from Geo-Graphics

Should the Fed Follow the Bank of England and Subsidize Bank Lending?

January 7, 2013

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Last week’s Bank of England (BoE) poll of UK lenders turned up some good news: credit “availability” for both households and companies is on the rise – as we document in the upper right figure of today’s Geo-Graphic.  The Old Lady of Threadneedle Street was quick to take credit for the credit: “Lenders noted,” crowed the BoE, “that the Funding for Lending Scheme,” through which the BoE and UK Treasury have since August provided banks with cheap funds to boost their lending, “had been an important factor behind this increase.”

The survey the BoE referred to should be considered about as reliable as LIBOR, which, as we know, has been subject to systematic manipulation by major international banks over recent years.  The indexes of credit availability the BoE has manufactured from its surveys are similarly unreliable, as the banks have every incentive to convince the BoE that FLS is working, and that cheap government funds should keep flowing to them.  Actual UK lending, however, as our bottom two figures show, remains depressed.

Not surprisingly, given tight lending conditions in the U.S (see the upper left figure), Fed Chairman Ben Bernanke has said that he is “very interested” in the scheme.  This has stimulated market expectations that the Fed might try to launch something similar in the United States.  The Fed should hold its fire.

Bank of England: Credit Conditions Survey 2012 Q4

Fed: October 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices

Bernanke: June 20, 2012 Press Conference

Financial Times: Credit Conditions Ease "Significantly"

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