Last week saw President Obama’s boldest move yet as he attempts to steer the US out of the storm.
His $trillion pledge has a substantial sum allocated to buy up legacy assets or in other words the loans that are considered toxic. Once the banks off-load these assets they will be a lot more confident about their ability to ride out further downsides in the economy and as a result will be more willing to lend money now, at least that is the theory. If this bold move works then the effects should boost confidence on both sides of the Atlantic.
The stock markets certainly liked the sound of the package and markets across the globe rallied, although it is far from clear whether this rally will hold or retreat. One glaringly obvious difference between the US and UK is that financial institutions of any size can participate whereas in the UK non bank lenders have been excluded. These non bank lenders were together responsible for a significant level of lending and it is highly questionable as to whether the banks by themselves can fill the lending gap.
The government should consider the valuable role that mothballed lenders could play in ensuring that the £billions of taxpayer’s money being pumped into the system actually ends up increasing the flow of loans to homeowners rather that just being used to improve the capital ratios of the banks.
