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The Tories launch Plan B: sub-prime loans, inflation and debt

October 4th, 2011 Posted in Uncategorized by

The Chancellor of the Exchequer announced his latest strategy for damaging rescuing the UK economy, on Monday, in the form of “Credit Easing”.

Credit Easing is the equally evil twin of Quantitative Easing. Where the former consists of the Bank of England printing money to buy government bonds, Credit Easing prints money to buy corporate bonds…

Now, readers may be forgiven for thinking that this all sounds very familiar. Like sub-prime mortgages, these sub-prime corporate loans will be diced and packaged… with the securitisations being divided and combined, we might face a corporate-loan repeat of the mortgage nightmare of five years ago.

Securitisation is the least of the problems with this plan, however…

To understand how this will lead to inflation, stagnation and a massive risk to the taxpayer, view the full article on the IEA website.

"Printing presses running; big business waiting with wheelbarrow; now to give my Conference speech."

3 Responses to “The Tories launch Plan B: sub-prime loans, inflation and debt”

  1. TJ Says:

    You skipped this paragraph from the IEA’s article, which I think is important in clarifying the IEA’s opinion:

    ‘This is a slight simplification. Technically nobody prints anything anymore, and it is unlikely that the money will be used purely to buy corporate bonds, if only because small and medium enterprises (SMEs) do not employ bonds to anything like the extent that larger companies do. While government loans to large businesses may be in the form of direct purchases of bonds, in the case of SMEs they are likely to be channelled through the banks, with the latter securitising the loans by bundling together (parts of) corporate loans and overdrafts and selling them on.’

    It is also relevant to point out that the problem is precisely that creditworthy companies, particularly SMEs, are finding it very difficult to access credit right now, because the banks have chosen to sit on the Quantitative Easing. This is probably to avoid the fate of Dexia, but it doesn’t help the SME much if the bank is solvent but not lending.

    The IEA does raise a very valid point about the risks of a secondary market emerging, though. No speculating on government-issued SME bonds, please.


  2. Tom Papworth Says:

    TJ,

    The above is just a short taster of the full article. It’s not “the IEA’s opinion” as they don’t really have one; it’s actually my opinion as I authored the article.

    The more crucial paragraph with respect to “creditworthy companies, particularly SMEs …finding it very difficult to access credit…”, is the one near the end:

    <i?Thirdly, there is the question of who gets to borrow the money. Governments, as we know, have a poor record when it comes to judging what industries are worth investing in. Credit easing…[is]…a subsidy in all but name. No central planning authority can gather enough information to know which investments are sound and which are not. This has two effects: in the short term, firms that are not credit worthy will be propped up, slowing or preventing the reallocation of the resources that they are employing to more productive ends; in the long run, the loans will be exposed as bad, resulting in losses.

    Not all the loans will be bad, of course, but many will – precisely those that the banks have already proven reluctant to lend to. If the government starts lending direclty, many of those loans will end up being written off, adding to the national debt while having propped-up zombie businesses.


  3. TJ Says:

    Quite, but without it I felt the story here was oversimplified. I didn’t want to rely on clickthrough alone.

    Regardless, the decision seems to be whether we want to risk losing money propping up businesses that might collapse anyway in five years time, or risk having those businesses, along with other perfectly sound ones, fall over now.

    I would argue that having them collapse now would feed back into the crisis of confidence, making banks even more reluctant to lend and entrenching our current problems. A liquidity trap situation, perhaps.

    Whereas giving them a few years grace would, we can only hope, place their potential bankruptcy against a backdrop of wider recovery in the coming years, making their impact on confidence less significant.