Credit easing is Osborne’s Plan B(oE)
As I told C4 News viewers a fortnight ago, the Treasury is working on Plan BoE, not Plan B, – a type of SME super-QE (that’s quantitative easing for small and medium enterprises). This morning the Chancellor announced he backed it in his conference speech in Manchester.
“To get the economy moving, I have set the Treasury to work on ways to inject money directly into the parts of the economy that need it, such as small business. It’s known as credit easing,” he said.
First thing: credit easing means easing the cost of credit in the economy, i.e. interest rates paid by small businesses and companies.
Second thing: in theory this type of plan does not require the Bank of England to engage in more QE. It could be pursued entirely by the Treasury, with Threadneedle Street acting as its agent.
The spinners in Manchester are suggesting it could see tens of billions of pounds of extra low interest credit. So in practice I think it does.
Third: credit (!) to the Liberal Democrats on this. Vince Cable has been an outrider for this idea, and his special adviser Giles Wilkes wrote this pamphlet for CentreForum in March 2010, at a time when he had never imagined a government post. And to Adam Posen, on the MPC who has been agitating for this.
Importantly, Number 11 aides argue the Treasury agrees with Sir Mervyn King, who has not used many of the credit easing tools already available to him. Sir Mervyn believes that these types of moves, which involve taxpayer risk, should be the decision of a democratically elected government, not the backdoor activities of the Bank of England.
In fact it was Mervyn King who pushed back against the Darling Treasury in trying credit easing, saying that the Treasury should bear credit risk..
So these policies will involve risk of loss to the public purse, a contingent liability and possible extra public spending. But not yet.
Here’s how I think it will work. There are four ways –
1. Auction guarantees for SME-backed loan securities – like the scheme for mortgage-backed securities in 2009, essentially to try to develop the market for SME backed securities.
2. Something like the US TALF (term asset-backed securities loan facility) – loaning money to companies who are buying SME loans or SME secuirities.
3. Or invest in those SME loan companies directly
4. Directly indemnify the Bank of England and ask them to purchase a specific type of assest: leave Bank experts to pick specific SME loans or corporate bonds or guarantees.
So it is in theory a fiscal operation, but one that can be monetised if the Bank of England increases QE. One of the reasons for Super SME QE, is that theres absolutely no point in lowering already record low gilt yields as a boost, when the economy is flatlining, even at these record lows.
This won’t be pursued at this week’s MPC meeting, but would dovetail quite nicely next month.
But there’s no guarantee it will work. Credit easing was tried and largely failed in the US. A scoundrel might point out that when Darling floated ideas like this, the then shadow chancellor suggested that it was the “last resort of a desperate government”.
Not just that, but it somewhat backs up the widespread scepticism about the much-hyped (but not by C4 News) Project Merlin accord between government and banks. Ironically the US adopted UK-style QE as its QE2. UK will now adopt US-style QE as its QE2.
And if the Bank doesn’t take the risk, then the Treasury will. Depending on the type of purchase, this might not lead to immediate increases in public spending/deficits. But it could in the future.
Further Reading
My front page essay from a year ago from Prospect suggesting credit easing: Precisely what Osborne has announced.
CentreForum Credit Easing pamphlet: Credit where it’s due.
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