Monday, 13 February 2012

For UK firms, the credit crunch continues

Simple question; if quantitative easing is working then why are UK companies paying back their bank loans?

Since 2009, the growth of bank lending to the UK corporate sector has been "negative".  Loan repayments are greater than new credits.

If quantitative easing is supposed to support the private economy, then we should expect companies to be investing in new plant and equipment.  The idea that was used to sell QE was that commercial banks would sell the Bank of England bonds, receive newly minted cash and then extent that liquidity as new loans to the private sector.

The chart above tells us that isn't happening. Instead, the corporate sector is being starved of new credit and the UK economy is stagnating.

Why are firms repaying their loans?  I will take a wild guess and suggest that it is complex mix of demand and supply factors.  Firms aren't demanding loans because they fear for the future.  When central banks print money, inflation is sure to follow, and interest rate policies are likely to be more erratic.  Anticipating a chaotic future, firms prefer to pay down their loans to minimize their exposure to higher interest rates and macroeconomic instability.

Banks are wary of lending to firms.  They, too, see the same future private sector firms do.  They are reluctant to extend credit to a private sector that will struggle when the full consequences of QE are brought to bear upon the beleaguered UK economy.

If supporting the private sector was the objective of quantitative easing, then it has manifestly failed.  It is time to put a stop to this ridiculous policy.


Anonymous said...

On the benefits of inflation....

Debt is devalued in real terms so that negative equity in both private and commercial terms is avoided.

Toxic debt on banks' books is reduced to a minimum over time.

Banking sector avoids breaching Basle rules.

Banking systems steadies rather than collapses under the weight of poor quality paper.

To maintain the sham, bankers's continue to get bonuses for their insightful decision making.

Pensioners robbed but what the hell as BoE pensioners have already had their pension pots moved into inflation-linked bonds.

On the benefits of controlled inflation....

House prices drop by 30% and those who took out mortgages forced to pay for their poor decisions over the whole of their lives - unless a rich aunt who had a pension with the BoE dies.

jain housing said...

nice post

agriculture investment said...

Its not surprising QE is not working. Banks and private firms and consumers are all trying to deleverage from all of the debt they have taken on.