By MoneyMorning.com.au
The US Federal Reserve isn’t the only central bank to print money. The Bank of England has too. It followed the failed attempt to stimulate the UK economy by dropping interest rates to 0.5%.
So with neither plan working, what’s a central banker to do?
Adam Posen, a member of the Bank of England (BoE) Monetary Policy Committee (MPC – the body that sets official UK interest rates) has an idea.
He feels the UK government should set up two new lending institutions. One would lend money to small businesses…
The other would be ‘…an entity to bundle and securitise loans made to SME’s (Small and Medium Enterprises) – a “good version” of the US’s Fannie Mae and Freddie Mac,’ he said.
He says these ‘new’ banks would give businesses the chance to ‘dust off’ their old loan applications and approach new lenders. It’s no wonder the BoE is desperate. Look at the following chart:
It shows lending to businesses is shrinking.
That’s despite UK banks committing to a government program to lend £76 billion (AUD: $116.6 billion) to SMEs. But half way through the year the banks are set to fall short of the target.
But is a UK version of ‘Fannie Mae’ and ‘Freddie Mac’ (pet names for government sponsored bodies that underwrote the US housing bubble) the answer to the problem?
Probably not. As it stands, ‘Fannie & Freddie’ cost U.S. taxpayers USD$160 billion (AUD: $155.8 billion). And Barclay’s Capital Inc. calculates that if house prices in the U.S. dropped another 20%, it will take USD$500 billion to keep ‘Fannie & Freddie’ solvent.
The UK banking system has flown under the radar in recent months, thanks to the problems in Greece, Italy and now France. In a credit-fuelled banking system, banks need to keep making loans to stop the system from collapsing…
And it’s something that’s clearly not happening now in the UK. When the French banks have collapsed, the market will look for the next sickest banking system… the UK could be the market to watch.
Shae Smith
Editor, Money Morning
Related Articles
Short Sell This Economic Empire Today
Is The China Boom Rumour or Fact for Aussie Stocks?
Why I’m Flying the Flag for China
Learning Economics from a Pencil
From the Archives…
HarveyNormanomics in One Lesson
2011-09-09 – Kris Sayce
When Nine Gold Stocks Just isn’t Enough
2011-09-08 – Kris Sayce & Dr. Alex Cowie
Manipulation on a Grand Scale
2011-09-07 – Kris Sayce
Three Steps to Wealth: Leverage, Volatility and Risk
2011-09-06 – Kris Sayce
Why it’s Not Too Late to Avoid This Investing Mistake
2011-09-05 – Kris Sayce
For editorial enquiries and feedback, email moneymorning@moneymorning.com.au