Bad workmen always blame their tools; and when it comes to quantitative easing (QE) we’re doing just that. QE (the purchase of financial assets via Central bank created money) has an enormous potential to get ailing economies moving, as numerous central banks throughout history – including that of our new Governor Carney’s native Canada – can vouch. We’re just not doing it right.
The money created through our current QE programme has not been going where we need it. Instead of ‘portfolio rebalancing’ (where investors reacting to QE switch their money away from government debt and into the corporate sector, boosting investment, production and employment) our economy is becoming distinctly unbalanced. The majority of our new QE money is winding up in the property market and in financial speculation; inflating the prices of these unproductive assets, enriching their owners and generally being of no help to the real economy at all.
Can Carney be smarter with QE?
Instead of relying on the UK’s risk-averse financial markets and sickly banking sector to start lending productively, the Bank of England must use its power of money creation to buy assets in intermediaries that have a remit to invest in the real economy. Buying bonds in the Green Investment Bank or the British Business Bank, for example; financing the still-born Green Deal; or capitalising a public interest company in order to build much needed affordable and social housing.
Even with no additional QE purchases, a total of £100bn of QE purchased government bonds will come up for renewal in the next 5 years. That’s equivalent to the government’s entire capital spending plans that Danny Alexander recently announced for the same period. It’s a huge opportunity to get QE right.
You only have to look at Canada to see how it’s done.
In 1944, the Canadian government and recently-formed Central Bank faced an enormous reconstruction challenge following WWII. One of the solutions was to create a new public bank, the Canadian Industrial Development Bank (IDB), to support an SME sector desperate for funding.
But where was the money to come from given a sky-high post-war public deficit? The answer was simple: the Central Bank created money to capitalise the IDB which would then lend to SMEs as needed. From 1944-1972, the IDB authorised 65,000 loans totalling $3 billion for 48,000 businesses, employing almost a million people. Not a single penny of taxpayers’ money was needed.
But is QE Canada-style really viable at the fiercely independent Bank of England?
Nef’s report on strategic QE, published yesterday, highlights one more requirement to make QE work in the UK. To safeguard the Bank of England’s independence on monetary policy (deciding how much new money to create), while ensuring the new money does what we need it to, a new financial body is needed. We’d call this the monetary allocation committee (MAC). Staffed by independent experts, but accountable to the Treasury and Parliament rather than the Bank (given its more fiscal remit) the MAC would decide where newly created money goes.
The fact is that the Bank of England, through schemes like Funding for Lending and the Financial Policy Committee is already blurring the line between monetary and fiscal policy. Our proposal makes the division transparent and democratically accountable. The result would be win-win-win: create sustainable growth and jobs, boost productivity and boost exports, all without increasing the public debt. What’s not to like?
This piece was originally published with an incorrect byline.