Robert Peston has written a long piece on Corbynomics. As he says:
Corbynism is a kind of collective howl - which can be heard in different accents all over the world - that it doesn't have to be this way.
He's right. And continues:
In this context, Jeremy Corbyn's most important policy is actually his most novel. And it is what he calls, alluringly, "quantitative easing for people instead of banks".
This is how he describes it: "one option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects".
Of this he adds:
For the avoidance of doubt, this is not same-old, same-old socialism; it is new, radical thinking.
For which I offer my thanks. I will return the compliment: he tries harder than most to explain and offer reasoned commentary upon People's QE, about which he then adds:
But in a world where globalisation and the free movement of capital are inescapable realities, so-called quantitative easing for people brings considerable risks. Some will see it as stupendously dangerous.
For detail on what it involves, Jeremy Corbyn prays in aid the campaigning tax analyst, Richard Murphy.
I have been called a lot of things: stupendously dangerous is, I think, a new one. So what's Robert Peston really trying to say? He effectively does a compare and contrast between People's QE and conventional QE. Of the latter he says:
But probably the most important point about quantitative easing as currently configured is that the debt bought by the Bank of England has to be repaid - eventually - by the Treasury.
In other words the £375bn of new money created by the Bank of England through quantitative easing will one day be withdrawn from the economy, through the repayment of debts by the government, when the economy is perceived to be strong enough.
He prudently adds:
Now it will be decades before all the £375bn is returned. And theoretically it could never be repaid, if the Bank of England simply decided to roll over maturing debts each time they are due for repayment (as it is doing at the moment).
But the important fact is that the debts still exist as a real liability of the Treasury - and that matters.
This is why he says that:
Central banks, like the Bank of England, have an extraordinary privilege and power to magic money out of nowhere. Which is another way of saying that money has no intrinsic value, and is only worth what we as a society determine it is worth. And, in the reality of global financial capitalism, it is currency traders who decide what sterling is worth, nano-second by nano-second.
So to avoid a collapse in the currency and rampant inflation, central banks have to be seen to be exercising great restraint in the creation of new money.
And, he notes:
The lore of central banks - which, rightly or wrongly, is almost universally accepted by investors - says that central banks should only look at whether there is too much or too little money in the economy in determining whether to increase or shrink the supply of money, and not at narrower economic questions such as whether there are enough roads or houses being being built in Britain.
So let me be clear, at a rather boring technical level I agree with him. Which is why I have been, and Jeremy Corbyn has also been, very keen to make clear that the Bank of England will not be investing in roads, or houses, or green energy. It would in fact be buying bonds from a National Investment Bank which would, under government direction and subject to government guarantees, engage in such investment issues. All that the Bank of England would do would buy some new forms of bond: it would not manage a single project or decide upon any investments. And as Robert Peston notes:
Probably Jeremy Corbyn and his counsellor Richard Murphy would argue that this is unduly alarmist - and that all the Bank of England would be doing would be to purchase new debt issued by energy or transport companies, presumably state-owned or state-backed, and this is surely not much different from the Bank of England's purchases of gilts or government debt.
I just did. So spot on Robert. And, as Robert continues:
That may be right, as a matter of theory, and even - in the case of America - in practice, in that the Federal Reserve in the US has subsidised housing finance for years by purchasing colossal amounts of state-backed mortgage debt.
No, not just the USA Robert: this is also going to be true in the EU as the ECB buys €1 trillion of bonds at the rate of €60 billion a month. So definitely not that unusual, after all. And Mario Draghi and Mark Carney have both made clear this form of QE is legal and possible. And as Robert makes clear is nowhere near as radical as some options:
What is more the former head of the Financial Services Authority, Adair Turner, has been arguing that in order to make meaningful inroads into the UK's massive debt burden, the Bank of England should consider going one step further than quantitative easing and - in a highly prescribed way - create money to actually annul debts.
Remember, he was considered a candidate for Governor of the Bank of England and is a former head of the CBI. So whatever the hard-left is, he (along Jeremy Corbyn) is definitely not a part of it.
But still Robert has his doubts. What are they? First, there's this:
But the dollar is still the world's reserve currency, and the Fed can take liberties with it that are not available to the Bank of England.
But the EU is going to do it. Oh, and in a way China has also just done so in a most unwise way by buying up on a massive scale crashing securities on its stock market. So let's leave that one aside.
And then there's this:
Also it is very difficult to conceive of a way in which the perception - the confidence trick perhaps - of Bank of England independence could be preserved, while obliging it (to repeat Jeremy Corbyn's words) "to invest in new large scale housing, energy, transport and digital projects".
That's apparently because:
Once it had those explicit objectives, investors would see it as politician's poodle and conclude that preserving the value of sterling would be not quite the priority it has today.
Robert adds that:
Which is not that the UK would turn into hyperinflationary Zimbabwe or 1923 Germany.
But the risk of investing in sterling and the UK would be seen to have increased. And therefore the cost of finance here would rise - which would mean that there would be even less long-term productive investment here, and a British malaise correctly identified by Jeremy Corbyn would be made more acute.
And that's where he ends. And if you like, where I really need to come in because Robert makes a number of key errors in this analysis.
First he succumbs to what Paul Krugman calls the paranoia of the 'confidence fairy', by which he means we must pander to the silly beliefs of the bond market or they might turn us over. My answer is simple: no they won't. How do I know? Because despite what many people (mainly mainstream economists) said from 2009 on - which was that unless we completely trashed the economy by balancing the books by 2015 then the markets would punish us so severely we would never recover - the truth is a) we have not had inflation b) the markets have bought every penny of debt the UK government has wanted to sell and c) base rates have stayed at 0.5%. So the markets do not behave as those who promote the confidence fairy suggest.
Second, I'd respectfully suggest that anyone who really believes that the Bank of England is really independent of the Treasury they has to first of all a) suspend their belief in democracy b) believe that Mark Carney does not heed what the Chancellor says and c) believe that running an economy without any consideration for what is really going on it is wise. I don't think any sane economist does that (or at least, I hope not). I dealt with this here.
Third, to argue as he does Robert has to believe that people's QE of maybe £50 billion a year (at most) is so massively influential that it does, for example, drown out the chance that the Bank could control the economy by a) politely refusing to buy more PQE bonds b) selling QE bonds at the same time as buying PQE bonds c) changing interest rates. I think all would at least theoretically be possible. If not, then Robert is already saying he does not think the Bank of England is independent and the whole confidence thing is really a myth as far as he is concerned anyway in that case.
Fourth, he ignores the fact that buying and selling bonds is not the only way to inject money into and withdraw it from an economy: tax can achieve exactly the same goal. Modern monetary theory makes clear they are substitutes for each other.
Or, in conclusion, what Robert argues is not logical from the perspective of current perceptions of Bank independence; is not logically consistent with democratic government; is not economically logical and, lastly, all comes down to paranoia about market power, which is precisely the issue to which Jeremy Corbyn will not succumb. Or, to put it another way, People's QE can work, whether or not it is radical new thinking; all that might stop it is a fear that bankers might not like it when its whole purpose is to exclude them from a decision making process on investment where they have very clearly failed.
Those supporting Jeremy Corbyn do not share this belief that markets are right. They do not do so for good reason: it is very obviously absurd to think they are, based on sound evidence. As a result those supporters of Jeremy Corbyn are looking for political alternatives that reject that notion. People's QE fits within that framework of alternatives and is economically sound, plausible and deliverable with the objections all coming down to a mistaken belief that central banks must be independent of democratic government and subject only to the will of bankers. Or, if you like, to a question of who governs.
Robert thinks it may be dangerous to upset bankers.
I think it will not be. What is more, I think that the time has come when they have to know that the economy is not run just in their interests.
But at least Robert Peston has had the implicit decency to make clear that this is where the frontline is on this issue. For that I am grateful.
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He also talks about the BOE acting to preserve the value of the currency yet ignores the fact that BOE have allowed private banks to create vast sums of debt based money.
All this fear mongering is about preserving the power of the banks.
It’s the people’s currency and should be issued to benefit the people.
That’s why I am promoting change
“create vast sums of debt based money”
There is no other kind. Money = An IOU…and the “O” tells us that debt is involved for (money) issuing party
Intelligent commentators, such as Robert Peston, know the current economic system is broken. The extent to which they are prepared to say this clearly and ambiguously is a function of personal courage (and, perhaps, foolhardiness) and the conflicts, compromises and constraints to which their positions expose them. PQE is fundamentally about the question: who governs? But I would be reluctant to express this primarily as a choice between bankers, on one side, and a democratically elected government, on the other. All those who possess, exercise and abuse economic and political power under the current dispensation have a vested interest in maintaining the continuation of this dispensation. We should not underestimate the lengths to which they will go to protect their illegitimately acquired power, undeserved privileges and ill-gotten gains. This is not an argument for doing nothing; it is an argument for the application of steely determination, unflinching resolve and the energising of like-minded voters and groupings throughout the EU.
I’m getting used to the flak
“What is more the former head of the Financial Services Authority, Adair Turner, has been arguing that in order to make meaningful inroads into the UK’s massive debt burden, the Bank of England should consider going one step further than quantitative easing and — in a highly prescribed way — create money to actually annul debts.”
That’s interesting. What do you make of that idea? I would think that investment is a better use of the created money. And I would think the markets, if they were going to react badly (and as you say that isn’t necessarily so for Green QE) would respond more negatively to that approach.
I think that would just suck in imports for a short term fix
Wholly undesirable
I’m delighted by this confident repost but still a bit circumspect as I do think that the City, having been pandered to for so long, will do its best to hang on to its ‘importance’ aka power.
Moreover, at its simplest level Britain is unlike the US and larger European countries, with which it is usually compared, as it has to be a net importer of food for its population to survive. Whilst the UK may never become insolvent as it creates its own currency, it is important that enough people are prepared to accept sterling so that the UK can feed itself.
It follows that foreign trade will always be essential to the UK. (It could never, as, say, the US could if it chose, just pull up the drawbridge.) And I think there lies the real danger in the ‘confidence fairy’.
You ignore the fact that financial markets are desperate for secure assets
It will take more than a little PQE to rock sterling’s position as a secure asset
The UK is a massive and wealthy market.
Who in their right mind is going to refuse to supply us?
Whilst I agree that Sterling is likely to be a secure asset, if the speculators choose to destabilise it à la Black Friday, say, then it will not be considered secure, at least temporarily. Whilst this is pretty much mass hysteria, that seems to be how the markets work and those that are more logical will have to go against the flow. And as we’ve seen there are very few with that courage, so I’m worried by the ‘right mind’ bit. There is lots of evidence that ‘right mind’ was absent in 2008 and I worry it still is and will remain so in any ‘crisis’. The UK is more vulnerable than most and in my opinion there has to be a fall back position. Just indicating the general security of assets might not cut it, so I struggle to get to grips with what a fall back position could be…
I have never seen an analysis of the £375 billion holding. If it is represented by gilts then the cumulative debt of the UK would be reduced by this amount if the BoE accounts were consolidated within the Whole of Government Account. I could never see the reasoning behind the decision to take relatively high yield gilts off the balance sheets of troubled banks, apart from injecting liquidity. The levels of toxicity would not have been reduced.
To make an accurate comparison between PQE and QE one would have to analyse the QE representation. A public sector, interest bearing, bond would be as secure as a gilt.
Peston appears to forget that the BoE purchased financial instruments via QE for negative reasons, to prop up the financial sector. The impact on GDP would not have been reflected in growth but in halting decline. Conversely PQE would be a positive step aimed at boosting GDP.
It is gilts
And I have shown that the accounting you suggest actually happens
Your logic is sound
At the risk of showing nothing but my own ignorance in such matters, surely the Bank of England via “normal” QE has shown they will create money to plough into whatever the government feels necessary? Huge debts run up by banks, need to prop these institutions up by buying the debt, print money to facilitate this.
How, inherently, is this different from the government decision that it needs to plough large sums of money into infrastructure project X, Y or Z and that the government needs to raise cash to fund this?
Surely both decisions are based on a cost/benefit argument? If we generate £a to prop up a bank it will return £b in revenue to us as a viable cash generating entity.
Similarly, if we generate £a to build these roads/houses/digital infrastructure they will return money to the economy in taxes and other revenue (as well as inherently benefiting citizens which we might term simply an intangible benefit).
What’s the flaw that I am missing in this understanding?
You’re not missing anything material
If there’s no significant difference between PQE and ‘normal’ QE why are you promoting it as a great new idea?
I have said there is a massive difference
And there is
Please read what I have written: making stuff up is not a basis for analysis
Hi,
“all that might stop it (ppl’s QE) is a fear that bankers might not like it when its whole purpose is to exclude them from a decision making process on investment where they have very clearly failed.”
That seems almost a better argument for ppl’s QE than the infrastructure and employment it could bring!
From down at the blunt (bludgeoned?) end of finance, it is obvious banks will only lend to businesses when they don’t need it, and do so only against rigid formulae, applying no judgement on the health or otherwise of a business. Investments, stocks, work in hand, invoices awaiting payment – all rubbish, computer say no.
If banks won’t see themselves as nurturers, not predators, then their talons need clipping one way or another.
I know it is not completely comparable but what did Iceland do right, because it’s recovery is strong. I understand it has natural resources and a good tourist industry amongst other things and of course did not bail out the banks. The greed of their bankers was corralled and it is a small country, but I understand the remaining debt trajectory is in the right direction. I guess I am being very simplistic, not easy to compare our countries, but they stood up to the banks. Can we help our communities as well as having such a global reach.
Please bear with me, Anatomy and physiology my thing, but damn it how much longer do our young have to wait for jam.
Hi Richard,
Firstly thank you for your work in laying down very clearly the macroeconomics logic behind your policies.
I would like to point out, as a supporter of your policies, that a lot of the logic that is used to ‘debunk’ your policies is basically neoliberal in nature. I hope you are aware of what it is and how it might be used to manipulate you( and the party) in the wrong direction. If not, I suggest you have a look at some of Professor Philip Mirowski’s (University of Notre Dame, USA) work.
Thanks and good luck.
Thanks
Am aware
And the heat will only increase!
No worries.
I was just going through this article by a prominent Modern Money theorist from the University of Newcastle,Australia who has commented on your manifesto. Thought I would point it out to you as you mentioned modern monetary theory in your blog –
“Jeremy Corbyn must break out of the neo-liberal framing – …The new “grassroots political movement” is reacting sensibly to the intellectual carnage at the top end of their Party and lets hope it is triumphant and purges these ideas from Labour forever. But, first, it must break out of the neo-liberal framing that is pervasive in its first major statement….
…The ‘Plan’ also falls into neo-liberal framing when it says:
… We all want the deficit closed on the current budget …
Why would we “all want” that? There is no rational economic reason, for a currency-issuing government, to think that a balanced fiscal position is responsible, desirable or even possible.
The fiscal balance should never be a policy target — whether it be an immediate aim or some stretched goal into the future.
The relevant goals should be about the outcomes that make societies prosperous and inclusive — goods schools and hospitals, good public transport, full employment, strong income support safety nets for those who cannot work, socially responsible minimum wages etc.
There is no sense that the narrative should be about balancing the fiscal deficit.”
Source – http://bilbo.economicoutlook.net/blog/?p=31487
I am very aware of Bill’s criticisms and note them with some sympathy
Cheers!
I would like to clarify another thing. When you mention ‘the government borrowing’ do you mean borrowing from the private sector or from the treasury or Bank of England?
Technically that’s semantic
To see why see my latest blog
Right. Quite a confusing blog post for me with all those mechanisms and jargon. While I am getting my head around it, can you please clarify if this is correct –
1) Does borrowing from the private sector only involve bond issuance or also actually borrowing from the private sector in the way that a person borrows for a mortgage? If I am correct, one of the major difference between these two is who decides the interest rate. In the former’s case its the central bank whereas in the latter its the private bank.
2) Is it a case of semantics only when talking about borrowing from either the treasury or central bank? Or is it also when borrowing from the private sector as I described above?
Thanks!
2)
Borrowing from the private sector is in three ways
The first is by gilts or bonds. The market sets the rate but government seeks to influence it by bank rate
Bank rate is paid on reserves held by banks with the BoE: it is lower than gilt rate
Then there is PFI: that’s at absurd market rates in most cases and is genuine borrowing from the private sector wrapped up in service contracts that obscure the fact
Ysaac,
Totally agree with Bill. Maybe you caught John McDonnell’s article in the Guardian yesterday that suggests Corbyn remains mired in validating his enemy’s framing…
http://www.theguardian.com/commentisfree/2015/aug/11/jeremy-corbyn-close-deficit-poor-labour-economy
Another adviser to Corbyn, Ann Pettifor, tweet on that article this morning shows she isn’t impressed. From that and Richard’s sympathetic response, I wonder if Corbyn’s political team got final say on sticking with the self-defeating ‘household’ framing.
I did not see or comment on the article before it was published
That I do not think a balanced budget is needed is a matter of record
Can you please post the link to Ann Pettifor’s post?
It was a tweet saying something like ‘here we go again’
Ann subsequently tweeted
Too true, but seems Corbyn’s (political, not economic!) advisers are hell bent on validating that very hegemony.
Cool.
I then assume that you disagree with him on certain issues highlighted in his blog post. Will you be elaborating them like you did with Robert Peston’s post? Would be quite informative for lay persons like us.
Unlikely
Only because I am scheduled to have a couple of days off
Am I right to say that the government simply repaying the debt to the Bank of England is not enough to remove the money from the money supply? Once the Bank of England has it all back, don’t they have to ‘uncreate’ it somehow?
Not sure how they would do that – if they burn 375,000,000,000 that would create some bonfire in Threadneedle Street!
Redemption is unwinding here
Which is why when it occurs right now they are buying replacement gilts
Very much enjoyed your links to Modern Money Theory. All very relevant to the ability of Labour to escape the Neoliberal orthodoxy.
Was Greece’s capitulation to the Troika last month round 1 to the Neoliberals I in the first overt fight with Modern Money?
If so, would a Jeremy Corbyn-led Labour be round 2?
If so, I worry because the gloves came off against Greece and the Neoliberals humiliated Greece, even though it made no economic sense. I suspect that non-economic interests drove the attitudes. If this was indeed the case, should Labour expect anything different? Is this a fight that can be won without international partners to prevent Labour’s collective punishment as an example to other democratic parties?
Excellent questions
And that fight needs to be on many fronts
Bankers believe that the economy is run in their interests, and that this is right and proper.
The question is: how damaging a tantrum will they throw when ‘their’ government says otherwise?
I do not fear the Confidence Fairy: but I am certain that Britain will be liberally sprinkled with twinkly glitter by the Stupidity Fairy.
This is a pretty sensible proposal actually (worth saying upfront that i am coming at this from a largely right leaning perspective and working myself in funds management).
Two comments:
The government should be investing more in infrastructure and long term capital projects for which the private sector does not have the necessary time horizon or risk appetite to take on. The government can borrow at real interest rates of -1% and surely there must be public investment projects that beat that hurdle rate. But clarifying what those investment projects might be and conservative rates of return would help to allay concern about white elephants.
Second, the BoE has a pure inflation targeting mandate. At the current juncture, with the economy rebounding, their thoughts are more tuned towards when to reduce stimulus, not increase it. In the future, there may come a time when the BoE again wants to inject stimulus and buy govt backed bonds (including those you propose) and I imagine they could well do so without a change in their mandate (they have bought corporate bonds before its worth noting).
To me the essense of your argument is to have more sensible, long term public investment, with cost and revenue projected transparently to show it is in the publics interest. Whether this investment is funded directly via gilt issuance, or indirectly via a state backed bank, or whether such debt is bought by the BoE I think is very much a secondary consideration.
I am not sure my proposal is secondary but I do not also think we are far apart
Firstly thanks to Richard and Jeremy for proposing ways to actually improve our lives and the future ability of our country to function in a healthy manner, the insulting way in which the present government promises to undertake these infrastructure projects whilst not actually stumping up the proper funds for doing so is one reason why Jeremy is capturing the imagination of so many of us.
I find it hard to understand why PQE is perceived as dangerous when throwing huge sums of money at bailing out banks and paying for wars was somehow acceptable or even essential.
The young people of the UK have been treated especially badly over the last decade or so, being forced to accept personal debts for education and training for essential roles, which industries are now struggling to fill, you have to invest in order to reap the rewards, and a society that doesn’t value and invest in young people is not valuing and investing in it’s future, you offer a long term plan which has been missing for a generation.
We desperately need a government which is committed to building for the future and investing in the British workforce and industry rather than looking to other countries for investment, for which they will demand a healthy return.
Please make your arguments for PQE as loudly as possible because this is the most exciting proposal I have heard to get us out of the desperate mess we are heading for if the Tories remain in power, the concept of PQE is logical and easy to understand as well as offering the first positive plan for the future that I have heard for years.
It occurs to me that this is probably pretty much what was done after the World wars?, resulting in such things as the introduction of the NHS and welfare state, with a caring government taking control to invest in systems which support people and invest in the future for the good of us all.
This cleared up a lot for me, thanks. I wonder if you could briefly respond to the argument that QE investment only works if the things it funds can be monetised.
http://www.prospectmagazine.co.uk/blogs/prospector-blog/why-peoples-qe-is-utter-nonsense
So I can see how rent from social housing could flow back to the investment bank but for other public services it’s not so clear. Or will the bank be less conventional about what it counts as ‘return’?
That one is quite amusing
He very clearly has not read the first thing about what he is writing about! Of course councils can issue bonds – just because they have not since thatcher doses not mean they could not with people’s QE
And no, monetisation is not essential a) because interest need not be paid b) because the loans are only repaid at gov’t option c) tax revenue is the alternative return as if us, for example, in PFI
To put it another way, that article was drivel of the highest order
Nationalise the Bank of England and issue Interest Free Loans for productive capacity.
Money supply remains constant as loans are paid back and cancelled and self regulatory
It doesn’t seem to have been mentioned, but to me the most extraordinary claim that RP makes is about the viability of the investments, with a theme throughout the article that a state investment bank would be supported investments that the private sector hasn’t deemed to be viable.
a) There is no shortage of viable investment opportunities that the traditional domestic private sector has failed to invest in. Hence the massive investment from essentially state owned chinese and middle eastern investment vehicles in the UK.
b) There are many examples where the domestic UK private sector does not have the capacity or inclination to invest in all profitable opportunities. Eg. Housebuilders consistently fail to meet domestic demand.
c) There are likely to be a whole host of not particularly risky socially/economically beneficial investment projects, which are not being invested in because they are only marginally below the unecessarily high investment hurdles required by most private sector organisations.
great idea Richard. I would love to see it followed through with ambition of FDR new deal. Check out the ‘lasting contribution’ figures for inspiration.
It’s about time we focused on the tangible benefits to society and not the narrow considerations of markets which constantly seem to be the primary concern of the debate.
http://www.newgeography.com/content/00165-the-new-deal-legacy-public-works
The flaw is not the QE per se. It is the new investment company, owned by the government, that will invest in uneconomic things.
The new bank will have non-performing loans and will need bailing out. Cutting through the verbiage, this is just another way to get the government doing business, a concept that has been discredited.
So the government should not invest in social housing, schools,roads, new energy infrastructure, education, health and so on.
Please tell me, who should?