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.