The Chancellor of the Exchequer has announced his latest strategy for rescuing the UK economy, in the form of ‘credit easing’. Credit easing is the equally evil twin of quantitative easing. While the former consists of the Bank of England printing money to buy government bonds, credit easing may involve printing or borrowing money to buy corporate bonds.
This is a slight simplification. Technically nobody prints anything anymore, and it is unlikely that the money will be used purely to buy corporate bonds, if only because small and medium enterprises (SMEs) do not employ bonds to anything like the extent that larger companies do. While government loans to large businesses may be in the form of direct purchases of bonds, in the case of SMEs they are likely to be channelled through the banks, with the latter securitising the loans by bundling together (parts of) corporate loans and overdrafts and selling them on.
Now, readers may be forgiven for thinking that this all sounds very familiar. Like sub-prime mortgages, these sub-prime corporate loans will be diced and packaged. They may avoid the fate of mortgage securitisations if they are bundled only once before being sold on to the Bank of England or a special investment vehicle set up by it: in this case, the credit ratings of these loans should be fairly transparent. But if a secondary market emerges, with the securitisations being divided and combined, we might face a corporate-loan repeat of the mortgage nightmare of five years ago.
Securitisation is the least of the problems with this plan, however. The second is that it may be inflationary. Wiser heads than mine will be able to advise on this. One of the dangers with quantitative easing is that it may, through the fractional reserve machine, spawn vast amounts of new money that will never be clawed back by the central bank. Credit easing is also likely to expand the money supply, and it is surely very quickly going to start passing through the hands of bankers. I suspect that its inflationary effects will not be long delayed.
Thirdly, there is the question of who gets to borrow the money. Governments, as we know, have a poor record when it comes to judging what industries are worth investing in. Credit easing may differ from direct subsidy, but soft loans are a subsidy in all but name. No central planning authority can gather enough information to know which investments are sound and which are not. This has two effects: in the short term, firms that are not credit worthy will be propped up, slowing or preventing the reallocation of the resources that they are employing to more productive ends; in the long run, the loans will be exposed as bad, resulting in losses.
Hence our fourth problem: there are bound to be losses. Now losses are the natural accompaniment of loans; it is worth noting that bank managers and investment funds may also face difficulties judging which investments are sound and which are not. But with private investors, the risk is voluntary: they choose to stake their money, and if it goes sour then so be it. With governments, the risk is anything but voluntary: we are all on the hook for risky loans.
This is compounded by the fact that these loans are, inevitably, more risky than those that private investors are already making voluntarily: it’s not the obviously credit-worthy firms that need to crawl to George Osborne with their caps in their hands. So expect, in years to come, significant sums to be written off as bad debts – possibly as companies go bankrupt, but as often to allow technically bankrupt companies to stagger on, the loan converted into a long-ago-wasted gift.
Plus ça change. For 13 years we had a Labour government that borrowed money to pay for public sector spending that it could not afford. Now the Conservatives are back in power, it’s time for the government to start printing money to bail out their friends in the business community. The pendulum swings again, and so public debt and the burden of taxation continue to rise.