Frances Coppola, who is a well respected commentator on banking issues, has issued a response to my comment piece in Holyrood magazine on green infrastructure quantitative easing. It's entitled 'Green QE and the Juncker Plan: a response to Richard Murphy' so I think it's fair to respond.
Frances has summarised my plan as follows:
- bond issuance by a government agency to fund infrastructure projects;
- purchase of those bonds by the central bank using newly-created sovereign money.
There are technical faults in that summary, but let me keep to the big issues and suggest her response comes in three parts. She suggests:
- that my plan is like the Juncker plan for investment in the EU, and then changes her mind;
- that issuing bonds to fund infrastructure projects is a good idea;
- that having them repurchased by the government using sovereign money is a very bad idea, albeit technically possible.
On the first point Frances reached the right conclusion: what I am proposing is nothing like the Juncker plan.
I could raise some technical issues on the way Frances thinks bonds must be issued in response to the second point, but they are not material to the argument here, so let me just note broad agreement and move to the third, and significant issue.
So let me turn to the third point. It seems that Frances has at least four objections to my plan that the government should use its right to create sovereign money for public good. These are:
- the Bank of England should not bear the losses on such investments;
- the government should not be telling the Bank of England what to do as it is meant to be independent;
- The Bank of England will lose control of monetary policy
- QE is meant to be reversible and what I am proposing does not look like it is;
- my plan could lead to inflation.
Other comments all seem to be wrapped around those themes, so let me address them.
On the question of losses there are a number of responses. First, Frances ignores the fact that this issue has already been addressed by the existing QE arrangements: the Bank of England has been indemnified with regard to its losses on this arrangement by the government. This is, of course, entirely appropriate; it is wholly owned by the government. In that case to argue whether or not the Bank of England should bear a loss or not is, then, irrelevant to this discussion: ultimately it is always the government's and so such an indemnity simply passes the consequences of the QE programme onto the government. But tellingly, in the process it also reveals who is responsible for that programme, which is very obviously central government and not the Bank of England. This is an issue I will return to below in another context.
There are two other issues on losses that I think Frances also ignores. The first of these is the rather obvious one that if the money that might be lost was created out of thin air in the first place the loss is, itself, somewhat notional unless the loss is greater than the sum loaned and that is unlikely.
More importantly, the perception of loss that France is using is, essentially, a microeconomic one because it is viewed solely from the viewpoint of the Bank of England balance sheet, but that is inappropriate on this occasion. The proposal I've made is to create a macroeconomic impact and therefore in any measure of loss the leveraged consequence of the economic activity flowing from the investment that green infrastructure quantitative easing might enable has to be taken into account. Since the Bank of England balance sheet would not measure this it is very obviously inappropriate to measure the loss at that point, which is precisely why an indemnity would need to be issued to it.
Let me then turn to the question of whether or not the Bank of England should take instruction from the government. As Frances herself says:
Richard's plan would force the Bank of England to CHANGE its monetary policy stance in order to do the bidding of the fiscal authority. This is "fiscal dominance", and it would mean the end of operational independence for the Bank of England. It's quite a problem, considering that the UK is a member of the EU, which enshrines the independence of central banks in treaty directives, and the Bank of England is a member of the Eurosystem and therefore (in theory) answerable to no-one.
To be sure, I have pointed out before that "independence" for a central bank is an illusion: central banks are only as independent as politicians allow them to be. So the loss of independence is perhaps not the main problem.
That might resolve that one in itself. But if in doubt, it's worth noting what Mark Carney had to say in response to a letter from Caroline Lucas in March 2014. As the FT noted, he wrote in the specific context f0o whether or not Green QE was possible that:
It is possible that if the MPC did vote to increase its asset purchases in future, it could expand the range of assets it purchased. Such a decision, however, would need to be agreed with the government.
I think that says a) all QE is under government control b) he will do what is asked.
Let me turn into the question of monetary policy. To do so let me go back to 1997 and the announcement that Gordon Brown made then about the creation of an independent Bank of England Monetary Policy Committee. According to the BBC he said:
I want to set in place a longterm framework for economic prosperity... I want to break from the boom bust economics of previous years.
That worked well then. Just as it has on inflation, growth, regulating the finance sector, preventing bank failure, changing the culture of politics and so much more.
It's also important to note that the BBC suggested in 1997 that:
It means the bank will now be free to decide monetary policy without taking the short-term wishes of politicians into account.
I am quite sure that the reference to the short term is is not a chance: this is what the briefing said. No one pretended, and no one should ever pretend, that a central bank should be above and beyond the control of a democratically elected government. That may be what bankers want, and may even be what bankers think is the case, but to suggest that monetary policy should be beyond democratic control is not just deeply worrying, it is profoundly anti-democratic. I am entirely happy that detailed workings of certain parts of government, of which I consider the Bank of England just one, can and should be delegated to committees of competent people, but to remove those committees from accountability is an affront to proper processes of government and so the objection to my proposal on the basis that it would take monetary policy into government control is, I hope, just a semantic error, because if it is anything else I am troubled.
I would add that this does not, of course, mean the end of monetary policy as Frances suggests. Short-term monetary policy would remain entirely under the control of the Bank of England. But given that I would only suggest that green infrastructure quantitative easing be used in periods when monetary policy is, in any case, largely ineffective (as it has been for five years) nothing changes in this respect: if that situation changed and the economy was sufficiently vibrant with business investment flourishing there would simultaneously be a need for monetary policy and no need for green infrastructure quantitative easing. There is, then, no conflict between the two.
What then of the concern that green infrastructure quantitative easing of the type that I have suggested would appear to be irreversible? I admit that I cannot take this objection seriously. If it was really necessary to reverse any green infrastructure quantitative easing at sometime in the future because the markets were so vibrant that the whole sum of £375 billion of government debt purchase between 2009 at 2012 had already been reissued into the money markets to reduce their exuberance then the problem that we would face would not be the irreversibility of the green infrastructure quantitative easing that I propose (which would, over the next few years, accumulate to a somewhat lesser amount than £375 billion) but would instead be the fact that we would have a runaway credit boom that would put us at risk of imminent financial collapse in the style of 2008. In other words, if the irreversibility of green QE was ever an issue there would be much bigger ones to worry about, and so I dismiss this objection now.
As for inflation? £375 billion has led us to zero inflation. Would another £50 billion of QE for each of the next five years really change that when there is, at present, a declining real money supply and a need to restore an inflationary environment? I hardly think so: in fact, I can only see it being a benefit. And as for the long-term, see the previous paragraph.
Let me pull all this together then. The first thing to say is that it is agreed that new investment is a good thing. Second, it appears to be agreed that green infrastructure quantitative easing is a new, and technically different idea from others that have been proposed. Third, Frances appears to be agreeing that technically green infrastructure QE is entirely possible. Fourth, with central government permission it is very obvious that it is also within the Bank of England's remit to undertake it: Mark Carney has already agreed that. Fifth, if it does create inflation that will be of benefit, and sixth, it's irreversibility is of no consequence, and of profound benefit to the projects that it will fund. Seventh, if there are losses then to the limit of the sum invested these will be purely notional: the loss will be of money that has already been created out of thin air. Beyond that any loss will have to take into consideration the multiplier effect that the investment has taken before a net appraisal of benefit is undertaken, which is precisely why the loss could not sit on the Bank of England balance sheet.
So, what objections are left? Only, it seems to me, that the state must not use its power to create money for the public good, and that this power must be reserved solely for the benefit of the financial services sector. That is not an economic objection; it is a purely political one. And that, I suggest, is all there is to Frances' objection to my proposal.
It is my opinion that the state can, and should, use its power to print money during periods of economic downturn for the benefit of the entire economy and everybody who lives within a state, and not just to bail out the financial sector. Some, it would seem Frances included, believe that this power should be reserved solely to benefit a small elite in the financial markets, which is how it has been used to date. I am entirely happy to disagree on this point, but I think it only appropriate to point out that this is what the objection really comes down to.
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If Frances Objection is to the notion of Sovereign Money she clearly belongs to the ‘inflationista’ school of thought where, as so as it is mentioned-people cry: “Weimar/Zimbabwe”. The low inflation (deflation) we have now is entirely to the benefit of those stockpiling cash -perhaps this is the fear, that sovereign money is a threat to the ‘party.’
Modern Money Theory and other groups such as Positive Money have dismissed the ‘inflationsita’ argument.
Money creation should be an outcome of spending decisions and not vice versa.
But the key point generally missed in national accounting is that the Bank of England/Treasury relationship is an agency relationship, not a counter-party relationship. The Bank of England has no ‘equity’ per se: the credit it creates and destroys on behalf of the Treasury is a credit instrument, analogous to a form of equity.
Richard, you have argued your case for Green QE very effectively here. The only way to evaluate it is to try it and at the modest level of £50 billion per annum, it should not trigger any dramatic effects.
We have discussed before how Prof Richard Werner tried to establish this in Japan but pressure from BoJ and BIS changed it to the QE modal we currently use.
There is always the question lurking in the shadows as to who actually exerts the final control at BoE – is it the Government, the City or BIS or a combination of all three?
The fact that Mark Carney clarified the position regarding the potential direction of QE funds suggests to me that your proposals are sound.
Must be gov’t – what this is spent on is under gov’t agency control -emphatically not BoE. They’re just a bank
Actually this is nothing like what Richard Werner proposed for Japan. The essence of Werner’s proposal was that credit creation BY BANKS (not by the government or the central bank) needed to increase. His measures were all aimed at increasing bank credit money creation:
– the central bank should buy non-performing assets from banks to clean up their balance sheets
– there should be a system of “guidance” for bank credit creation
– bank capital requirements should be loosened, not tightened
– government should borrow directly from commercial banks instead of issuing bonds.
They are listed in Werner’s paper here: http://www.res.org.uk/view/art5jul13features.html
Richard Murphy’s proposal does nothing to increase bank credit money creation. Selling infrastructure bonds directly to commercial banks would be in keeping with Werner’s proposal, although he would see little point in the government issuing bonds when it could simply borrow long-term from those same banks. But the central bank then buying those bonds back from commercial banks is not in keeping with Werner’s proposal, since it neutralises credit money creation. Nor is selling the bonds into the financial marketplace for them to be repurchased by the central bank.
I have explained in my post the crucial difference between Carney’s statement and Richard’s proposal. The Bank of England has been told it MAY purchase other assets, not that it MUST. Regarding the existing QE purchases, the Government reimbursed the Bank for purchases the Bank chose to make, but it did not instruct the Bank of England which assets to purchase. The Bank of England is not, and should not be, required to purchase particular classes of asset to meet political objectives.
I would agree that this is not QE as Richard Werner first thought of it
But he has endorsed the work of the Green New Deal group and written for us
I think that is some indication he has moved on
And the price you link to was about history, not the present
‘The Bank of England is not, and should not be, required to purchase particular classes of asset to meet political objectives’.
Are you serious? So if the BoE chooses NOT to do something, that is just apolitical is it? I doubt it in this context.
I don’t wish to be rude but Francis, you need to read a lot more about how policies are actually made in Government – that real people with real agendas make things happen within any rules or theory you talk of and can still exert political control to achieve political objectives.
For example it seems to me that Government borrowing of its own money from private banks is favoured over the printing of its own money by a certain political clique.
I wonder why Frances? I wonder why? Don’t you? Evidently not. It’s about time you did.
————-
ED NOTE: I would prefer enquiries were raised a little less aggressively although the reasons for frustration are understood
Richard,
Very important points you make of to whom the BoE should be democratically accountable. The ‘independent central bank’ notion is just plain wrong.
By the way people have to get over this ‘money creation’ thing. It is not something the treasury / BoE do under very special conditions e.g. for QE. It occurs every moment of every day whenever the government spends.
That expenditure is not ‘tax’ money (the very act of taxation destroys the money collected), nor is it sourced from ‘government borrowing’ (is a complete misnomer as ‘gilts’ are just a deposit account at the BoE, that NEVER gets touched again until handed back to the bond holder maturity date)
What her analysis fails to address is that climate change is an existential threat to our country, our people, all of humanity and the living biosphere.
Do you think Churchill was weighing up whether to defend the nation in 1940, lest the Bank of England incur losses by investing in the production of modern fighter aircraft ?
Her position is nonsensical and obscurantist when seen in the real context of what this policy is trying to achieve – ”we can’t save ourselves as it might break some arbitrary accounting rules – sorry world”.
Ridiculous.
Relevant to what you say here is a statement made by the Australian economist Bill Mitchell. He says:
“What is the purpose of the economy? What does it do? The economy is not there to deliver fiscal surpluses to the government.
The economy is where goods and services are produced, incomes are generated and people find jobs. The role of government therefore is to make those things happen not to undermine them.
Government policy makers should be firmly focused on maximising the potential of its population. The sustainable goal should be the zero waste of people! This at least requires the state to maximise employment — which means provide work for all those who desire work at the current wages.
It should not mean anything less than that. Policy should always be consistent with that goal.
Remember always that the Economy is Us.”
This statement makes it clear that fiscal policy is always political. Allowing the financial sector to control the money supply is a political decision not a prudent one, it just makes a lot of profit for them with a guaranteed bailout at the end when they create too much household/mortgage debt that can’t be repaid.
Creating money by quantitative easing or deficit spending is the duty of government, to make the economy work for its citizens.
It has been shown from the 2008 crisis that if this is not done, governments will get a deficit in the end anyway from the crisis created via the build up of debt and unemployment.
A friend of mine took me racing last year, and insisted he could pick winners.
He suggested I place a bet in the first race.
Instead, I asked him to pick the winners of the first three races while I watched.
When he failed to correctly identify any of them, I decided to ignore his advice.
You and your statist friends will be allowed to centrally-plan all our futures when you demonstrate yourselves capable of accurately forecasting economic events.
So did the neo-lib dominated economists who dominate our lives forecast what was going to happen in 2008? No they didn’t did they? Even the Queeen asked that question and didn’t get straight answer did she?
The reason why even the markets can get forecasts so wrong is because of increasing deregulation of the economy – a lack of interventionj by Government. Not as the neo-libs say, because of too much.
You don’t see this because you are so obvioulsy prejudiced.
Peter Schiff called it.
Put simply, your advice about solving these problems would be credible only if you had forecast them.
the accumulated wisdom of Wall Street, Greenspan et al and City didn’t forecast the Global financial crisis, which is why i place little faith in those who act as their flag wavers. The crisis and the cost, which goes into trillions with millions of lost jobs was not a ‘statist’ crisis, but a private banking one.
I believe they knew what was going to happen, the neo-libs and their billion Lord’s have both got what they desired due to the crash
Doesn’t that apply to you, also? Or is the rest of the universe of human activity and thought to be ignored when you act the role of the Oracle?
Ivor
Continuing to make the same point about the State not being able to forecast economic issues without conceding that the private sector or market did exactly the same (and still cannot accept that markets only corrected themselves with Governement help) makes you look like a fool. Do a bit more research mate and get up to speed.
Richard,
You complain about others being rude to you but yet you continue to allow Mark Crown on your site to add nothing to the debate, except be very rude to other people. Surely you are better than that?
I asked for moderation
It has been agreed
And by the standards of most blogs he was very tame
I can’t improve on Cowperthwaite:
“In the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster”
Mistakes are inevitable, but the free market corrects faster.
Agreed?
No
All done by human beings
No reason at all why this logic follows
The evidence, indeed, noted long ago by Keynes, is that it is entirely likely that markets will not correct themselves
I find it difficult to understand the complex fiscal and monetary arguments that are discussed on your blog, but I sense that we could miss out on a once in a generation opportunity to invest in projects like you propose. like you have educated me on in previous blogs its obvious that there is an agenda against the state and big government and the overwhelming majority of the media is biased towards the right so how can you with these obstacles get your ideas out there, so that the masses can see there is an alternative to austerity and one that has little or no risk. If we don’t act on this opportunity we have right now I believe economist of the future will look back in disbelief that the ideas you and others like you have didn’t overcome the biased media and into the minds of ordinary folk. with all the media outlets available these days how does the austerity narrative which when put into practice brings misery to most become almost gospel. In My opinion we don’t have the democratic framework that could overcome the for said barriers. I think europe is where your ideas will find willing ears.
You say there has been no inflation, but what about house price? The most expensive things that people can buy is going up in price very fast. A 10% increase in something like a house is much more impactful than a 10% increase in baked beans.
That inflation resulted from QE being misapplied
This proves QE can create inflation, but in this case of the wrong sort
Bonds? Equities?
All the evidence suggests QE has blown asset bubbles and has failed horribly as a stimulus to aggregate demand.
In short, it has impoverished the poor and enriched the rich.
Agreed?
Yes
That’s why I designed something very different
You clearly have not bothered to read it
So presume you will be deleted
I hope the following is constructive. You could look at Green QE as a combination of two policies:
1) a program of £50bn infrastructure investment each year, funded by the Government issuing additional gilts (which they can do very cheaply now)
2) £50bn of QE each year, used to buy up, and effectively cancel, £50bn of gilts
If you combine those two, you have £50bn of infrastructure investment a year, with no cost of funding. (I’m ignoring that your proposal involves issuing infrastructure bonds, not gilts; but since the bonds are effectively cancelled either way, perhaps this technical detail can be glossed over?)
Now the two policies may well work much better in combination than separately. And the massive unused capacity in the economy is an argument for both of them. But perhaps to some extent, they can be considered separately.
Is the rationale for (2) that the Bank of England’s monetary policy is incorrect, because it is seriously undershooting its 2% inflation target (with a danger of deflation)? Perhaps Frances doesn’t like that you are sneaking in a disagreement with the BoE about monetary policy as part of the Green QE proposal, rather than arguing for it explicitly.
The point was made (in the comments on Frances’ blog) that it would be a bad idea for infrastructure investment to gyrate up and down according to how much QE stimulus is required each year. Though you suggest that we could commit to £50bn for 5 years now; is that a kind of “forward guidance”?
Would it be better to say that the scale of infrastructure investment should be fixed at £50bn a year for 5 years (or, i would prefer, for 10 years); and that initially it should be funded by QE, but later – when the MPC says that more QE would risk excessive inflation – it would be funded other ways (e.g. by selling new infrastructure bonds to pension funds)?
Your logic is close to mine
I can see now way there is a problem with such guidance
Worth reading this http://blog-imfdirect.imf.org/2015/05/01/ten-take-aways-from-the-rethinking-macro-policy-progress-or-confusion/#more-9503
OK Richard.
I will take this on board and be less direct in future. But if I wander into being more direct, then please just pity me.
In mitigation, I’m just a working class lad from the Midlands who managed to get into University (I’ve just finhsed an MBA after a BA(Hons) in 2000) and has learnt a lot but is still bascially working class and not middle class in manners perhaps. I’m driven by getting answers to why my father was made redundant by asset strippers; why I was made redundant twice in other sectors of the economy and why I still face redundancy now – especially if the Tories get in again. And ditto people who I have known suffer the same fate through no fault of their own. I don’t dwell with accountants, doctors or lawyers. I’m alongside people with less esoteric jobs. I tend to be more Dennis Skinner than Alan Johnson I’m afraid!! I am not a politician and nor do I want to be. But I am angry and I want answers.
But it is frustrating that many of our problems are created from perfect theories that fail to take into account the human factor – such as greed, irrationality (as opposed to being ‘rational’) political agendas and what actually happens when politicians get together with civil servants to make policy despite ‘the rules’ etc.
Even the maths was wrong about how deriviatives worked that contributed to the 2008 crash – instead of spreading risk (according to theory) they actually amplified it and increased contagion in the global financial system. And they still aren’t regulated as much as they should be.
And what about Rogoff and his mate who wrote a piece that bascially set a size limit on Government economic activity so as not to supposedly impede markets? A paper that was used by Osbourne to justify public sector cuts. A paper that was later exposed to be badly flawed and embarassed its authors (I thought Rogoff was one of the good guys)? All this whilst Thomas Piketty was being taken to the cleaners over his book.
A lot of this reminds me of Dr Pangloss in Candide – ‘all is for the best’ etc., and we can still ignore the economic suffering of those who really pay the price for such fundamentally bad ideas if we just accept these ideas are perfect and unquestionable.
As someone who really got cracking in his education as a mature student and has revelled in learning, I ask how can it be that in an information rich era, so many lies and untruths can become recieved wisdom? I think it is because a lot of these theories are actually wishful thinking. They make things sound so easy. And they are supported rather too well by a collusive press and academia again reminiscent of Voltaire’s Candide who want to create this perfect world and then place blame on those for whom it has not worked rather than the deeply flawed ideas themselves.
Having said all that I still think that Ms Copolla is dealing in wishful thinking in the last statement of her response.
Finally, I believe strongly that modern citizens need to free themselves from media driven explanations of their world and simply seek the truth elsewhere and just read more – freeing themselves from a reliance on ‘opinion’. That is the only way forward for us I can see at the moment – we must take personal responsibility to get at the truth and the truth very often reveals balance – not orthodoxy or just ‘one way’.
Yours apologetically
Mark
No need to apologise
Your comments are appreciated
Thank you – I will work harder at a more measured tone in the future.