Monday, 11 June 2012

BOE's Posen: Bank of England Should Buy Small Business Loans


  By Jason Douglas 
 
LONDON--The Bank of England should purchase bundles of small business loans in an effort to boost the supply of credit and end an "investors' strike" that is holding back the economy, BOE rate-setter Adam Posen said Monday.

In a reprise of an earlier appeal, Posen said major central banks around the world should engage in a fresh round of stimulus and target their efforts at parts of their economies most in need of official help.
In the U.S., that is the residential mortgage market. In the U.K., it is lending to small businesses, Mr. Posen said, according to a text of his speech.

"The critical gap to be addressed is in lending to small and medium enterprises, and new businesses," he said.
Mr. Posen said risk-aversion among investors is preventing the extra cash pumped into the U.K. economy by the BOE through its asset purchase program from sparking a revival in investment--an investors' strike that monetary policy should seek to bring to an end.

His proposal calls for the BOE to buy small business loans, thereby spurring banks to lend more to small firms in the knowledge the central bank stands ready to snap up those loans.

Mr. Posen first made his proposal in September last year but the idea met resistance from BOE Governor Mervyn King, who argues that only elected lawmakers can risk taxpayers' money on risky loans. The BOE's GBP325 billion asset purchase program has focused almost exclusively on U.K. government bonds, or gilts.
Mr. Posen, who steps down from the Monetary Policy Committee in August to head the Petersen Institute in Washington, a think tank, said those concerns should be assuaged if the government vowed to indemnify the central bank against any losses.

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