Blurred lines: The BoE goes corporate

The Bank of England has taken a significant step in its attempts to save us all from the claws of recession. The Bank will step up it’s so far modest purchases of bonds issued, not by their paymasters in the Treasury, but by private companies. The debate has so far focussed on what companies are eligible, with some quarters outraged by the inclusion of foreign conglomerates like Verizon, AT&T and McDonalds. The bare fact that a state institution is lending money directly to randomly selected firms seems to be less controversial than the names on the list. But of course the policy will have significant, negative unintended consequences.

It should never be the state’s role to lend money to private companies, as it blurs the line between monetary policy and corporate welfare. Already, with the BoE’s practice of reinvesting maturing gilts, the line between monetary and fiscal policy is unclear: the BoE is in effect monetising government debt, at least until it proves otherwise and unwinds QE by reducing it’s balance sheet down to pre-crisis levels. Now another line is about to be crossed. And as with all government policy it has real economic impact, apart from the stated goal of reducing borrowing costs for all: companies who qualify for the purchase programme are likely to be perceived as ‘too-important-to-fail’ and as such a better credit than their un-favoured peers. They will have an easier time attracting investors and as a result enjoy lower borrowing costs than before the programme. The result is an artificial, sub-optimal capital allocation, where resources increasingly finds its way, not to the best projects, but to projects initiated by the chosen few.

Next step will be copying the Bank of Japan and implement a share purchase scheme. The BoJ is on course to be Japan’s biggest shareholder. It is likely only a matter of time before the BoE follows suit.

Such state interference in capital markets and the free allocation of capital can only result in lower growth and lower living standards for all. A free capital market allocates resources in an optimal way, where each project will pay a cost of capital that reflects the true risk/return profile. Central bank interference like the new BoE policy disturbs this process and harms economic growth. The BoE, in its desperate attempt to keep the economy alive, is hammering another nail in the coffin.


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