"Credit easing": another good money thrown after bad

When politicians start doing something right you can be sure that the situation is serious. This cynical comment - sometimes quite unfair - seems to be true this time. The British Finance Minister (the Chancellor of the Exchequer), George Osborne, plans for a "credit easing" programme for small companies worth £20 bn (possibly up to £40 bn). The previous money expansion programmes, i.e. banks' recapitalisation and rounds of quantitative easing, failed to jump start the economy. The reason was simple and obvious before these actions: no benefit of hindsight. Having depleted the banks reserves by running a giant pyramid scheme (effectively banks defrauded the reserves), the banks were holding on to new money to keep them afloat. In 2008 it was already obvious that if the government wanted to jump start the economy, it must have set up an altarnative system of putting new money into economy AND circulating them outside the mainstream financial system.

After over three years the government seems to have understood the first part. Hence the decision to start "credit easing" for small companies. It is an introduction of new money into economy effectively bypassing the banks. The amount mentioned is not staggering. It is £20 bn, but it can be very effective. Typically in a healthy functioning economy, with a healthy financial system, would have multiplied this narrow money in circulation into £140 - £200 bn broad money. This could have jump-started the economy.

However contrary to a recommendation given to the House of Commons Treasury Committee, the government does not provide any mechanism to circulate these £20 bn in the economy safely, generating new credits from the initial injection, "easing". Once businesses start getting credit through "credit easing" these money will end up in the financial system, it will be cashed for all sorts of toxic waste that the financial system has generated for years and keeps generating them or in the reserves. It will not be relent. It will be another way of subsidising the banks. As a result £20 bn will be expanded in a minimal way, if at all. No doubt it will help some struggling small businesses. But there is a very high risk that from the economic perspective it will be a good money, with the best of intentions, thrown after bad money.

Sometimes a half of good solution is a bad solution: "credit easing" seems to be falling into this category. It is likely that in six months time or so the government will be wondering why the programme failed. But is it not obvious now?