Monday, 3 October 2011

When sub prime is not sub prime

One of the more worrying statements to come out of the Chancellor's mouth earlier today is that news that the Treasury is to back a new bond market that lends cash to small companies.

The government is concerned that banks are simply not lending enough to drive the economy forward.

These loans won’t show at part of the national debt, because the assumption is that the companies will repay them.

Does this all sound rather dangerous? Well some commentators are using the word sub prime,a phrase that sets the heart racing.

The Treasury says that the comparison is not the case.Indeed the loans will be completely different to the American version adding that there is no risk of being undermined.

But as Fraser Nelson writes

In 1995, the Clinton Administration said the same about the US mortgage industry. The Treasury’s view is that Britain’s banking system is “impaired”, and ill-placed to judge who is creditworthy and who is not. So ministers must intervene.

The credit easing scheme would issue gilts to raise money this would then be used to buy financial assets which would sit on the government’s balance sheet.

For matters of complex economics,it is ofen best to refer to Robert Peston.

These are his up to date thoughts on the announcement

First it demonstrates,if such demonstration were needed,that the Treasury is seriously worried that deterioration in the eurozone's financial crisis could lead to a full scale credit crunch, since phase one of credit easing would be designed to keep the supply of loans flowing to businesses in those appalling circumstances.
Second, it's proof the Treasury has given up hope that - in the absence of structural reform of the credit market - small businesses will find it any cheaper or easier to borrow, even in the longer term.

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