A key Bank of England policymaker believes the state of the banking system "bodes poorly for the sustainability of the coming economic recovery", and has cast doubt on whether the Bank's policy of quantitative easing – injecting money directly into the economy – has succeeded.
Adam Posen, the newest member of the Monetary Policy Committee, said yesterday: "The relative limits in the UK on availability of non-bank financing for smaller companies may constrain emergence of a sustainable private-sector led recovery."
Most disturbingly, he drew a parallel between the Bank's current efforts and those by the Bank of Japan in the early 1990s, which were ineffective.
Mr Posen, an independent external member of the committe, said: "The banking system must be largely fixed before the macro-economic stimulus is needed to be withdrawn".
He cast doubt on how rapidly that would happen, warning: "The alternative is likely to result in a still-born recovery, a double-dip (though less severe) recession, and/or persistently slow growth."
However, in the latest quarterly report on its quantitative easing scheme, the Bank pointed out that the revival in capital markets had helped many companies raise funds since QE was launched in March.
By 24 September, the Bank had acquired £153.8bn of assets, of which £151.8bn was comprised of gilts, £1.1bn of corporate bonds and £922m of commercial paper.
Because yields on gilts were depressed over the course of the programme investors appear to have switched to other investments, prompting a dramatic boost in the stock market and a wave of rights issues, debt-for-equity swaps and other corporate fund-raising and restructurings.
Critics have, however, pointed out that much of the activity has been directed at paying down debt, with little being spent on investment in new plant and machinery and training, which has collapsed during the recession.
Mr Posen is among many who argue that QE has also done comparatively little, directly, to help small businesses and first-time home-buyers who cannot access the capital markets and rely on the banks for credit.
The initial £175bn QE programme is nearly complete. The Monetary Policy Committee will meet on 5 November to decide if a further expansion of the scheme is called for. Last Friday's shockingly weak data on GDP growth – a decline of 0.4 per cent against widespread hopes of an increase – will have strengthened the case for another injection of money into the economy.Reuse content