UK Chancellor looking to by-pass the banks to get credit to small businesses

According to a Telegraph article, George Osborne, the UK's Chancellor, has directed the UK's Treasury to look into how the government could directly lend money to small businesses and then package these loans so they could be sold in the capital markets.

The UK government would not need to do this if the securitization markets were functioning.  If they were, there would be private firms that would make the loans and sell them into the capital markets.

Regular readers know that the securitization market is not functioning because the buyers are on strike.  They went on strike at the beginning of the credit crisis and are not coming back until they have access to current performance information on the underlying assets.

The UK government could restart loans flowing to small business simply by requiring current performance disclosure on the underlying assets.

Of course, the UK government could also elect to retain the credit risk of the loans as an enticement to attract buyers.  But by doing so, it is no longer really "selling" the loans.  Instead, it is setting up the equivalent of Fannie Mae and Freddie Mac in the US - an agency where private investors do well and taxpayers are stuck with the losses.

George Osborne used his speech at the Conservative Party Conference to announce plans for "credit easing" - which is a form of quantitative easing for businesses. 

The Chancellor said: "I have set the Treasury to work on ways to inject money directly into parts of the economy that need it such as small business. It is known as credit easing. It is another form of monetary activism," he said. "It is similar to the national loan guarantee scheme we talked about in opposition." ...

However the Government could deploy public to buy corporate bonds either directly through the Treasury or via the Bank of England's asset purchase facility. This facility was set up in 2009 during the apex of the financial crisis but has hardly been used since. 

The Treasury wants to create packages of small business loans that could then be traded. 

In this way the Government support would not add to the national debt for accounting purposes because they would be a tradable asset. 

The plans also include setting up a Small Business Bank that could handle the new policy. At the Liberal Democrat Conference two weeks ago, Vince Cable used his speech to back plans for a new state-backed bank as a way of tackling the failure of banks to lend to small firms.... 

The chancellor also repeated that he would give the Bank of England the green light to engage in further quantitative easing if it decided to go for more asset purchases. 

John walker, National Chairman, Federation of Small Businesses, said: We also welcome steps to help inject money into small firms, but need to see more detail so look forward to working with the Government on this."