I posted this thread on Twitter this morning:
This year the government will give the UK's banks £45 billion they have done nothing to earn. That's because of QE and interest rate rises. At the same time they say they can't afford decent pay rises for nurses, doctors, teachers and others. This makes no sense. A thread….
It's little understood that bailing out the UK's banks and paying for the Covid crisis was not a cost paid for with tax. Politicians say it was, but they usually talk a lot of nonsense and they most certainly are when they make this claim.
The way in which these two crises was paid for was with money creation. Quite literally, the Bank of England created new money out of thin air on the government's behalf - as every bank is capable of doing - and the government spent this into the economy.
That was the right thing to do. On both occasions the economy needed saving. Tax revenues could never have covered the costs. Money creation could do so. And it did so without ever creating inflationary pressure because at no time was the economy overheated as a result.
But, new money creation does have a consequence. This new money had to move from the government sector, where it was created, to the private sector, where it was used. This is done by increasing the balances owed by the Bank of England to the UK's commercial banks.
All that is required to make this happen is the making of a few entries with a lot of noughts on the end of them in the accounts of the Bank of England. When that process was complete commercial banks had almost £1,000 billion owed to them by the Bank of England.
Let's be clear that since all money is debt there is nothing unusual about this. Let's also be clear that some of this was essential to save the banks. It is much harder for them to fail now as a consequence, so they have gained enormously from having this new money.
And just to be clear, what they use this money for is to pay each other without ever having to borrow funds from the Bank of England to do so, and banks paying each other is normal and happens whenever we pay someone who does not bank with the same bank as us.
So, there have been real benefits to the stability of banking as a result of our commercial banks having this vast sum of newly created money placed in deposit accounts with their names on it by the government. But let's also be clear; the banks did nothing to earn this money.
Apart from the impact on bank stability none of this mattered too much when interest rates were well under 1%, which they were for more than a decade from 2009 to 2021.
And interest rates do matter when it comes to these accounts because the Bank of England treats them like deposit accounts and pays Bank base rate on them. And that base rate is now 5%, and the Bank of England says such rates are here to stay for some time.
It's fair to say that the balances on these accounts have now fallen a bit. They are now closer to £900bn. That's largely because the Bank of England has been selling off some of the government bonds it owns. But £900 billion is still a staggering sum.
What is more, five per cent interest on £900 billion is also a staggering sum. It is £45 billion. That might be the interest cost in these balances in the next year. And remember, the balances were gifted to banks because the government created new money.
Before rates started rising in 2021, this interest was paid at 0.1%. The interest cost for these accounts was less than £1 billion a year. Now it is £45 billion. That is a £44 billion increase. And it has happened because the Bank of England has decided to increase interest rates.
So, not only did the government choose to create this money and effectively gift it into bank deposit accounts owned by the UK's banks, it has also now chosen to gift them £44 billion extra interest a year on these balances. No wonder the banks are making such massive profits.
At the same time, the government has:
- Refused teachers a decent pay rise
- Denied nurses fair pay
- Entered into a dispute with junior doctors
- Provoked the first ever hospital consultant's strike
- Imposed crushing austerity on the country.
None of this would have been required if £44 billion of total unearned income was not being paid by the government to our commercial banks via the Bank of England.
The government has, then, made a choice. It has chosen to favour banks over working people. It has chosen to reward wealth rather than work. It has chosen to shift income upwards in the economy. It has chosen to increase inequality. And none of this was necessary.
The simple fact is that the Bank of England does not need to pay Bank base rate on all these deposits it has created for the commercial banks that are held with it.
I am not disputing that to ensure the effectiveness of its interest rate policy it needs to pay Bank base rate on some of these balances. I suspect that £200 billion would be enough to do this. The rest could be paid a very much lower rate of interest - even 0.1%.
The saving from doing this would be well over £30 billion a year. That would be more than enough to pay inflation-matching pay rises to all public sector employees and to end austerity. In other words, it could be used to end considerable causes of untold misery.
And what I am suggesting - a two-tier interest rate on these deposits commercial banks have with our central bank - is entirely possible. Japan does it, as does the eurozone. Even we did it in the past. But right now, we choose not to. And that is just a choice. We could do it.
The cost of that choice is economic mayhem, rising bank profits, growing economic stress and the undermining of our vital public services. As choices go, this one is, in that case, beyond terrible. It is catastrophic.
So why is no one talking about this? Firstly, I suspect, because politicians do not understand it. Second, the Bank of England wants this (and the resulting stress) to happen. Third, no politician in this country seems to be willing to stand up to finance.
But most of all, I think nothing is being said because our politicians no longer care about inequality. Nor do they care about public services. And they seem entirely indifferent to the massively unfair treatment of public sector workers.
I also happen to think that true of both Labour and the Tories. Both favour banks over people. But they need not do so. One simple change to the rules on interest paid by the Bank of England to commercial banks could fund every pay claim and a great deal more.
Politicians who refuse to make that change - which would simply bring the UK into line with international norms - are failing the people and public services of this country.
How did we get to the point that they all thought banks more important than health, education and so much else? That's one of the big questions of our age.
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:
Why was the Bank of England brought into public ownership in the first place? Supposedly because it was considered too important a national asset. It used to be a private enterprise with shareholders.
Perhaps HMGov should never have acquired it…?
That is an absurd argument
Let’s privatise it because it behaves too much liked a failed private enterprise…
@ Benedict High time you read some Hyman Minsky and his Instability Hypothesis Theory to bring you up to speed and make you a better educated voter. Indeed you might even go further back and read some Walter Bagehot about the lender of last resort role and why it’s necessary.
Probably because governments and society believed that central banks controlled the quantity of money. By nationalising the reserve banking system (but not the banks), governments believed that this would grant them the ability to control monetary policy and improve financial stability. Supposedly the government would restrict risk taking and ensure that the banking system worked for the benefit of society.
The bank of England perhaps started as shareholder company, but this is a bit misleading. The BoE was created by the government in order for the government to receive financing without needing to borrow money. Anyone could buy a share in the bank of England and this money would directly go to the government. No debt was owed by the government to the bank.
Gradually the bank of England became the primary buyer of government bonds. And it is by this role that the BoE began to have a large (political and financial) influence over government spending.
This seeems to me like a very confused history and some of it is just wrong
The BoE does not issue bonds, for example
Sorry – but this would fail an exam
Leaving aside the issue of what is the right level of rates…..
If you choose not to pay interest on reserves there are implications about how monetary policy is transmitted to the real economy. If the BoE pays nothing this will leak into lower rates for borrowers. However, as a start it’s estimated that about 400bn of reserves is required to oil the wheels…. so pay zero on that for a start.
Second, get NS&I to pay base rate minus 1% on savings. The migration of deposits in the internet age might be dramatic…. and this would reduce the level of reserves (NS&I savings drain reserves).
Third, tax savings income equally with earned income.
Now, not a perfect solution but a start and easily implemented.
The NS&I investments total around £196Bn (2022), whether bonds or prizes, maturing <1 year. This is a paradigm public, cashable safe asset; currently owned by around 22m ordinary people. I am not sure (without persuasion), I believe that would be the best place to "start" something innovative here. Don't spook the horses. Perhaps I misunderstood the comment; it was tersely written, and the argument is compressed.
I would also like to see the double entries for the "drain on reserves"; I am not disputing it, I just wish to understand it.
You nand Clive are both right – this is the place to start
Richard
The Govt, –” has chosen to reward wealth rather than work ”
any chance of you getting an extra job as Starmers speech writer ?
@ rob gray Fat chance of the arrogant Witch-Finder General Starmer listening to anybody with substantially different economic and monetary views like Richard even though this particular general lacks any understandable and logically coherent ones as far as anyone with a brain can make out. Indeed given half a chance it’s possible the Witch-Finder General would have Richard’s citizenship removed if he thought he could get away with it!
Whisper it very quietly but I am talking to a Labour MP today and not one of those you might guess
I wish you well. Hope you’re both wearing disguises!
I’ve been watching a KONP call on the 75th anniversary of the NHS. Richard Burgon was brilliant on it. Surprised he’s still allowed to be a member of the party.
Anyway, one of the links gave this quote from Bevan.
“… we rejected the principle of insurance and decided that the best way to finance the scheme, the fairest and most equitable way, would be to obtain the finance from the Exchequer funds by general taxation, and those who had the most would pay the most.
It is a very good principle. What more pleasure can a millionaire have than to know that his taxes will help the sick? … The redistributive aspect of the scheme was one which attracted me almost as much as the therapeutical.”
He probably wasn’t being sarcastic then, either.
Also to note Richard. You’ll be aware of rumours that this government are considering dropping climate commitments. Another thing that this bunch don’t care about, but could easily pay for if they did.
https://www.theguardian.com/environment/2023/jul/04/revealed-uk-plans-to-drop-flagship-climate-pledge-rishi-sunak
Noted here this morning
How much longer can we tolerate this out of control capitalism?
‘Speaking to a colleague today whose wife works for the regional police as a Neighbourhood Investigation Officer. It was a new post being set up and her and others were being trained up.
Anyhow, yesterday, they all got called in to be told because of budget cuts, the new team was being cut and they were to be made redundant. Right in the middle of the team launch.
They’ve got 10 years on their mortgage the cost of which is going up and daughters wanting to go to university.
What a country eh?
So desperately unfair, and ridiculous
In reply to Bill Hughes:
About as long as people are dumb/duped enough to vote against their best interests. In this country, it might be a while still.