The merits of such interventions need to be judged on a case-by-case basis. For tonight’s discussion I just want to argue that such decisions should be undertaken with the support of the democratic political system and should be implemented as a fiscal operation. Indeed, during this crisis, the UK Government has made a number of such interventions – such as the Enterprise Finance Guarantee Scheme and the Vehicle Discount or “Scrappage” Scheme. The Special Liquidity Scheme Now, as an aside, some keen watchers of central banks may want to argue that the Bank of England’s Special Liquidity Scheme (SLS) appears to have provided £ funding for the UK banking sector. The SLS, supported by a Government indemnity, was probably the single most generous liquidity support scheme introduced by a central bank during the crisis. 4 Its  2  In the past, when financial markets were less well developed, the Bank of England has played a part in selected industrial or financial market interventions (see Sayers, 1976), but that is not a role we have now. 3  The Bank of England issues banknotes of course, but these are monetary liabilities or “central bank money” which impact on the monetary stance. They are backed only by the highest quality assets, in order to maintain confidence in the integrity of the currency. 4  This was required given the relatively small capital base of the Bank of England – around £ ½ bn at end-Feb 2009.
That is the largest recorded quarterly fall in output since 1958. In the wake of the financial dislocation of Autumn 2008, there was a collapse of confidence and elevated uncertainty which had a profound effect on consumer demand and investment intentions. There was also an intensification of the “Credit Crunch” which had been in train since the start of the crisis in mid-2007. A range of policies had been introduced in the United Kingdom to prevent an economic meltdown. That included action to re-capitalise some of the banks; guarantee some of their funding; expand liquidity assistance and to set appropriately accommodative fiscal and monetary policies. Governments around the world took very similar steps. Asset purchases were one part of the policy response. At its peak, the Bank of England bought nearly £ of commercial paper and corporate bonds (Chart 2). This is sometimes compared with the eventual total of £ gilts purchased, prompting the question why the Bank didn’t buy more private sector assets? This question reflects a – perhaps natural – misunderstanding of the different purposes of these interventions. The gilt purchases were intended as a monetary policy operation to inject a substantial amount of money into the economy. The consequences of that policy have been addressed in Bank publications (Bank of England, Quarterly Bulletin, June 2009 for example), speeches and elsewhere. There has been much less discussion about the private sector asset purchases.