Who is blocking more creative QE?
An interesting Gavyn Davis column in last week’s FT revisited the ongoing debate over whether the Bank of England should be taking additional action to support the economy through ‘unconventional’ forms of QE including central bank purchases of private assets or the establishment of a direct lending institution funded by the Bank (as Adam Posen has argued should be introduced). While the impression has long been maintained that the Government has faced an uphill struggle convincing a resistant governor of the need to do more, the Davis article hinted at an alternative scenario, claiming that (emphasis my own):
With the downside risks to the economy so prevalent, the governor now seems to have an open mind to some of these less conventional forms of QE, as long as the credit risk for these operations is taken by the Government, and not the BoE“
Contrary to previous accounts, this suggests that it may not be a conservative interpretation of monetary policy that’s holding us back, but a Conservative Chancellor who is ideologically opposed to any growth supporting measure that could lead to an increase in the Government’s liabilities.
But despite this reticence to lend directly, the case for increasing credit flows to SMEs has now been accepted by the Government. The Bank of England’s Funding for Lending programme (which is being supported by HMT) will mean that banks and building societies can borrow directly from the BoE, with borrowing rates coming down the more they lend. It takes over from the Government’s previous attempt, the National Loan Guarantee Scheme (credit easing), which provided government guarantees on unsecured borrowing by banks, allowing them to borrow at cheaper rates and then pass the benefits onto smaller businesses through cheaper loans.
Credit easing had some moderate success, but many were disappointed in the scale of what it achieved – ultimately banks didn’t participate as much as was hoped. And similar risks remain under Funding for Lending, particularly as discounted rates might not be passed directly onto businesses, and could instead help to boost banks’ profit margins.
The basic problem is that as long as banks remain the middle men, the outcomes of any BoE or Government backed scheme remain both highly uncertain and also contingent upon banks placing the economic recovery ahead of their own immediate priorities. But until the Government concede that they need to back direct lending to business – whether through agreeing to back new forms of QE or in the medium term via a state investment bank – a significant step change in access to credit may remain elusive.