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 The implied threat is that if banks don't up lending to households and firms then the loans will be withdrawn.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.
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