Easing the way? Controversy over new measures to boost the economy

October 10th, 2011 | 1 comment Source: BAD News

Two significant new measures designed to boost the economy and improve lending to small firms have provoked criticism from both the business and financial sectors.

The first measure is a further round of quantitative easing (QE), in which the Treasury buys up financial assets from banks and other financial institutions in order to boost the amount of money circulating in the economy. The Bank of England injected £75 billion into the economy via QE last week, following an initial QE injection of £200 billion in 2009.

Also last week, the Chancellor George Osborne announced plans to introduce credit easing. The Chancellor explained that credit easing is designed to increase the flow of credit to small and medium-sized businesses, and will be achieved by the Bank of England buying up bundles of small business loans on behalf of the Treasury.

However, there has been criticism of the Bank’s decision to use QE for a second time arguing that it fails to address the fundamental problems with the economy, particularly the rising level of inflation.

David Smith, economics columnist for The Sunday Times, has warned that the strategy will have limited effect on the economy and will not increase bank lending. He says what the recovery really needs is a rise in consumer spending, which will not happen while incomes are still being squeezed by high inflation. “A sustained period of high inflation needs to be followed by a long period of below-target inflation to restore real incomes,” he argues.

The Federation of Small Businesses (FSB) has welcomed the plans for credit easing, although the Chancellor has been urged by business groups and economists to speed the decision on credit easing and introduce measures in the short term to help small firms.

However, the British Bankers’ Association (BBA) is arguing that credit easing will not increase borrowing among small firms. A spokesman for the BBA has claimed that the problem of reduced bank lending did not arise from “a lack of available credit from banks, but a growing lack of confidence in economic recovery,” leading to less demand from businesses themselves.

One Response to “Easing the way? Controversy over new measures to boost the economy”

  • I think the main problem with credit easing is that Government simply don’t understand the nature of the problem – or indeed the link between ‘struggling business’ and ‘bad debt’.

    I am all in favour of giving a helping hand on the basis that some of those struggling businesses will actually survive. However for any scheme to work it has to be understood that there will be significant write-offs.

    The EFG scheme ignored this concept entirely and therefore became unworkable for the banks – the concept of a State-owned Business Bank is frankly terrifying; the only positive outcome I can foresee is that it will create a few jobs.

    My suggestion remains that the Government work within the resources currently available and revisit the dreadful, contradictory EFG scheme and make that work. I have been kind enough to expand these views in various blog posts fundingportal.blogspot.co.uk

    Comment was posted on Thursday, October 13, 2011 3:19 pm

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