Today the Bank of England started providing cheap loans to banks. This is effectively the same tactic as increasing the money supply, but deals with a problem in the system.
With Quantitative Easing the money supply rises and, in theory, asset prices rise and market interest rates fall. This should lead to more investment and so rising AD and output.
But the problem QE encountered was that banks were reluctant to lend the extra money that would make this process work. This was known before the process began, but it was hoped enough money would get through to make a difference.
Banks are, quite rightly, concerned with building up their balance sheets so that a future financial crisis will not lead to their collapse. As the Euro crisis and double dip recession show there are more than a few reasons to be cautious. So this scheme encourages banks to lend.
The scheme overcomes the QE weakness by lending to banks at very low interest rates on the, fairly weak, condition that their lending will be monitored. The implied threat is that if banks don't up lending to households and firms then the loans will be withdrawn.
The signs are that market rates for borrowers have fallen already and so that is the first objective achieved. Next will be getting firms and households to actually borrow. So far firms have claimed they can't get funds, but we will now see if they are really confident enough to borrow.
Tuesday 31 July 2012
Wednesday 25 July 2012
Oh dear, oh dear, oh dear
The raw figures were that GDP fell by 0.7%. There are factors to be taken into account that mean the fall is as not as bad as it seems, but once they are accounted for GDP would still have fallen. This 'second recession' means that the UK is far from a recovery that will provide the income and jobs people need.
It is an odd type of recession however. It's a recession that is creating jobs, 180,000 in the last three months. That is not typical, recessions should see fewer jobs.
So what is the cause of the problem?
* The main problem is the world economic situation. Markets are weak and so sales are down. The continuing Euro saga means that confidence is low in financial markets and with the overhang from the 2007/8 global financial crisis banks are not lending.
* The EU is the UK's largest export market and recession there means that they are buying less from us. This shows how interdependent economies are.
* Consumer confidence is very low which means consumers are saving (about 8% of income at present, up from 1 to 2% during the period before 2008).
* The governments of the world are very concerned about the level of debt they hold and are making efforts to reduce it. This means higher taxation and lower government spending (and jobs) and so in the short term this helps to contract the economy.
Some people argue for greater government short-term stimulus to rectify the current problems. This would mean stopping the deficit reduction program (or at least delaying it). It also means government investment in infrastructure and probably tax cuts.
Most people completely overestimate the ability of governments to influence economic activity. Governments are actually pretty powerless even when they act together, but when they are seen to be acting this often raises consumer and business confidence. That seems to be the key now, not actually what is done, but being seen doing more.
Of course the weakness of the financial system will remain and it is, frankly, a house of cards which could collapse at any moment. But for once the illusion of Keynesian style stimulus packages might actually be what we need and its about time these cheap conjuring tricks were given top billing.
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