In 2010 George Osborne led the UK into solely politically motivated austerity and government cuts using the first of his political bogeymen - the power of the bond markets.
As John Kay says in the FT this morning:
The power of the bond markets is a bluff - with long term borrowing costs at about zero for advanced economies those worried about future financing should issue as much debt as possible.
He is absolutely right.
This is the moment to issue cost free debt to fund a Green New Deal to get the UK back to work on delivering a sustainable future.
It's possible. We just need Courageous politicians to deliver it. They are the sort of politicians who would not as Kay puts it:
spend too much time talking to people who take a daily interest in the bond market, and come to believe that their obsessions are important. Britain's economic performance should be judged by benchmarks relating to employment, productivity, growth and innovation, not credit ratings.
Quite so.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Even better, get courageous politicians to get banks to fund it.
1. Stop QE. Even ‘green’ QE. We won’t need it.
2. Establish the Bank of England formally as lender of last resort, using the mechanism of the discount window. The BoE should (as per Bagehot) lend freely to solvent banks with good collateral at a high rate of interest. If a bank has a liquidity crisis (i.e. it is solvent, with more assets than liabilities, but in the short term has a cash flow problem and needs an injection of liquidity) it goes to the BoE, hands over a stock of assets as collateral, gets a short term loan of the cash it needs, for which it will pay a high rate of interest.
2. Relax reserve cash requirements, allowing reserves to also be held in appropriate collateral assets. There is no need for a bank to hold assets as cash in case of crisis once the BoE is established as a supplier of crisis liquidity. The assets could be held in a more productive form instead, with banks forecasting their own reserve requirements (they won’t want to use the discount window if they can help it, because of the high rate of interest they’d need to pay, so will keep enough cash to manage expected liquidity requirements).
3. Establish the nature of acceptable assets to meet the requirements for collateral; loans to small business and green pension bonds, for example. As long as the returns on these are better than the returns on cash deposits held at the BoE, the banks will immediately invest much of their reserve cash into these assets, thus financing the start of the GND.
4. Over time, increase the reserve requirements for cash + acceptable assets to establish better robustness for the banks in the event of a crisis, and to promote further investment in GND projects.
We recommend green QE because direct lending by the BoE may not be possible, legally
There is reason in our thinking
But the aim is as you note to a large degree
I understand how QE and Green QE works but not this.
“The BoE should lend freely to solvent banks with good collateral at a high rate of interest.” If that occurs these banks will in turn lend at an even higher rate of interest to the public won’t they? Isn’t interest one of the problems with our monetary system – private banks creating money and then charging interest for it?
And
“Establish the nature of acceptable assets to meet the requirements for collateral; loans to small business and green pension bonds, for example. As long as the returns on these are better than the returns on cash deposits held at the BoE, the banks will immediately invest much of their reserve cash into these assets, thus financing the start of the GND” As long as the returns are better? How do we ensure that?
“If that occurs these banks will in turn lend at an even higher rate of interest to the public won’t they?”
No, the discount window proposal is a short term emergency fund. Think of it as a Wonga style payday loan for banks. Someone taking out a payday loan is solvent (in the fact that they ‘own’ the asset of ‘about to be paid’) but they have a liquidity problem – over the very near term their cash outgoings exceed their cash income. A payday loan can get see them through the crisis and back into liquidity, but it’s a pretty painful experience, and no-one would do it by choice. We’d all rather have enough cash on hand to cope with any expected liquidity problems. It’s hard to see a business model being successful that involves taking out a Wonga loan and trying to lend it out at a profit.
Since the credit-crunch, where all forms of refinancing dried up completely, the policy answer has been to demand that banks keep enough cash reserves to get them through any liquidity problems that might lie ahead. The trouble with that is that if you try and imagine the worst possible liquidity crisis, and how much cash you might need to have on hand… Well, we can QE for ever and the banks will keep on soaking up the cash.
If we give the Bank of England the official role of Wonga to the banks, then they will still hold enough cash to see them through whatever they can forecast needing, but if something bad happens then they can count on the BoE to see them through the crisis. Think of this role as the BoE insuring the banks’ liquidity in the event of a crisis. That’s better than what we’re trying to do now with QE, which is trying to give the banks the insurance payouts in advance.
“As long as the returns are better? How do we ensure that?”
Interest rates. Both securities for small business loans, and bonds for green pension schemes are pretty much certain to pay a higher rate of interest than cash held in a deposit account (because things that pay you tomorrow tend to yield more interest than things that pay you today). It’s a strange circumstance indeed when deposit accounts pay more interest than long term loans.
Isn’t it the EU that has made this illegal? If we were to go ahead and lend directly anyway, what could they actually do about it?
If it were up to me, I would say blow the EU and just do it!
Allegedly, despite having a few blurred photos and describing his abduction experience in detail, Osborne is unable to prove the existence of UBOs (unidentified Bond Ogres);-)