Credit easing is fundamentally flawed
20 March 2012
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Press Release
Press Release
The IEA responds to the Budget
21 March 2012
Economic Theory
The IEA responds to the Government's plan for credit easing
Commenting on the idea of credit easing, Prof Philip Booth, Editorial Director at the Institute of Economic Affairs, said:
“Credit easing is a scheme ridden with contradictions that will make very little difference to British business.
“The government is currently raising the cost of banking by imposing onerous capital requirements and structural changes on banks to ensure that they are less likely to receive government bailouts in the future. At the same time the government is subsidising banks’ loans to small businesses using a method that is unlikely to increase the volume of small business lending.
“One of the major causes of the financial crash was the US government underwriting mortgage borrowing. This government is repeating that mistake with small business borrowing. By subsidising one particular approach to lending – that is lending financed through wholesale markets – the government is also subsidising a specific model of banking which is the very model that failed Northern Rock.
“The paradox at the heart of this scheme is that, if it remains small, it will do little good. On the other hand, if it grows large, it will hugely increase risks in the banking system and to taxpayers.”
Notes to editors
To arrange an interview with an IEA spokesperson please contact Stephanie Lis, Director of Communications: 020 7799 8909, [email protected]
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
“Credit easing is a scheme ridden with contradictions that will make very little difference to British business.
“The government is currently raising the cost of banking by imposing onerous capital requirements and structural changes on banks to ensure that they are less likely to receive government bailouts in the future. At the same time the government is subsidising banks’ loans to small businesses using a method that is unlikely to increase the volume of small business lending.
“One of the major causes of the financial crash was the US government underwriting mortgage borrowing. This government is repeating that mistake with small business borrowing. By subsidising one particular approach to lending – that is lending financed through wholesale markets – the government is also subsidising a specific model of banking which is the very model that failed Northern Rock.
“The paradox at the heart of this scheme is that, if it remains small, it will do little good. On the other hand, if it grows large, it will hugely increase risks in the banking system and to taxpayers.”
Notes to editors
To arrange an interview with an IEA spokesperson please contact Stephanie Lis, Director of Communications: 020 7799 8909, [email protected]
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
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