We Just Crashed On The Motorway.

06/03/2009 by info.

Imagine you are driving along the motorway, the road is clear and you can drive safely at 70 mph without any trouble.

Now image trying to drive at that speed in rush hour traffic, what often happens is that someone gets concerned about whether they are too close to the car in front, they apply their brakes, you are not sure about how quickly they are slowing down and you apply your brakes. This creates a pulse and leads to all the cars on the motorway coming to a halt.

This could be used as an analogy for the recession, as there were simply too many businesses trading, leading to inflation. The brakes were applied and everything stopped, in fact there has been a big crash.

So now the Bank of England has further reduced base rates and has decided to take the route of quantitative easing. Quantitative easing without being too technical is the creation of new money out of ‘thin air’ by a central bank, its injection into the banking system, which allow the bank to technically lend the money to others. It is the same as creating another lane on the motorway.

It is now hoped that all of the cars on the road can continue along their journey simply by some of them taking the new lane on the motorway, or having access to this new money.

But wait it was the banks who were policing this motorway in the first place, the motorway grinded to a halt because they gave money for everyone to buy old cars, and then feasted on hamburgers and pizza on the hard shoulder out of their profits.

It these same banks do not lend this new money, and let people move into this new lane then the economy will remain blocked.

What is needed is for the banks to use a great deal of business acumen, being able to recognise the businesses that should survive and the businesses/old cars that should be scrapped.

Do the chief executives of the banks and your bank manager have this business acumen? To recognise a good business opportunity when it is presented to them? Some of them couldn’t even run their own business. So we will see.

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