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Geo-Graphics: Should the Fed Follow the Bank of England and Subsidize Bank Lending?

A version of this post originally appeared on Geo-Graphics, a Council on Foreign Relations blog by the Maurice R. Greenberg Center for Geoeconomic Studies.

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.

See the original post on Geo-Graphics.

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