4th October 2011
This could see the Government buy up the debt of large firms and do likewise for small businesses as well by packaging them together.
In a speech to the Conservative party conference in Manchester, he said: "I have set the Treasury to work on ways to inject money directly into parts of the economy that need it such as small business. It is known as credit easing. It is another form of monetary activism. It is similar to the national loan guarantee scheme we talked about in opposition."
Details will be released in November but Robert Peston says he has been briefed and has put them on his BBC blog.
Peston says that the Bank of England will use its asset purchase facility to buy the loans of larger businesses but only if the credit situation deteriorates significantly.
For smaller businesses, Peston writes: "In the longer term, the impact of credit easing on the flow of credit to smaller businesses could be more significant – because the Treasury is hoping to encourage the creation of bonds made out of small-business loans, by promising to buy such small-business bonds and thus create a market for them. The idea is to encourage banks to parcel up small business loans into such bonds."
It has certainly attracted a lot of comments. Here are three.
Ignitionnet says: "It does seem very strange trying to cure the hangover from a decade of cheap credit by trying to make credit cheaper. Maybe I'm misunderstanding the whole thing, but if I were a business I'd use this to facility to refinance and replace previous credit to reduce interest payments, not to invest in production when demand is still debatable."
Purps would rather the Chancellor ran it through the insurance industry. "Credit Easing is a very good move, although I would prefer they utilise the Insurance industry. Creating a new market where cash rich major corporates could buy these bonds thus releasing cash currently held on their balance sheets is good for economy. Private investors should be incentivised to invest in these packaged SME bonds. All in all negative to UK Banks."
And Coll isn't at all convinced. Packages of loans remind this commenter of mortgage backed securities.
"Shall we call these a Company MBS or Small Business MBS ? Sounds rather similar to the original cause of the credit crisis. Since assessing small company financial health is probably more difficult than assessing an individual households financial state – this is surely a recipe for disaster. It seems somewhat foolish to have the state underwrite securitised small company debt."
Business leaders have broadly welcomed the plan, but on the Guardian, the Chancellor has one perhaps surprising supporter for the policy in the form of David Blanchflower the former Dovish MPC member. Blanchflower does not like the overall strategy but does like credit easing.
He says: "The announcements are small change and will not prime growth. I am pleased though that Osborne appears has taken on board the idea that Adam Posen and I have been pushing, of credit easing to help small firms obtain finance. Together we will certainly "ride out the storm", but it is going to be an unpleasant journey. After 13 years in opposition and 16 months in office the Tories still have no growth plan."
John Clancy, a councillor and businessman writing on his Birmingham Post Business Blog wants more radical action.
He suggest the Chancellor take over the day to day running of RBS NatWest as a national investment bank – given that the state already owns most of it.
"Make it the National Investment Bank, initially – get the QE directly into it by buying its illiquid assets (which we effectively own anyway). Get sustainable credit to starved sustainable businesses direct, through the handy fact that we only actually already own a bank or two. RBS/NatWest already has a strong profile in the SME sector. It could get going on this tomorrow if we stopped pretending it was a private entity."
Director of Finance online considers the move here and quotes PwC's Alex Henderson who says: "The questions now will be how easy the new finance will be to access, how much is going to be made available and what will be the cost to the borrower. Down the line there could be worries around how the Government will deal with the costs of any bad debts – if businesses see that other taxes will have to rise to fund the scheme then the initiative will have less effect."
Mindful Money's economist blogger Shaun Richards says on his blog: "As George Osborne has made some announcements about a possible credit easing policy in the UK I thought that I would take you in a trip on Doctor Who’s TARDIS when an oddly similar policy was announced by the previous Chancellor of the Exchequer Alistair Darling back in February 2010."
He adds: "I want to approve of (Osbourne's) plan above because I think that some help for our smaller businesses is needed. However there are loads of pitfulls and the journey from February 2010 to now has highlighted then.