My old friend, Professor Prem Sikka, who is now a member of the House of Lords, spoke in a debate on quantitative easing in that place a few days ago. This is what he had to say:
Much of the money released by QE has been used to shore up bank balance sheets. A large part has also escaped into shadow banks, such as private equity and hedge funds—a sector that is now as big as retail banking, if not bigger, and is posing new dangers, especially as it is not regulated. There are no capital adequacy requirements or stress tests on their balance sheets.
Banks have not used the QE money to support businesses or hard-pressed households. Pre-Covid statistics show that lending to businesses has remained stagnant. In the post-Covid world of government loans, a recent survey—barely three weeks ago—showed that more than half of small and medium-sized enterprises say that they are holding back from investing to grow for the future as funds are taken up by debt repayments. Banks are not stepping up to support SMEs at all. In the era of QE, low interest rates, low corporate tax rates and low inflation, we have not seen any great investment in productive assets in the UK, either. The UK invests around 16.9% of its GDP in productive assets, compared to the average of 20.1% in the EU countries. Among major European countries, only Greece and Portugal have invested less.
QE should have been people-centred and used directly to improve people's lives. Just imagine what we could have done if £895 billion of QE had been used for the green new deal, building social infrastructure, creating energy self-reliance, clearing slums, writing off debts for graduates, starting production of generic drugs to prevent abuses by pharmaceutical companies, and much more. Life would have been transformed.
That is not what the Government chose to do. Instead, they chose to give money to speculators. QE did not cause an increase in inflation, as we have heard, so using it to rebuild the economy and help hard-pressed households perhaps would not have caused inflation either, but we would have had an entirely different country from what we have today.
Finally, QE has sent a signal to the finance industry that, no matter how reckless it is, the state will always come to its aid. We have handed it an £895 billion subsidy, which has not only seen the bankers avoid punishment for numerous scandals but actually entrenched their financial advantage even more. Is that fair?
I did and the emphasis. What Prem was referring to in that paragraph is what I call green quantitative easing, which Colin Hines and I have been promoting since 2010. Our latest version, published last month by Finance for the Future is called The QuEST for a Green New Deal- How do we pay for it?
Prem Sikka is absolutely right in his analysis. If only quantitative easing had been used for the purposes of promoting the activities that he highlights we could have transformed society since 2010. Instead that money has been very largely used to promote financial speculation with the consequence that there has been a massive rise in inequality in the UK, a significant increase in personal debt, overinflated house prices and the potential for another financial meltdown. Colin Hines and I predicted all these things in our 2010 paper on green quantitative easing. All of this could have been avoided.
But, we are where we are and now the question is whether that is willingness to use green QE for this purpose now when it is so obvious that the need still exists?
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Well done Prem.
Well done indeed Prem. I hope everyone heard you!
A clear pattern has emerged over the last 40 years or so, basically since the election in 1979 of Thatcher, that when Tories are in power they preach the message that state intervention is bad. Of course, in reality those Tory Governments have always used the instruments of the state to keep hold of power and that includes borrowing, creating new money and spending as and when it benefits them or if there is a national emergency where it is clear that the “free market” has no answer other than to collapse. However, their underlying ideological message, the con they play on the public, is that Govt spending is always invariably bad. They don’t want to be seen to promote big positive plans of state intervention, although they will always do a bit of this approach once they see it’s popular.
The big question is whether the opposition can grasp the opportunity. Labour are afraid to say boo to a goose. They are always afraid that the Tories and their friends in the press will say it is a tax and spend approach. Selling QE for the common good ought to be easy, but it isn’t because I think most people have little understanding of how money is created or where it comes from. The Tories always get a lot of political propaganda out of tax and spend. Usually the opposition parties fall into line fearing that they will be seen as tax and spend.
There is a great opportunity for the opposition to grasp a new deal approach because of the challenges brought about by covid. They should be bold and say we cannot and should not return to past thinking. Germany now has a “green” coalition. As to how green, who knows, but they are moving in the right direction. The opposition here need to do the same. Labour need to stop messing around with old 2 party politics thinking and grasp the opportunity. It’s a once in a lifetime chance to really change things.
I’m a bit shocked by how little this has been reported in the mainstream media. Silence in The Guardian…
So, thank you, Richard, for expanding the knowledge of non-financial people like me.