The Credit Squeeze in Financial Crisis by Bank of England

This Friday, I visited the Bank of England with our professor. And the history about their financial management in this country shocked me greatly. However, compared with the Federal Reserve, their policies presented to be more conservation. According to the definition of Credit Squeeze, government measures designed to limit the supply of credit in the economy, in order to curb inflation by controlling growth in the money supply. Two example of credit squeeze include restricting bank lending and credit sales, and increasing interest rates. Regarding the capital structure, debts could obtain some advantages to help companies survive the crisis. For example, debts are before taxation item, so that the company could reduce their taxes. But, at the same time, it also provides the extra risk on companies’ cash ability and the credit risk in the whole industry.

Last Thursday, the Wall Street Journal has comment about UK’s credit squeeze policy in the financial crisis. In this February, the real estate suffered from the sharply drop on the price, and the costs of debt are increasingly pushed up. Moreover, because of the credit squeeze policy, more and more small and middle size companies defaulted in their business. Commenters has post their attitude that they believe the UK may suffer more about the depression in the market, and they are gambling about their future.

Speak from the MPC (Monetary Policy Committee), what they did was aimed to keep their market steady and reduce the risks in the capital market. However, the policies really did harm to the development. In this financial crisis, the sub-credit swap broke the confidence of the capital market. Their policy aimed to reduce the doubts in the market, and more assets as deposits, if these are some troubles in the market, the creditor would reduce their lost. Secondly, the inflation could be controlled by these policies. The Quantitative Easing Policy speeds the liquidity up, and at the same time, the inflation is trigged. The market would be destroyed in the great inflation.

However, whether the policy is successful or not is due to the harm of inflation and lack of liquidity. If the inflation provides more harm to the national economy, the credit squeeze should be more effective, vice versa. In this financial crisis, UK faced with the depression of the market. Customers were doubt about their purchase ability, and the employment market was terrible. Companies cut their employment plan to survive. I think the government has to do something to incentive the market, and the liquidity is so low that it possesses the potential to develop without inflation. Last but not least, the squeeze destroyed the fairness in the market, and if companies started play unethically, the market fairness would be recovered very slowly in the future, which could occur the further troubles to the national economy. Therefore, I think that it is the time to loose their controls on the credits to give opportunities to the market.