Lending money to the banks

Two new economic stimulus packages will be launched by the Bank of England in order to address the worsening UK economic outlook.

Rather than extend its programme of quantitative easing, the Bank will be lending tens of billions of pounds directly to banks in order for them to lend to individuals and businesses.

This aims to address the issue where banks have been holding onto cash rather than lending it to the real economy.

We are yet to see the details to understand how the Bank will ensure high street banks actually lend the money to consumers and businesses this time.

Unless there are significant penalties for the banks that do not feed this cash through into the real economy, we suspect many will simply use the money to continue rebuilding their balance sheets.

The second measure is the implementation of the Extended Collateral Term Repo Facility that was announced in December.

This will give banks access to £5bn of cash each money which they can borrow to cover any cash shortfalls.

We think this move from the Bank of England is a clear sign of the concerns over the outlook for the UK economy. This weekend represents another crunch point in the eurozone sovereign debt crisis, with the latest general election in Greece.

Lending money to the banks (do you remember when they used to lend money to us?!) is the wrong move.

An economic stimulus package of this scale would have been much more effective if the cash was delivered directly to the UK consumer.

Based on the size of this package, it could have put £4,200 into the pocket of every adult in the UK – money that could have more quickly have found its way into the real economy through the purchase of goods and services, or the reduction in personal debt.

Rather than being a “bridge to calmer times”, as it has been described by the Bank, this looks more like pushing the panic button.

Photo credit: Flickr/OliverN5