Duncan’s Economic Blog

Credit Easing – Five Questions

Posted in Uncategorized by duncanseconomicblog on October 4, 2011

The big announcement in Osbone’s speech from a macroeconomic point of view was the talk of ‘credit easing’ – Treasury action to ease loan availability to small and medium sized businesses.

Implicitly the Chancellor has therefore acknowledged that the ‘Project Merlin’ deal with the big banks to ensure credit gets to SMEs is failing. This is a good start but the devil will of course be in the details. Those details remain sketchy but is seems likely that credit easing will take the form of some sort of securitisation process whereby banks (or other investors) lending to SMEs can bundle those small loans into larger bonds and sell them on either to the Treasury, some new government arms length agency or maybe to the Bank of England. In effect this would make the funding of new SME loans much easier – and possibly cheaper.

This all raises a few questions. First, and crucially, how quickly could such an operation be gotten up and running? I suspect it could easily take well over a year. This is is not a quick fix to poor credit availability for SMEs.

Second how large will the programme actually be? This is the kind of crucial detail we really need to be able to assess the impact of such a move.

Third – what does this announcement, from the Chancellor, say about diverging views between HMT and the Bank? MPC member Adam Posen floated a similar (but more comprehensive and BOE funded) scheme a few weeks ago, has that been rejected by the Bank?

Fourth – what will the OBR make of this? Assuming the Treasury can pull together a concrete proposal soon it should be included in the autumn forecast numbers released at the end of November.

Finally – why an indirect scheme like this rather than some form of state backed investment bank focussed on SMEs? Surely that would be a more direct way of dealing with the problem of SME credit access.

13 Responses

Subscribe to comments with RSS.

  1. Tim Worstall said, on October 4, 2011 at 11:00 am

    “First, and crucially, how quickly could such an operation be gotten up and running? I suspect it could easily take well over a year. This is is not a quick fix to poor credit availability for SMEs.”

    “Finally – why an indirect scheme like this rather than some form of state backed investment bank focussed on SMEs? Surely that would be a more direct way of dealing with the problem of SME credit access.”

    I think the first answers the second. Slapping a govt guarantee (ie, Fannie, Freddie lookalike) on loans coming out of a pre-existing network is likely to take less time to set up than creating an entirely new network.

  2. JakeS said, on October 4, 2011 at 11:16 am

    You missed the sixth, and most important, question: How is making it easier to obtain credit going to solve the income distribution problem that’s at the bottom of this crisis?

    The answer, of course, is that it’s not. Only fiscal policy can do that.

    – Jake

  3. Gareth said, on October 4, 2011 at 11:22 am

    Mervyn King was pretty clear about “credit allocation” being left to fiscal policy, which seemed like a smackdown to Posen’s idea of QEasing this way.

    They could reopen the Special Liquidity Scheme to buy “securitised” SME loan books like you say. It’s not much different to what they did with the SLS before but with different assets targeted. Buying existing loans off the banks, or offering to do so on a large scale would be the only way I can see to get this stuff happening fast; much faster than setting up a “State Investment Bank” certainly.

    But it would be full of moral hazard and would amount to (another) backdoor subsidy to the banking sector, who could offload risk to the taxpayer.

    A BOE commitment to maintain strong growth of nominal spending with as much QE as proves necessary is really all we need at this point, not politicians trying to micro-manage the economy.

    • JakeS said, on October 4, 2011 at 11:30 am

      The BoE has no instrument by which it can stimulate spending. It can destroy spending by raising rates, and reduce its destruction of spending by lowering them. But it cannot create spending out of whole cloth. Only fiscal policy can do that.

      QE is just a gussied-up discount window operation, and as such is of no operational consequence – it does not matter one whit whether financial sector securities are in Gilts or in overnight reserves at the BoE. The belief that it does is based on a combination of the quantity fallacy of money and a failure to understand what qualifies as money under nonconvertible currency.

      – Jake

      • Gareth said, on October 4, 2011 at 1:57 pm

        Ah, the Chartalists are here… what fun. What do you guys think about the Swiss National Bank action? Is their forex intervention going to make no difference to domestic prices/spending? Or does it not count as “monetary policy” in your weird nomenclature?

        • JakeS said, on October 4, 2011 at 2:24 pm

          If you want to call it monetary policy, be my guest. Certainly a lot of CHF is being minted. But it does not in any way prejudice the Swiss central bank’s ability to conduct interest rate policy (i.e. fix the CHF risk-free yield curve), which is what most people understand by monetary policy.

          It will certainly make a difference to domestic prices and output, in the sense that it will prevent imported deflation and a drop in domestic output (due to loss of competitiveness) from an improvement in the terms of trade.

          If the money currently flowing into CHF were flowing into CHF because of some newfound appreciation for Swiss engineering, preventing the currency from appreciating would increase output and/or inflation above the status quo ante, due to increased net exports. But the money flowing into CHF is hot money looking for a safe haven to sit out the Eurozone crisis. It’s not going to be spent in the Swiss economy, it’s going straight into a mattress somewhere, where it will hide until people think the €-Mark is safe again (or until the €-Mark breaks up and people can buy D-Mark instead).

          If the SNB had not capped appreciation, the exit of this hot money when the CHF stops being a safe haven would almost certainly have triggered a run on the currency, as the SNB would struggle to accommodate people wishing to convert CHF into hard currency. The SNB’s intervention avoided an all too familiar pattern where hot money first moves in, causing a temporary appreciation which destroys domestic industry due to loss of competitiveness and deflation increasing its debt load; and then rushes out again, causing imported inflation and loss of access to imports (and inviting a run on the currency).

          – Jake

          • Gareth said, on October 4, 2011 at 4:18 pm

            Right, so basically the argument is “I redefine all monetary policy interventions as “fiscal policy” if they don’t involve changing interest rates, and therefore, monetary policy is ineffective at the ZLB!!!”. Great, thanks for that, way to make a point.

            • JakeS said, on October 4, 2011 at 4:37 pm

              Um, where did I say the SNB is doing fiscal policy? It isn’t. It’s doing currency policy, which I would define as a branch of monetary policy. It’s just not how Monetarist textbooks define monetary policy, since most Monetarist textbooks assume away most of the results of currency policy by pretending the existence of a NAIRU. (They also simply omit unmentioned the third major component of monetary policy, namely ensuring regulatory compliance in the banking system.)

              But purely monetary operations – currency policy, interest rate policy and banking regulation cannot create demand – only shift it in time (banking regulation), reduce it to a greater or lesser extent (interest rate policy) or shift it between you and your trading partners (currency policy). Only fiscal policy can create aggregate demand, because fiscal policy is the only policy that injects new equity into the private sector, and private sector spending is equity-constrained.

              – Jake

              • Gareth said, on October 5, 2011 at 12:31 pm

                If aggregate demand is determined only by the level of fiscal spending at the ZLB, would you expect there to be a correlation between nominal GDP and nominal govt cash outlays since the BOE hit the ZLB? Or perhaps NGDP and the public sector net cash requirement, to take account of taxation changes? I haven’t graphed these, but it would be easy to do.

                Fiscal outlays increased massively in 2008, yet demand crashed; they increased modestly in 2009, yet demand recovered strongly. The recovery in 2009 was correlated very strongly with QE; to assume that was a co-incidence seems bizarre.

                • JakeS said, on October 5, 2011 at 2:47 pm

                  If aggregate demand is determined only by the level of fiscal spending at the ZLB, would you expect there to be a correlation between nominal GDP and nominal govt cash outlays since the BOE hit the ZLB?

                  It isn’t, so I don’t.

                  Aggregate demand is determined by exogenous demand: Net government spending plus net exports plus the change in gross private debt.

                  The rate of change of gross private debt obviously depends on the volume of gross private debt, as well as its distribution. At the zero bound, government spending sufficient to stabilise nominal GDP in year 1 in the face of declining gross private debt will be sufficient to increase GDP in year 2, because gross private debt will be less, and thus ceteris paribus the decline will be less.

                  It is much easier to believe that (a) the British version of QE was actually a cash-for-trash programme, that is to say a fiscal transfer pretending to be monetary policy and/or (b) just happened to coincide with the end of the first round of private sector deleveraging and/or improvements in the foreign balance, than it is to believe that the BoE renaming the discount window as quantitative easing would have any material influence on lending.

                  The financial sector has access to unlimited liquidity at the prevailing interest rate. Therefore we may state with great confidence that pure liquidity operations like QE are of no consequence to financial sector behaviour, except insofar as the financial sector takes its behavioral cues from the Wall Street Journal rather than a clear-headed assessment of reality (which is, of course entirely possible).

                  – Jake

  4. Ralph Musgrave said, on October 4, 2011 at 5:25 pm

    Where is the actual EVIDENCE that poor access to credit is a major problem facing businesses? This UK based survey of businesses put the latter problem second and equal to two other problems (“competition” and “cost of production”). Way ahead, and first was “finding customers” – i.e. lack of demand.

    http://www.icffr.org/Research/Comments/April-2011/ECB-Survey-on-SMEs-Shows-Lack-of-Customers-a-Bigge.aspx

    Moreover, banks lend when they see a firm with a full and profitable order book. I.e. increase demand, and the alleged lending problem takes care of itself.

    As for the US (for what that’s worth) surveys indicate that lack of access to credit is a total irrelevance. See:

    1. http://www.nfib.com/Portals/0/PDF/sbet/sbet201009.pdf (Page 18)
    2. http://blumshapiro.com/media/uploads/files/BlumShapiro%20CBIA%20Survey.pdf (Page 4)
    3. http://www.pwc.com/us/en/industrial-manufacturing/barometer-manufacturing (Page 26)

  5. jomiku said, on October 4, 2011 at 5:32 pm

    I don’t see this stimulating lending much. It may be a way of dumping bad credit on the government. That would help UK banks build capital but it’s not an incentive to lend. Some reasons: 1) they still need to underwrite and those standards now are ridiculously tight, 2) the government will assuredly have some sort of vetting process for loans so tight standards won’t be loosened, 3) the approval process may be ridiculous (can they run this without pre-approving what loans are accepted?), 4) the fees allowed to lenders can’t be particularly large, 5) as noted in 3, if they accept loans without a pre-approval process, the government will be writing a blank check and that will come back to bite politically, both for the government and the lenders.

    Looks like a show. Here’s the essential economic argument: why would a lender make a loan that might not be picked up by the government unless it is already a loan the lender would make? Since they aren’t lending, they would continue to not lend.

  6. Keith said, on October 7, 2011 at 7:43 pm

    This is a gimmick for party conference time throwing a bone to the dog. Why not subsidise every ones credit card? Then we can buy stuff at Treasury expense. Or just give free money to people? Who generally shows the most wisdom about financial management; too Big to fail banks or private citizens?


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: