Monday, October 03, 2011
Osborne gets into credit engineering
Posted by David Smith at 05:00 PM
Category: Thoughts and responses

George Osborne's Tory party conference speech, here, was notable for the absence of any significant spending commitments, a robust defence of the coalition's fiscal strategy and some imaginative thinking on getting credit flowing to small and medium-sized firms.

Though the details are sketchy, it is good that the Treasury is finally starting to think about credit easing, and has the ability to drag a reluctant Bank of England with it.

My favoured approach would be to swap out some of the gilts the Bank has bought under quantitative easing - at a profit - for bundles of SME loans. The Bank would have to be indemnified against losses on these securities, though that is the case at present under QE. Adam Posen of the monetary policy committee would do it in conjunction with more QE but that is not strictly necessary.

Some of the coverage of the credit easing announcement suggests the Treasury would buy the bonds of large corporates in the event of a eurozone meltdown. That may become necessary but does not fill the SME gap.

Earlier there was a boost for the UK with a rise in the purchasing managers' index for manufacturing from 49.4 to 51.1 - into expansion territory - while most eurozone PMIs suggest contraction.