Uneasy easing

09-Feb-2012 - The Bank of England need to rethink its policy of credit easing if it wants to affect the real economy, says Mick James, Top-Consultant.com’s management consultancy columnist.

Uneasy easing

I have a feeling that growth, or the lack of it is going to be a bit of a theme round here this year…and the next…and the next. From a consultancy view point, there’s an uneasy disconnect between what happens at the micro-level with clients and what’s happening at the macro-level with government interventions. It’s like wearing a badly-made pair of varifocals, where the middle distance is always out of focus.

Still, the Bank of England monetary policy committee meets this week so we can all see what they can do by pushing on their end of the rope.

Long ago it struck that the Bank of England’s efforts to control the economy using the single lever of interest rates were a bit like a forklift truck I was forced to drive as a lad, which had no brakes and could only be controlled by shifting between forward and reverse gears. I duly drove it through the side of the factory.

Notwithstanding this dire warning from history, the Bank regularly brings together the greatest financial minds for what is effectively a game of Play Your Cards Right, except, at the moment, with the options to shout “Higher” and “Lower” disabled.

So, bearing in mind the dictum that you get nothing for a pair, the Bank now has an even mightier weapon in quantitative easing. This week it is widely expected to “inject” another £50bn into the economy with another round of quantitative easing, bringing the total amount pumped in so far under the scheme to £325bn. And a further £50bn is predicted to come next quarter, with some economists predicting the total will hit £600bn by the end of the year.

Don’t be holding your umbrella upside down though, for although the theory is that with all this cash being stuffed into them, the banks will shortly explode like Mr Creosote and shower us with the stuff, this doesn’t seem to be happening.

It all reminds me of my maths exams, back in the days when questions ran along the lines of, “If it takes two men with two buckets an hour to fill a bath, how long will it take four men to fill the same bath with eight buckets.” The answer is, of course, either no time at all, because the first two men have already filled it. Or, forever, unless one of four men has the nous to put the plug in.

Quantitative easing is, of course, the practice of swapping government cash for government bonds, at which point the bankers are supposed to scurry out into the high street like Scrooge on Christmas Day. Why isn’t this happening?

I’m fortunate enough to have an offset mortgage with a bit of headroom on it, so I can practise quantitative easing on myself: if you’ll bear with me a moment, I will just transfer £100,000 into my current account from the mortgage, with my house equity standing in for my stash of gilts.

A hundred grand (and 45p) in my current account! I’ve never had so much money in my life. Where’s that yacht catalogue? Hang on though—better clear it with the wife first (in this production the role of Basel 3 will be played by Mrs James). What’s that? Preserve and improve capital ratios? Good idea—when’s the next bond auction? And back into the offset it goes.

Now I realise this is desperately pathetic of me. I could have put that money out into the world, to work for me. There’s plenty of routes these days—recently I’ve been looking at alternative sources of lending to SME’s, including peer-to-peer sites like thincats.com or Funding Circle, which aim to link up individual investors with entrepreneurs. Registering with one of them, I find attractive rates of interest and the opportunity to invest £100,000 but there’s one snag. There’s just one (1) company seeking funding. Even worse, it’s a finance and leasing company, so the great process of dotcom disintermediarisation has only hooked me up with…an intermediary.

Which brings me to my problems with the final weapon in the Bank’s armoury: £21bn of credit easing, as promised in the Chancellor’s autumn statement. Credit easing sounded great, particularly in the early days, when no-one knew what it was. But this is where the rubber hits the road, and the Bank starts interacting with the real economy. Actually the term is highly misleading: the Bank already has the facility to purchase corporate assets such as bonds using the same Asset Purchase Facility as underpins QE, which is probably what Ben Bernanke of the Federal Reserve, who coined the phrase, would recognise as credit easing. Which it has done, to the tune of approximately 0.2% of the QE total.

What the Chancellor is, in fact, proposing is, for the most part, a loan guarantee scheme whereby the government will allow banks to raise an extra £20 billion to lend to business and effectively guarantee those loans (thereby not raising national debt as such, just our “contingent liabilities”). There’s also a billion available for something called a “business finance partnership,” which aims to pump-prime non-bank loans—such as presumably, the peer-to-peer networks. Good luck with that.

There’s only one problem with all this largesse, as we have seen above. Nobody wants it. That much should have been obvious when the Bank nailed interest rates to the floor. If a lending-based recovery was ever going to kick off, that would surely have been the moment. Money may be as cheap as chips—but where are the opportunities? Surveys of the SME market suggest that despite the perception that bank managers are turning away weeping entrepreneurs on a daily basis, the demand just isn’t there. And I imagine that a lot of the demand that is there is from people who are a couple of bad invoices away from packing it in altogether.

So what will happen with CE? Probably just a massive substitution in lending, with banks simply offering cheaper loans to people they would have lent to anyway, with possibly a few weaker or even terminal companies sneaking through because of the government guarantee…which is nice. But if it doesn’t work we can always have more of it—there’s another £20bn earmarked. So we should reach that £600bn total with no problems at all. One more wafer thin mint, Mr Creosote?

It’s no wonder that people at the sharp end don’t understand finance, particularly its monetary aspects. Even in these downbeat times, you can still do a lot of damage in Poundland with a fiver. But 600 billion pounds, that’s a different story. £600bn can pass through us all like a shower of Higgs bosons, leaving not a trace on the cloud chamber of the real economy.

So the government needs to think again. Perhaps the next policy initiative could be examined closely by experts to see whether or not it begins with the words: “we will make £xbn available to banks so that they can…”

All views expressed in this article are those of Mick James and do not necessarily reflect the views of Top-Consultant.com and Consultant-News.com.

Contact Mick with your views or suggestions at: mick.james@top-consultant.com.