What has happened?
The Bank of England has decided to inject a further £75 billion into the UK economy in a bid to kick-start lending, encourage investment and increase business confidence to recruit.
The Bank’s Monetary Policy Committee (MPC) has already gone down this route. In March 2009, they started the process whereby £200 billion of new money was printed. This is due to run out at the end of February 2011.
The new batch of QE will be introduced over a four month period. It is highly likely that more quantitative easing will be required in March 2012.
Why should it work in theory?
In theory, the new cash injection should encourage banks to lend to businesses and individuals. This will enable businesses to invest and take on new staff and individuals to have access to credit to start spending on purchases that they have put off.
Why might it not work in practice?
It has been tried before but the new money did not get to where it was required. Businesses have been hoarding cash for security.
The Governor of the Bank of England, Mervyn King, spent the money on UK government bonds, a safe investment, but it meant not much of the money got to the small and medium sized businesses that needed the money. Credit terms to individuals for loans and mortgages did not seem to improve much either.
There is no reason to think that the distribution of the funds will be any more successful this time.
Where does credit easing come in to the equation?
Credit easing is a form of QE, but it targets specific companies or sectors of the economy that require help. The last round of QE left the Governor with the responsibility of not losing the money.
So, he was loath to lend to potentially risky recipients. Credit easing should come with some sort of guarantee from the UK Treasury and should be administered in a way that targets the funds to the companies and parts of the economy that need a boost.
However, it is not yet clear how credit easing will work; whether the Treasury will issue funds itself, ask the Bank of England to do this or set up its own vehicle to administer the scheme.
What other factors could hinder the success of QE2?
Quantitative easing or credit easing may not work on their own or in tandem unless other major problems in the global economy are solved.
The major European economies and the United States need to follow a deficit reduction programme and stick to it and the crisis in the eurozone could yet see further bailouts from European countries, a run on major banks and not only recessions in many countries but a global recession and a financial crisis as serious as the one in 2008.
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