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article imageJonathan Portes on the latest UK banking rip-off Special

By Alexander Baron     Aug 5, 2012 in Business
London - Last Wednesday, the British Government launched its latest whacky attempt to stimulate the economy, by giving money to the banks. Jonathan Portes doesn't think much of it.
The latest attempt to kick start the British economy was reported widely, including by the BBC. This involves making £80 billion of cheap credit available to the banks, and hoping they will re-lend it. Hope is a wonderful thing, and so is generosity. When the American Federal Reserve did something like this last year, Michael Burns commenting on PressTV said the banks were simply sitting on this new money and creating even more debts.
What does someone on this side of the Pond who knows about finance think of this latest scheme?
Jonathan Portes is Director of the National Institute of Economic and Social Research. He is a mathematician, so understands figures, something most of the government don't appear to do.
AB: What is your opinion of the Government's latest scheme?
JP: While the Funding for Lending scheme will probably have a positive effect on the availability and price of credit to the real economy, this must be a third best option.
AB: Why is that?
JP: First, the implicit assumption is that private banks, irrespective of their condition, will always be the best way to allocate funds. Second, the banks will of course take a spread on the funds which could be used for costs such as bonuses as well as dividends, rather than focusing on retained earnings which enable building up of capital buffers and/or provisioning against impaired loans.
AB: And third?
JP: Third, there is a need for vigilance to ensure that such implicit subsidies do not limit balance sheet adjustment, especially writing off of bad loans.
AB: What would you advocate instead?
JP: We contend that it would be much better to create new frameworks which support lending to the specific areas of the economy which the government feels are constrained, rather than simply rely on cheap financing to too-big-to-fail banks.
You can find further comment by Jonathan Portes and NIESR on his blog, but be warned, it makes depressing reading.
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