Friday, Jan 01, 2010
Extend and pretend
The Times: Money printing scheme is working, Bank of England says
Lending to households and businesses continued to pick up in the final three months of last year and is expected to rise further in the coming months, the Bank of England said yesterday, boosting hopes that its scheme of quantitative easing is working.
Posted by devo @ 11:58 AM (702 views) Add Comment
3 Comments
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1. hpwatcher said...
Yes, it's working. Working to keep interest rates right down!
2. mark wadsworth said...
Glossing over the point that interest rates are artificially low, I have to come back to the basic rule that credit-worthy borrowers create loans, reserves and deposits, not vice versa. So if they want "lending" (i.e. "borrowing") to increase, all they have to do is help people and businesses become more creditworthy, by, for example, cutting taxes and regulations.
3. icarus said...
Borrowing will increase only if debts are written down or re-structured. Until then there'll be a dearth creditworthy, borrowers with good business plans or assets that are likely to increase in value. The authorities had a choice between propping up banks and boosting asset prices and bank reserves on the one hand and showering that money on companies and consumers on the other. They chose to support bank reserves on the false premise that reserves create loans "if we don't support prices of property, shares etc. banks will not have the reserves necessary to make real-economy loans". As MW says, it's creditworthy borrowers putting the money into the real economy, as distinct from speculation on bubbles, that gets the economy moving again.
(When I say 'false premise' that doesn't necessarily mean that the authorities got the theory wrong - governments' ties to the banks played a part too.)
Extend and pretend. Delay and pray. Similar story with IMF loans to countries that would otherwise default - the loans help to keep loan repayments current so banks don't have to write them down and can pretend the loan is an asset worth 100 cents on the dollar.