You can buy bonds but you cannot make banks lend. That is the problem in the UK where the BOE has aggressively eased to solve the recession crisis only to see that the money supply is not growing as fast as expected.
The key issue is now understanding whether the credit crisis was a balance sheet problem or liquidity problem. We have seen spreads decrease in LIBOR and the corporate market as the perceived risk of corporate and financial institutions have declined, but there has been constraints on the amount of new lending. Bank balance sheets have yet to be cleaned up. Increasing the supply of money and cutting rates may not change the desire to lend money.
Watching the BOE is important because it is facing the same problems as the Fed. We are getting a preview of what is in store for the US.
The key issue is now understanding whether the credit crisis was a balance sheet problem or liquidity problem. We have seen spreads decrease in LIBOR and the corporate market as the perceived risk of corporate and financial institutions have declined, but there has been constraints on the amount of new lending. Bank balance sheets have yet to be cleaned up. Increasing the supply of money and cutting rates may not change the desire to lend money.
Watching the BOE is important because it is facing the same problems as the Fed. We are getting a preview of what is in store for the US.
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