirm this.  Therefore something must be done.  This is something.


We must therefore, do it.


Yep, dear old Mervyn and George have decided to throw more cheap money at the banks in the hope that gets ‘em lending again and before you know it, everything will be tickety-boo.    


Only it won’t.  Just as the ill-fated project Project Merlin failed (centrally set targets not proving effective, who knew?), this to will no doubt be hailed a success, but in reality it is conceptually flawed from the very start.  Here’s why.


First, there is no confirmation where all this extra ‘liquidity’ will come from.  Either the bank/government will issue more bonds thereby pushing up our national debt still higher, or the magic money tree of QE will be visited again.  The traditional idea of banking whereby people defer consumption (in the form of savings) allowing capital to be allocated to investment rather than consumption seems to have been thrown away.  Of course, quite why anyone would save money in the bank at the moment when RPI is officially 3.5% (but probably in reality it’s a bit higher) and savings rates are barely in positive territory is unclear.


So straight away, there is the very clear chance of a misallocation of resources leading to the next boom/bust cycle.  Von Mises explained this one hundred years ago. 


Then the bank is apparent insisting that the retail and high street banks themselves bear the risk of all this lending, not the taxpayer.  This is doubly stupid.  Whilst it is reasonable in principle to ask people to bear the risks of their business decisions, the tax payer IS on the hook for this because if the loans go bad it may well impact on the liquidity or even solvency of some of the weaker banks, and they won’t be allowed to go bust after all the bailouts so in effect we are back to moral hazard again. 


Finally, along with the new liquidity ratios, it seems not to have occurred to anyone that whilst the government is hoovering up about £12B a month of credit, it is simply crowding out the small business sector.  If you were a banker, would you lend to a small company or a large government with coercive powers to extract money from anyone at will?   


What George should do is announce no more QE ever, sack the MPC and let the market decide what rates should be and slice about £12B a month off the national budget, (thus no more borrowing) thereby freeing up the banks to lend to wealth producing commerce again.  And no, this does not “take money out” of the economy, it simply allows it back into the productive sector of the UK.


Sadly there is no chance of this and the cycle of recession, dopey policy announcement, more recession and more bailout seems doomed to continue.  But it can’t continue for ever; the end is coming for fiat cash and the debt-financed government and sooner than our masters realise. 


  1. NickM says:

    “Of course, quite why anyone would save money in the bank at the moment when RPI is officially 3.5% (but probably in reality it’s a bit higher) and savings rates are barely in positive territory is unclear.”

    And that is the ultimate nub of the issue. Call me Mr Naive but aren’t banks supposed to loan monies that others have deposited. The depositors have a safe place for their money and make modest interest, the bank skims to make a profit and someone with a bright idea who needs a few quid at a reasonable interest rate can obtain the capital they need (subject to the bank assessing the bet, natch*) some of the profits from which of course go back to the bank for it’s services and as profit for shareholders and of course as interest to those who deposit money with the bank.

    I mean that is how it is supposed to work? Or am I being a bit thick? I mean I guess I know little of “financial instruments” but they mainly seem to be playing Sam Barber’s Adagio for strings…

    *And sometimes long-shots are worth it. But have to be leavened with a lot of bread and butter for that bit of caviar that might be a pair of scruffy hippies called Steve with an insane idea… 99/100 it’s gonna crash and burn but when it plays, it plays… So play the tables how you will (and none of us know the future) but if you come round my house and play with “imagination money” you will be firmly but politely be asked to leave.

  2. Paul Marks says:

    The best comment about the government latest antics (all of a piece with their previous antics of course) would be a stream of obsenities. But I can not be bothered to type them.

    As for Nick’s question.

    No the idea that banks should lend out real savings (rather than credit money expansion – created by their own book keeping tricks plus Central Bank interventionism) is considered hopelessly “reactionary”.

    Indeed “mainstream” economists consider credit expansion to BE savings – “every bit as real” as any other form of savings.

    No one need sacrifice consumption in order for there to be money available to borrow for investment.

    Loans can fund themselves – via credit expansion.

    Sort of like a perpetual motion machine – accept it speeds up.

    You are a natural scientist Nick.

    If real what woul da perpetual motion machine that speeded up do to the universe?

  3. John says:

    Banks only lending money they had on deposit ?
    What weird world do you live in ?
    Banks have never lent only money they actually had, they’ve always lent money they had not, and lots of it.
    That is the major cause of our present problems.
    To much money, not enough asset.
    In their “real” world the interest from their lending is an asset….as is, for instance, the property bought with the money they lent (even though they never lent any money).
    Now, having gone through the hundreds of billions they were given to lend, and kept (and claimed tax relief on their “losses”), they are to be given more to lend to less…..after all, a successful business has no need to borrow. An unsuccessful business has a need to borrow, but little ability to repay. A household in todays financial and political climate is looking to unmaximise its cards and end its overdraft……then along comes this government to wave cheap money in peoples faces “hey guys…keep on spending….loadsa money”
    (eventually they will realise that the government is lending them their own money and charging interest……which is ok, after all….THE BANKS HAVE BEEN DOING THE SAME THING FOR YEARS)
    scheme anyone ?

  4. Lynne says:

    It is my understanding that banks operate on debt, the bigger the better. Until the debt gets so big we are forced have to bail the bastards out.

  5. JohnM says:

    Which has not altered the size of the original debt.
    The “bail-out” was to improve their “liquidity” (give them something to lend) because the “inter bank lending” had dried up (everyone realised at the same time that they had nothing to lend)
    In the real world it altered nothing, the amount they “lent” over the years has far exceeded the amount that is deposited that the government would have to “lend” them several trillions to make an appreciable dent in their rather dramatically over-leveraged accounts.
    As long as nobody asked them how much they had lent, and how much they had deposited, things were just rosy…..
    Now; spot the elephant:

  6. Paul Marks says:

    What should be remembered is that banks (and other such) were encouraged (every steop of the way) by governments.

    Sure bankers would create credit “money” bubbles on their own – but nothing like the SIZE that has been created.

    And governments have learned NOTHING – they are still encouraging “monetary stimulus”.

    Mr David Cameron (and, I believe, Gideon Osbourne) both accepted the “mainstream” *(i.e. crackbrained) education they got at university.

    Sanity is not going to come from these people.

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