Quantative Easing is latest effort to stimulate lending in the UK
March 9th, 2009 by Daniel Young | Filed under Politics.My mother who lives in London tipped me off about Quantative Easing last night and I just read this story in The Guardian. The bank of England is buying gilts (Government bonds) from banks and financial institutions, which will provide the latter with the capital that they may like to use to start lending again. Apparently, even well run small businesses in the UK are having trouble getting even the most meagre overdraft or loan at the moment.
Wikipedia defines gilts as: Gilts are bonds issued by the governments of the United Kingdom, South Africa, or Ireland. The term is of British origin, and refers to the debt securities issued by the Bank of England, which had a gilt (or gilded) edge. Hence, they are called gilt-edged securities, or gilts for short. Generally, when a market participant refers to gilts, what is meant is British gilts unless otherwise specified, and the description below applies to the UK gilt market. ONS data reveal that about two-thirds of all gilts are held by insurance companies and pension funds.
It sounds to me like a gilt is another form of debt.
This practice is also referred to as printing money because the central bank will create the money in order to buy the gilts – the value of which (pounds75billion) is equivalent to one and a half times the entire stock of notes in the economy.
It all sounds very full on and risky (not to mention complicated) and is further evidence if it were needed that we are still a very long way from being out of the woods of financial crisis.
More from The Guardian here.
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Tags: crisis, easing, gfc, quantative, UK
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Printing money is usually a recipe to create higher inflation. I think this policy might help stimulate a bit of lending, but with consumer confidence shot, I wonder whether it will make much difference. The huge downside risk in this current environment is stagflation (low interest rates + high inflation) – kinda the worst of both worlds.
As well as help give the banks the ability to lend – governments around the world need to try and bring confidence and optimism back to consumers. There will be no recovery until Joe Public starts opening their wallet again, and all these stimulus packages are reliant on people spending again.
I think Barack Obama is the only world leader I have heard who has said a positive message (the “We will recover” speech a week or two ago). I’d like to see more of that from our leaders.