We've Seen Osbourne's Big Idea Before

George Osborne is putting forward his idea of "Credit Easing" as though it was something new. It isn't, and in its previous incarnation it was disastrous. His idea goes like this.

Firstly, big companies don't need to borrow money because they have lots of cash on their Balance Sheets, and can in any case use their size to issue Bonds and raise money on the Capital Markets.

Despite that, Osborne is still proposing that the Treasury might help out these large, profitable companies by buying their Bonds. To suggest doing that now means he must believe that Credit Crunch 2 is about to strike, because otherwise there would be no reason for the State to have to step in to replace those Capital Markets. So much for the Liberal-Tory claims about keeping British interest rates low. So much too for the State not increasing its spending, because if it buys these Bonds, it will require funding, and if the companies go bust, then just as with the bail-out of the Banks, that money could be lost.

The second part of the Credit Easing is worse. The Liberal-Tories have been trying to get the Banks to lend to small businesses, but without success. There are two reasons for that.

Firstly, most businesses know that the economy is going down the tubes ,as a result of the austerity measures. Demand is drying up. So there is no reason that most healthy businesses would want to borrow under those conditions, because only an idiot would expand at a time when they know that there would be no market for the expanding production. The only firms who will want to borrow under those conditions will be those who need the money not to invest, but to stop themselves going under. Not surprisingly, the Banks have no interest in lending to such companies.

The Liberal-Tories have a solution. Instead of the Banks lending the Government will. They propose bundling up a load of loans made to small companies into a single investment product that can be then sold to investors. The Government will facilitate this by guaranteeing the loans. This should sound familiar.

It is what was done with sub-prime mortgages.

That is Banks would not have lent to people who were not likely to be able to pay back the mortgage. However, by bundling a load of these mortgages, into the same kind of special investment vehicle that the Liberal-Tories now propose, the Banks could make these irresponsible loans, and then shift the risk of it going bad on to others who then bought the Mortgage Backed Security and other such derivative products. Well we all know how that ended. Its not likely that Osborne's SIV for sub-prime business loans will fare any better.

But, it gets even worse. With the sale of Mortgage Backed Securities (MBS) and other Special Investment Vehicles based on sub-prime mortgages, the Ponzi Scheme continued because the Credit Rating Agencies, rated these products as AAA, even though they were clearly nothing of the sort. Had they not done so, some of the Financial Institutions that bought them, would have been prevented from doing so. That happened, because the Credit Rating Agencies, as part of the Financial Services Industry, and tied into the profits being amde from the sales, had an incentive to do so.

On Newsnight, last night, Tory Minister, Philip Hammond, when asked who would rate these Special Investment Vehicles, replied that some of them, such as the Bonds issued by the larger companies, would be rated by those same Credit Rating Agencies, but it got much worse from there. He said that, for the bundling of the loans to the smaller companies, it would be the Banks themselves, who rated their risk!!!! That is ridiculous. A Bank here and now, will not lend to a small business, because it doesn't believe its business plans, and thinks it might be going bust. But, with this new scheme for handing out taxpayers money, the Tories will allow that Bank, along with others to say, "Oh yes, this loan is fine, and low risk" The Bank will then make the loan, from which it will derive profits, it will sell the risk from the loan on via the SIV, to other Banks, with all of the Bankers, and Investment Analysts along the way, creaming off their commissions and bonuses, as they did during the sub-prime crisis - which in turn incentivises these dodgy loans being made, and sold on - and those that do so will know in advance (which they didn't even know with the MBS scam) that they are free to make the most stupid decisions, because the Government has guaranteed, to cover the cost of any losses that are made!!! These are supposed to be people who are financially savvy, that understand how the Banking system, and investment works. Many of them are former bankers, and investment analysts themselves. So, they must know what all this amounts to.

What it amounts to is this. Socialism for the rich.

The banks made huge gambles that went bad. The bankers and their shareholders did not lose out. They were bailed out by taxpayers, and let loose to continue making huge profits, huge salaries, and grotersque bonuses. Now, the Liberal-Tories want to provide the same bail-out for their friends in small business, all paid for at taxpayers expense. But, of course, this is the same Government that says it cannot bail-out vital Public Services.