From the front page of City AM:
Terry Smith, chief executive of Tullett Prebon, said: "So-called ‘credit easing’ is totally misconceived. If you thought the banks were bad at lending, wait until you see what happens when the government try it."
Yup, nail, head. But what's this in the very next paragraph..?
Currently, the market for commercial paper issued by Britain’s smaller firms is virtually non-existent (1) and the cost of borrowing is prohibitively high. (2) The government claims that by buying bonds it will push down yields (3) and encourage private investors to follow suit, (4) thus growing the entire market.
1) True but irrelevant: this happens because the 'legal and professional fees' are so huge, you're looking at tens of thousands of pounds per issue, so if you want to raise £100,000 it's a non-starter; if you want to raise £1 million, it's well worth considering.
2) No it isn't.
3) True, probably. See also "sub-prime debt" (which is what Allister Heath describes it as on the very next page), it works fine until it goes horribly wrong.
4) Woah! If yields go down, this makes it less attractive for private investors. It may be that some sort of government guarantees make it more attractive and hence push down yields, but this is either a subsidy to bond holders or a subsidy to over-ambitious or struggling businesses, and it's difficult deciding which is worse.
Hanwell Systems
1 hour ago
16 comments:
Yes. And if the Chancellor really wants to lower interest rates on/increase the availability of loans to small businesses why doesn't he pump some of this magic money into the banks that we own and get them to lend the money using established criteria and routes rather than quickly inventing a whole new mechanism?
As you say everyone is currently risk averse but the idea that the government can suddenly afford to pile in to the riskiest investments is quite scary.
I was quite impressed with the Chancellor's speech up until that point.
(2) it sort of is - if you look at the spread that lenders charge for small business, can be 9%.
BE, are you sure that throwing money at banks in the vague hope that a couple of per cent will dribble out to small businesses is a good idea?
L, that seems fair enough to me, it's still less than half as much as borrowing on a credit card. I'm not sure that I'd lend money to small businesses for much less than 15%.
I thought "WHAT A DUMB IDEA" when I saw it.
Why not just take less off business in the first place?
AC1
MW well if I was a canny Chancellor I would be putting serious strings on this new magic money, rather than hoping for anything at all.
Let's see: I magic £20 billion into your system ta 2.5%, I expect to see £20 billion lent out to businesses at 3.5% on top of continuing to lend the same amount at similar rates as before.
And if the nationalised banks won't do it, I'll be happy to do it.
AC1, great minds.
BE: "on top of continuing to lend the same amount at similar rates as before."
How are you going to ensure that banks don't encourage businesses to repay £20 bn in old loans and then magically lend out the new £20 billion? It would be nigh on impossible to police.
Anyway ,the good thing is that even
the Conservative Party has given up on the private sector banks as a source of business finance and is resorting to lower level Quantitatve easing ,creating credit for their old school chums whose wizard business wheezes somehow don't pass muster with the banks.The arguments and accusations of government graft and favouritism will be well worth it.
Someone of my vintage wonders why they don't propose creating credit for distribution to us punters: lack of demand being the problem. in
DBC, is it really lack of demand or just staggering lack of confidence? You can print money all you like but this may scare people even more, and they may just use their freshly printed notes to pay off some of their debts.
I note that true Socialist Mr K Cahill stabbed us in the back again in today's FT.
the real problem too is that 50% of all wealth rests with rich individuals who are hoarding at the moment - in fact lqiuidating shares etc out of fear.
thier spedning is minial so there is no monetary velocity in the system. the rest of us have no spare income to creat demand.
So there is no demand. To create demand we need more income for everyone so much lower taxes all round - and massive cuts to pay for it unaffordable areas which add little to demand:
Foregin aid
EU spending
High Speed Rail
Subsidy for wind farms etc
Expensive NHS drugs
Olympics budget
Easily £20 billion to be cut. Important not to hit benefits and other areas which put money into the hands of those who spend it. One tax to raise is to 10x the tax on non dom status to put people off claiming it too.
The above sounds radical now but if the markets and debt crisis carry on as they are now, it will be conservative by 2012.
CU, that's a good list, but just the tip of the iceberg, really. If you add on PFI stuff, bank subsidies, govt advertising, 'consultancy contracts', MoD overspend, quangocracy etc. it's well over £100 bn a year.
BTW, the NHS only spends a tenth of its budget on drugs, and does get a reasonably good deal; it spends maybe a third of its budget on nurse and doctor salaries (the capital spending is f- all). I always wonder, where does the rest of it go? The Olympics budget is already largely spent, and when I'm in charge, there'll be no need for non-dom levy as the really rich ones will be paying hundreds of thousands of pounds a year in LVT on their Westminster mansions.
Let's see: I magic £20 billion into your system ta 2.5%, I expect to see £20 billion lent out to businesses at 3.5% on top of continuing to lend the same amount at similar rates as before.
And if the nationalised banks won't do it, I'll be happy to do it.
Just cut the rate of tax, give the public all the money and let them buy products that keep businesses going or help businesses become more profitable. The banks are adding no value in your setup, just taking a cut for all their administration.
is it really lack of demand or just staggering lack of confidence?
I think that they are one and the same, the lack of confidence is crystallised in a lack of demand. Private debt deflation is a very real effect though. As mentioned above, such a situation tax cuts are required, but I also think there is a roll for increased state spending on useful stuff like infrastructure. Of course this assumes that the state isn't already wasting money on useless stuff and isn't in deficit despite a long run of GDP growth.
The evidence for the currently popular fad, namely that lack of access to credit is the main problem facing employers, is thin on the ground. According to this UK based survey, the latter problem is of equal importance to two other problems: “competition” and “costs of production” and way behind “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. These are two surveys. I could cite more.
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)
JT, that seems to be the consensus round these parts.
QP, splitting hairs, there is a difference. There is, for example, not much demand for cloth-covered bi-planes any more, people don't want them. But lots of people would like a new car, and will buy one sooner or later. It's just that if you are worried about your job, you'll put off buying a car, even if you have the money all saved up.
RM, splendid, thanks for back up. I just said it on the basis of real life evidence i.e. looking at dozens of sets of SME accounts every week, plus cross referencing to what banks actually lend money for.
Yes, it's all quite staggering. Basically it seems to be yet another scheme to transfer risk from the banks to taxpayers.
RM - my empirical experience has been nicely backed up by your post. Personally, my bank will be happy to lend us money, but I am just not interested as I don't need it as I can (should I so wish) expand my business without it. What's stopping me is, among some other things, the pointlessness of doing so when all the rewards of my efforts and risk just get confiscated by tax.
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