Japan expert warns UK FSI not fit for economic recovery
"The alternative [to restructuring the banks] is a double dip recession and persistently slow-growth," warned Dr Adam Posner, speaking to the Cass Business School. Posner, an American academic and the MPC's latest recruit, is internationally renowned for his knowledge and understanding of Japan's recession and the so-called 'lost decade' of the 1990s.
In his first speech as an external member of the MPC, and on the same day that Professor Posen discussed some of the issues arising from the introduction of quantitative easing this year to a Cass audience. Posen argued that the impact of unconventional monetary policy on the economy is likely to be positive even though it is not possible to be precise about the size or timing of its impact.
He said there is no evidence to support the conclusion that quantitative easing will lead to unacceptably high inflation. He argued that policy should be thought about in terms of its impact on specific credit markets as well as the overall sums spent.
A key concern is the ability of the financial sector to support recovery. He said: “The relative limits in the UK on availability of non-bank financing for smaller companies may constrain emergence of a sustainable private-sector led recovery”. Posen discussed how the structure of the UK financial system provides few alternative means of financing for businesses when the major banks are troubled. "This is a disturbing parallel to Japan in the 1990s. Those parallels should not be exaggerated but neither overlooked."
He argued that restructuring the UK financial system to provide more banking competition and more access to non-bank financing is in the interests of economic recovery as well as of financial stability. Posen restated his view, "that the banking system must be largely fixed before the macroeconomic stimulus is needed to be withdrawn.”
To view the full speech please visit: http://www.bankofengland.co.uk/publications/news/2009/080.htm