June 28, 2013

If bank credit was allowed to flow freely, central bankers´ quantitative easing would help so much more

Sir, David Miles with respect to quantitative easing tells us to “Ignore the pessimists – central banks are helping” June 28. Even if we accept that, the fact remains that they could be helping so much more, if they allowed the financial resources represented by bank credit to flow freely to where in the real economy these could be put to best use, and not just where they are perceived to be safer.

And this is so because when you allow a bank much less equity for what is perceived as “absolutely safe” than what is perceived as “risky” you are effectively allowing a bank to earn much higher risk-adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky”, like unrated small and medium businesses and entrepreneurs, and that only distorts.