Chancellor George Osborne’s latest idea to stimulate the economy is to offer the banks money (£140bn) to lend to firms and households. The idea is that families will borrow more and spend the extra cash on goods and services, while firms will borrow more to invest in providing these goods and services. With one bound, the economy is free? Not quite.
Interest rates are already at rock bottom, where they have been for almost two years. Larger firms are actually sitting on mountains of cash that they are reluctant to invest because they do not see any sign of life coming back to the economy any time soon. Small investors and pension funds have plenty of money that they could lend to businesses if they chose to. Households have been scaling down their borrowing or adding to the piles of money under the mattress, fearful that they might be hit by unemployment or an unexpected bill.
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