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Sunday, 22 February 2009

Let's look at ths government statement as reported on the BBC

The following was on the BBC website, so lets deconstruct it line by line:

UK may get cash injection 'soon'

Strange, no? You probably thought we had already had a ash injection. Apparently not.

The Bank of England could help increase the flow of money. A government minister has suggested that plans to inject more cash into the economy could happen "quite soon".

Now what could they mean by that? Banks after all have been promised lots more cash but they haven't started lending because that equity is wiped out by losses.

Treasury Secretary Stephen Timms told the BBC the government and the Bank of England were in talks regarding so-called quantitative easing.

Ah, quantitative easing.

Quantitative easing effectively allows the central bank to write cheques to banks in exchange for assets.

Sounds like free money. IOU's from the government. Does that mean the printing preeses are running?

The hope is that this would encourage banks to lend to consumers, who would spend more, helping economic recovery.

So this is just more cash going to the banks, which as we have seen already, hasn't got the economy going.

This method is seen as a way to help the economy, as the benefit from lowering interest rates is seen to be diminishing.

So interest rates didn't work (I am not surprised - why drop interest from 3% to 2% if the 100% outstanding is never going to be repaid), so the government is going to try something else.


Not a sheep said...

Do you think the Government have any idea what there are doing? Is there a strategy behind their decisions or are they just determined not to be "the do nothing party"?

Alex said...

They will spend all the money until it runs out. If the economy gets better in the meantime they will claim the credit. If it doesn't they will sit on their index-linked pensions.

My solution has always been to clear out the mss in the banks and put that stuff into a separate run-off vehicle, leaving sound banks with new management to run the banking biusiness, splitting off the trading parts of the bank into unregulated and separately capitalised entities, which may be floated off but which may not be guaranteed by a state guaranteed bank.