I first heard about the government's new "credit easing" plan from David Gauke MP, who spoke at at one of the ASI's tremendously successful events. The idea to give government backing to small business bonds in some form sounded strangely familiar. Allister Heath, who also spoke at the event, had the same feeling of deja vu:

It is hard not to see the parallels between Osborne’s plans, which would involve massive government intervention, and what happened to the US mortgage market. If it decides to start a vehicle to purchase bonds issued by small companies, as hinted yesterday, the UK government would encourage their issuance. But it will also mean that the private sector will no longer have an incentive to check their quality, which means that we could soon see an explosion of dodgy, sub-prime small business debt.

Thousands of businesses could over-extend themselves and go bust, and the taxpayer would risk losing a fortune, especially if sound firms continue to borrow from banks and the bad ones tap into the government’s scheme. Osborne may also want to encourage the securitisation of small firms’ loans. Again, this may be a good idea but not if moral hazard destroys the idea as a result of government guarantees. Osborne’s real plan is probably to create a system that could be extended to guarantee all private bond issuance in case the Eurozone implodes; but this would threaten the UK’s solvency by over-extending the government’s balance sheet.

If there was one lesson from the subprime mortgage crisis, it was that government backing for risky loans creates perverse incentives. But the government seems to be completely preoccupied with debt and credit. Instead of cutting back on the state to encourage economic activity, Osborne focuses solely on doing so to cut the deficit and reducing the government's cost of borrowing. In other words, in doing the least amount necessary to fix the debt burden. That's important, but only one part of the story. 

The same myopia can be seen here, in small business policies – where firms need tax and regulation cuts, he gives them government-backed credit with all the financial danger that will create. We need a passionate free marketeer running the show to get the economy moving again. But in Osborne, we've got a zero-conviction manager.