Thursday, 5 March 2009

Q&E – but where are the slumdog millionaires?

I am not a professional economist. And my early banking career was very short-lived. Does this explain my lack of confidence in today's Bank of England's decision to cut interest rates by another half percent and ALSO announce a programme of quantitative easing (QE)?

What is the Bank / government trying to achieve? Obviously, it is trying to re-stimulate lending by our banks in the hope that this will kick-start economic activity.

But pardon me for making this observation. While there may be many businesses being harshly treated by their banks (by restricting reasonable access to cash flow), there are many more with turnover that has dramatically declined who can't reasonably expect banks to provide credit on previous business terms, if at all. It's not reasonable for banks to substitute lost turnover with loans when there's no expectation of an end to the current depression.

Businesses do not exist in a world of their own, able to expand and flourish as long as they can borrow money. Businesses need customers, who are both able and willing to spend. For the foreseeable future, the public will not be entertaining any spending sprees. They face unemployment, crashing housing assets and their government (without formal request) has purloined several trillion pounds of their future earnings, which at some future date must surely be paid up.

Mervyn King probably does get this. Last month, heralding future QE, he said, "the balance of risks to the path for GDP is very much to the downside, reflecting in large part uncertainty about when lending and confidence will recover".

In other words, even if introducing quantitative easing does reduce long-term borrowing rates, restoring economic confidence may be a separate issue altogether.

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