Show Hide image

Plan B: Lend directly to small businesses

Dear Chancellor,

I hope that your advisers have assured you of two fundamental truths. First, there is no chance that the UK economy will double-dip and slip back into recession. The heavily ironic reason for this is that the 2008-2009 recession hasn't finished yet. Output is still 4 per cent below the early 2008 peak and the levels of all the important economic indicators are similarly depressed, just as new drags are coming as a result of the euro crisis.

Second, therefore, economic policy must be framed in the context of a unique, post-1945 predicament that we share with all our leading trade partners. We are in a classic deleveraging era, in which the debt burdens of the household, banking and government sectors have to decline. As the private sector is unable to lend and spend sufficiently to keep the economy moving forward, the government and the Bank of England must try to do so. With fiscal credibility earned, the litmus test of the government's economic strategy now needs to include employment generation and income formation, as suggested in others' letters here. Your creditors will expect nothing less if the debt-reduction strategy is to succeed.

Such policies will work even better follow-ing the Bank of England's decision to restart quantitative easing (QE). As you know, QE is about printing money, as the Bank buys assets and expands its balance sheet, while the private sector and the government try to shrink their balance sheets.
The Bank reckons that its first venture (£200bn of gilt purchases) raised GDP by between 1.5 and 2 per cent and lifted inflation by between 0.75 and 1.25 per cent. But remember that this occurred while the global economic stimulus programmes allowed us all to bungee-jump off the edge of an abyss. Now, QE may gain far less traction.

This time, the Bank might have to be bolder. The recent decision to spend another £75bn on gilt purchases will help to sustain low yields and allow households to refinance mortgages. You should, however, encourage the Bank to consider increasing QE if need be, as last time, and to be more adventurous. The precise remit of the Bank is less important nowadays than the task of easing private-sector credit conditions and stimulating lending to small and medium-sized enterprises (SMEs) and creditworthy households. You referred to this in your conference speech in Manchester, but the Bank can implement this "credit easing" faster and more effectively than the Treasury. It could purchase and package banks' SME loans for sale to investors, purchase bank bonds to ease funding (and therefore lending) constraints, and buy mortgages, the real deadweight on bank lending and household spending.

Ultimately, the Bank could get involved in direct lending to SMEs and to the government, so that the latter could fund infrastructure and other programmes to boost employment. Extra­ordinary times call for comparable economic thinking. We are a long way from having to worry about inflation and, as things stand, the status quo on policy is leading us into a depression that will sink your medium-term fiscal and economic strategy, to say nothing of the disastrous social consequences.

George Magnus is senior economic adviser to UBS Investment Bank. The Telegraph has described him as "the man who predicted the sub-prime crisis would lead to recession"

Previous: Lift the cap on immigration, says Jonathan Portes

Next: Launch a green new deal, says Ann Pettifor

Back to list

This article first appeared in the 17 October 2011 issue of the New Statesman, This is plan B