Richard Murphy and Colin Hines published the Green QE report, which is summarised below.
In March 2009 the Bank of England began a programme of quantitative easing in the UK – in effect, the Bank of England granted the Treasury an overdraft but to keep the European Union happy had to do so by buying Government gilts issued by the Treasury from UK commercial banks, pension funds and other financial institutions.
There were three reasons for doing this:
- To keep interest rates low;
- To provide banks with the money they needed to lend to business and others to keep the economy going.
- To make sure there was enough money in the economy to prevent deflation happening
No one was sure whether quantitative easing would work, and as we note, no one is sure for certain whether it has worked.
We do however suggest in this report that several things did happen:
- The banks profited enormously from the programme, which is why they bounced back into profit so soon after the crash– and bankers’ bonuses never went away;
- The entire government deficit in 2009/10 of £155 billion was basically paid for by the quantitative easing programme. If you wanted to know how the government met its costs, now you do; There was a shortage of gilts available for investment purposes as a result of the Bank of England buying so many in the market. Large quantities of funds were invested instead in other financial assets including the stock market and commodities such as food stuffs and metals.
- The USA also undertook quantitative easing at the same time as the UK, which meant that despite near recessionary conditions commodity prices for coffee and basic metals such as copper have risen enormously. This has impacted on inflation, which has stayed above the Bank of England target rate;
- Deflation has been avoided, although the relative role of quantitative easing in this versus the previous government’s reflation policies is unclear;
- Interest rates have remained low.
However, one thing has not happened, and that is that the funds made available have not resulted in new bank lending. In fact bank lending has declined almost steadily since the quantitative easing programme began.
there is an urgent need for action to stimulate the economy by investing in the new jobs, infrastructure, products and services we need in this country and there is no sign that this will happen without government intervention.
For that reason we propose a new round of quantitative easing –or Green QE2 as we call it.
Green QE2 would do three things. First it would deliver the Green New Deal – the innovative programme for investment in the new economy the UK needs as outlined by the Green New Deal group in its reports for the New Economics Foundation. This would require three actions:
- The government would need to invest directly in new infrastructure for the UK.
- The government needs to invest in the UK economy, in conjunction with the private sector, working through a new National Investment Bank;
- The government must liberate local authorities to partner with the private sector to green their local economies for the benefit of their own communities, and it can do this by providing a capital fund for them to use in the form of equity that bears the residual risks in such projects.
A second round of quantitative easing should involve direct expenditure on new infrastructure projects in the UK.
For example there is a desperate need for new energy efficient social housing in this country, for adequate investment in railways, not to mention a reinstatement of the schools rebuilding programme. Undertaking these activities would give the economy and immediate shot in the arm as well as providing infrastructure of lasting use which would more than repay any debt incurred in the course of its creation.
This is the result of the ‘Keynesian multiplier’ effect. This is the phenomenon that occurs when government borrowing to fund investment takes place during a time of unemployment.
That borrowing directly funds employment.
That new employment does four things.
First it reduces the obligation to pay benefits.
Second, it means that the person in that new employment pays tax.
Third, it means their employer pays tax on profits they make.
As Martin Wolf, the eminent Financial Times columnist has said in this FT video: “Borrowing is no sin, provided we use the funds to ensure that we bequeath a better infrastructure to the future”.
This is what we believe the programme we recommend would do and this is precisely why it is appropriate to do it now when the cost of government borrowing is so low, a point Wolf and Skidelsky also make.
Borrowing now to spend into the economy is the basis for the first stage of Green QE2 – and of the Green New Deal.
Read the whole report here: http://openaccess.city.ac.uk/16569/1/GreenQuEasing.pdf