Exceptional times call for drastic steps
AT last – something "exceptional" has happened.
Somebody is showing some leadership. No, not the England football team, or anything to do with elections that have taken place in Europe – but our own Chancellor of the Exchequer and Governor of the Bank of England at the Mansion House speech announcing that they have again turned on the printing presses, this time for the benefit of the banks.
There is little doubt that we face the biggest possible economic change over the next month that many of us will have seen in our lives.
The implosion of the eurozone is, in my view, now a certainty. The leap in the cost of borrowing for Spain and Italy over the last week now ensures a bailout is required for both. Markets have them in their sights, and that is no place to be, as they rarely miss.
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For George and Mervyn to sit back and take no action would have been foolhardy. Instead they have decided on a two-pronged attack to help UK plc.
Prong one is the Bank of England will issue at least £5bn of loans a month, which the banks can bid for at very low rates of interest.
The second prong is "funding for lending", which basically means the more they borrow, the cheaper it becomes, as long as they lend it out.
In essence they are protecting the UK banks from the nuclear fallout that will occur when Spain and Italy default.
The Governor of the Bank of England has always argued against this type of arrangement as it was felt that it would stop the banks healing themselves, and I think he was right. However, they are now talking about the "exceptional nature" of the crisis facing us, so something had to be done.
From next year the regulation of the banks also moves to the Bank of England and they have now been given the objective of financial stability, which translates into "growing the economy".
Be in no doubt the economic leadership of this country has shifted up a gear. Next month I am sure we will see further evidence when they again turn on the printing presses and add to quantitative easing.
But what does all this printing of money mean?
Usually if you print money until it is going out of fashion you end up with inflation or even hyperinflation. Germany c1930 is evidence of this and it explains their current reluctance to write massive cheques in favour of the eurozone.
However, the lack of activity in our own economy means that at present you can print money with little inflationary effect. What will happen if the banks hit another credit crunch remains to be seen, but be under no illusion these are "exceptional" times.