Fix the banks or risk another recession, says new MPC member
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The banking sector must be able to lend more freely to small and medium sized enterprises before any fiscal stimulus is withdrawn, warned the newest Monetary Policy Committee member Adam Posen.
Speaking at the Cass Business School in London last night, Posen warned that quantitative easing has highlighted the problems facing SME lending and without fixing the “leaks” in the banking sector, the UK faces a ‘double dip’ recession like that of Japan in the nineties.
Posen said: “There are limits to how far and how long public policy stimulus can substitute for private sector sources of demand and growth.
“Limitation on quantitative easing reveals a major long-term structural problem in UK financial markets which could be of potential harm as the UK economy begins to recover. In fact, in this aspect the UK has an uncomfortable parallel with the Japanese financial system.”
Posen argued that while other central banks round the world were able to offer newly created money to the private sector, the Bank of England has limited its stimulus to buying gilts, which means only the largest UK institutional firms have received credit.
He said: “I am concerned that the UK financial system as currently structured, as well as damaged by the crisis, may not be ready to support the coming handover of recovery to private-sector impetus from public-sector stimulus.”
Posen said that the Bank’s £175bn stimulus cannot be reversed until the private sector is able to access credit freely, which he hopes will lead to a natural recovery. He said evidence indicates that UK SMEs have more trouble accessing credit through either non-bank sources or through securities than any other enterprises in the G7, thus exacerbating the need for a healthy and fully recovered banking sector.
He said: “The alternative is likely to result in a still-born recovery, a double-dip (though less severe) recession, and/or persistently slow growth.”
Posen said the key to fixing the banking sector is to increase competition: “We need a financial system that is subject to sufficient competitive pressure such that it provides enough traditional lending to non-financial business, rather than one beset by too big to fail institutions who engage in relatively unproductive speculative behavior,” he said.
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Readers' comments (1)
Duncan Jones | 27 Oct 2009 10:48 am
Banks are no different to any other business that will fail if they do not remain relevant to customers needs. Given the level of taxpayer support the banks should be keen to restore their reputation as the provider of loan capital to the SME sector which is typically undercapitalised.. Furthermore the SME sector is Britains largest employer and likely to lead the way in reducing unemployment if only it could access funds!! the veritable catch22.
Can we afford to wait until after the election before this problem is tackled? Now is the time for those in power -Brown, Darling, Myners et al to join the vertebrates of this country.and extract results from the banking system on behalf of the taxpayer who were never consulted on this trillion pound experiment anyway.
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