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The case for a new kind of quantitative easing

Policy-makers are clinging to a rigid determination to do everything at arms-length. Even when it do

Vince Cable famously described his critics as the "ideological descendents of the people who sent children up chimneys". But the real problem is not the influence of those who voted against the Ten Hours Bill. It is that economic policy remains in the hands of those with a snobbish horror of trade.

Perhaps it is a horror of government intervention. Perhaps it is a horror of broken finger nails. But, whatever it is, policy-makers cling to a rigid determination to do everything at arms-length. Even when it doesn't work.

Instead of effective local economic regeneration, based on using local money flows more efficiently, we have plans to raise the motorway speed limit to 80 mph. Instead of reforming local government systems to bring to bear people's face-to-face skills and pride in the job, we get shared back office services and call centres.

But worst of all, instead of ambitious projects to direct new money where it is needed, we have quantitative easing -- a hands-off, labyrinthine scheme for buying government bonds from banks, which they then use for bonuses. All the evidence from Japan over the past generation is that this form of quantitative easing doesn't work. It seems unable to kickstart the zombie banks into life.

But perhaps that is hardly surprising, because it is so indirect. Why have we lost our faith in our own ability to roll up our sleeves and make things happen?

The news that the government will launch "credit easing", a project to invest government money in small business bonds to help them expand, is a sign that the coalition has begun to feel the same way. It is a sign that ministers realise not just that Project Merlin has failed, but that if you want something done, you will be as old as Methuselah (as Ebenezer Howard used to say) if you expect the money to trickle down magically into the right sectors.

You have to use money more precisely, not just from the centre but locally too. We have to find the enterprising people and the green business projects, help them with their plans, find them the start-up finance, provide them with mentors. There is no point waiting politely for the trickle down that never trickles.

So here is the real test. When we get a new round of quantitative easing, as we almost certainly will, can we persuade the Bank of England to abandon the gentlemanly -- and, let's face it, downright wasteful -- hands-off method?

If they are going to create the money we need, interest-free, then for goodness sake, they must direct it to where it matters. We don't have the time for trickling. They must:

  • Put it directly into the new institution, buying small business bonds.
  • Buy bonds in the new Green Investment Bank, so that the money goes directly into loans that build the green economy (green quantitative easing).
  • If necessary, create the money to pay off the euro debt that threatens the world.

No more polite distaste for the mucky business of making things happen. It is time to act and to innovate. Because, at the end of the day, economics was made to serve humanity, not humanity to serve economics.

David Boyle is a fellow of the New Economics Foundation and the author of The Human Element (Earthscan).