An important argument at the moment is whether or not the so-called credit channel exists. When central banks carry out quantitative easing, and even more so in the case of a “credit easing” policy like the one George Osborne announced recently, a major reason for it is that they are trying to reduce the price (i.e. the real-terms interest rate) and increase the supply of loans to businesses. This being their effective cost of capital, this should encourage them to invest, and thus to increase aggregate demand. This is the New Keynesian account; the monetarist one is that creating an expectation of future inflation creates a disincentive to hold onto cash.

But there is a criticism of the credit channel that works like this: as banks actually create credit, they are only loosely constrained by its supply. Instead, they supply just as much as their customers demand. If the customers are businesses, they are more likely to worry whether their new venture is a good one or not. If it’s a winner, whether it’s a winner with a carrying cost of 4% or 6% isn’t a primary consideration. If it’s a loser, it’s a loser no matter what the interest rate. The bank operates in one of two states – essentially, risk-loving or risk-averse. In the risk-loving state, it expands its balance sheet as fast as its customers demand credit. In the risk-averse state, it digs in and hoards cash. Therefore, there is no credit channel, and the transition between the two states is something like the Minsky model of financial crisis.

Now, I responded to Daniel Davies (who made exactly this argument on the blog he is still keeping private – surely it is time for an Occupy Dsquared movement) on the grounds that if a big, price-insensitive buyer like a central bank can cause a dramatic turnaround in the market for Swiss francs, it could by the same logic flip the bank from state 2 back to state 1 if it went in hard enough.

Here is a data point: the refusal rate for British SMB loans tripled from 2007 to 2010. This could be used in either sense – the credit channel side would argue that this shows that, yes, the supply of credit to the business sector has been choked off, the demand first side would argue that SMB lending is a terrible business to be in at the moment because there’s no demand for their products. The problem is, however, to what extent agency is with the sell- or the buy-side.

On the other hand, the UK business sector excluding finance and real estate was a net saver through the boom years; surely that’s got to be a problem.

At Crooked Timber, they’re discussing a Tobin tax. Andrew F. asks:

How well did this work out for Sweden?

In the ruins of the city once known as Stockholm, ragged survivors barter rotting fish for scraps of used toilet paper outside the scorched hulk of the former Riksbank, that was once the oldest central bank in the world. Many have hacked out their own eyes with shards of plastic rather than see the desolation and depravity they brought upon themselves. “Would we hadn’t done it! The Tax that Dare Not Speak Its Name has reduced us to things lower than beasts!”

Elsewhere, corpses litter what were the chic alleys of hipster Södermalm, marking out the last desperate and insane brawls over crispbread and Cheap Monday products, clearly fought to the knife or rather to anything that would take an edge, in that grim night without darkness.

In the darkened concrete bunkers of what used to be one of the world’s largest Internet exchange points, Netnod, we found the rotting bodies of sysadmins still surrounding a router that appeared to have exploded, as if some sort of wave of pure evil had exploded across the wires from the hearts of a million bloggers the moment the first transaction tax was assessed.

And they tell me it’s worse in Skane. That’s how it worked out for Sweden.

(Although, the Greek source quoted here seems to be thinking along the same lines:

“If we default, it’s not just the domino effect. It will make Argentina look like small game. This place will become worse off than Bangladesh. People will be killed for a sandwich as they cross the road. It will be that bad.”

)

From William Keegan’s column in the sadly reduced business section of the Observer, a newspaper that used to be worth buying just for its business section, it looks like the sunshine club has got another member, ex-MPC man Christopher Smallwood of Lombard Street Research:

In Lombard Street Research’s Monthly Review for September, the economist Christopher Smallwood reminds us that “a currency system with Germany at its core necessarily displays a strong deflationary bias. For a monetary union to work well, it needs to be operated on the basis of ‘symmetrical obligations’ among the members. But if the strong surplus country is perpetually unwilling to take expansionary action, all necessary adjustments within the system have to be made by deficit countries taking deflationary action.”

Smallwood points out that Greece, Portugal, Spain and Italy have suffered a rise in costs relative to Germany and some of the northern economies of up to 30%….

Meanwhile, the BANKERS! remind us that something like 15% of German GDP is accounted for its intra-eurozone trade surplus. Also, note that Jürgen Trittin and the Greens are calling for a Northern European fiscal reflation, according to the transcript of the EFSF debate.

Speaking of the Observer and bankers, Heather Stewart quotes the IMF:

“The large number of ‘underwater’ mortgages poses a risk for a downward spiral of falling house prices and distress sales that further undermines consumption and labour mobility,” it warned, calling for courts to be allowed to write off a proportion of mortgages where borrowers have got themselves in trouble; for the taxpayer-backed mortgage guarantors Fannie Mae and Freddie Mac to encourage writedowns; and for an extension of state-level programmes to support troubled homeowners.”

The IMF is now arguing for unilateral cramdown by the GSEs.