Saturday, July 14, 2012

“Funding for Lending.”

“Funding for Lending” is the British government’s latest attempt at stimulus (or pretence that they’re going for stimulus). It consists of lending money to banks if the latter show they’ve lent some minimum amount to businesses and mortgagors. (To be strictly correct, the Bank of England will lend eligible private banks government debt. But the latter is as good as cash.)

The obvious problem here is that banks do not lend central bank money or “reserves”. Private banks just don’t need central bank money in order to lend. Put another way, private banks can create money out of thin air and lend it out whenever they see a viable lending opportunity.

An INDIVIDUAL private bank’s lending is constrained in that it cannot expand much faster than other banks by simply creating its own money. So any private bank in that situation will be helped by the scheme. On the other hand, Funding for Lending will only last 18 months. Now what bank is going to go out on a limb so to speak on the basis of a source of funds that will only last 18 months? Didn’t the rapidly expanding Northern Rock go bust because it relied on short term sources of funds which then dried up?

As distinct from an INDIVIDUAL bank “going out on a limb” or expanding its lending faster than other banks, i.e. to the extent that all private banks expand at the same rate, “Funding for Lending” is useless for reasons given above: private banks don’t need central bank money in order to lend.

Conclusion: “Funding for Lending" smells like a gimmick designed primarily to make it looks as though government and central bank are doing something.


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