Big banks in the U.K. jumped on the news that the U.K. central bank would provide billions of pounds of new money to the big banks should Europe’s financial crisis take a turn for the worse.
Too bad the rest of the citizens can’t be in line for some freshly printed money…
There is no question that the U.K. central bank, much like Ben Bernanke here in the U.S., is concerned that, should big banks in southern Europe collapse, then it could cause a credit freeze in the U.K. and the U.S.—lending would especially dry up at the big banks.
The reason the U.K. central bank announced this step is that it does not want a “Lehman crisis” moment on its hands and wants to assure the markets that the U.K. central bank is ready to step in.
This is simply more money printing. Should such conditions visit U.S. shores, Ben Bernanke will perform the same actions here to help the big banks, as he alluded to in his latest testimonies.
The other initiative the U.K. revealed was its “funding for lending” program. Basically, the U.K. central bank will take any questionable loan from the big banks (or other lenders, for that matter) in exchange for cash.
The catch is this cash will only be offered if the big banks and other lenders funnel this money directly into consumer and/or business loans.
The U.K. central bank believes this program is so attractive for big banks that it could inject another 80 billion pounds into the economy.
The only problem with this theory is that the U.K. economy is in a recession and, much like the corporations in the U.S., U.K. corporations are not investing, as they do not have faith that economic growth will return. It doesn’t matter how low interest rates are.
We live in a truly interconnected world. The only way this initiative by the U.K. has even a chance of working is if the central banks from around the world would join in it.
With the U.K. and Europe in a recession, along with the slowdown in China and the U.S., U.K. consumers are very hesitant to take on new loans. Fear of losing their jobs makes them fickle, regardless of how low interest rates would be.
If it sounds like a vicious circle, dear reader, that’s because it is. When times are great, strong economic growth reinforces itself through big banks, consumers and businesses. When economic times are tough, everyone experiences a contraction, including big banks, consumers, and businesses.
If the U.K. central bank really wanted to jumpstart the economy, it should have done something different. When the money printing begins, it should find its way to the pockets of consumers instead of to the big banks.