New money for a green economy
At environment4change we avoid issues of a political nature as much as possible, put something quite significant happened last week in the UK and it does bear mentioning.
On April 9, 2020, the Bank of England announced it would directly fund government spending during the Covid-19 crisis. This is a huge relief for anyone remembering the disaster of the effects of Quantitative Easing from the 2008/2009 financial crisis.
We are all students of history so that disasters are not repeated!
In 2009, the UK government and many other Governments around the world wanted to get more money (liquidity) into the economy to start a recovery. That is normally achieved in one of two ways (i) having the Banks make more loans, also called qualitative easing, and (ii) directing the Bank of England to print more money, also known as quantitative easing.
Every loan a bank makes creates new money. When people borrow, more money is created. However, in 2009 Banks weren't lending to each other or too the real economy. The High Street Banks were terrified that their existing loans wouldn't be repaid. Accordingly, they weren't prepared to make new loans.
In this instance, the Bank of England stepped in to create money instead. From 2009, the Bank of England started a scheme called Quantitative Easing. They electronically created £200 billion of new money to stimulate the economy. I vividly remember the debate at the time as one suggestion was to give every man, woman and child in the UK an amount a little less that £3,500. Instead of giving this money to ordinary people, something I believed best on the basis that all individuals will spend money more effectively than an appointed surrogate or the UK government, the Bank of England put this £200 billion into the financial markets to fund the biggest, most polluting Companies and projects in the world.
The idea behind quantitative easing was that those listed Companies would employ more staff and people who own shares of large institutions would feel wealthier and would then go out into the economy and spend more, the money would trickle down and eventually everyone would end up, better off. This is the basis of the term “trickledown economics?”. The problem is most people don't own many shares. In fact, 40% of the stock market is owned by the wealthiest 5% of the population. Those 5% invested more money into the financial markets (large companies) to benefit from rising prices. So quantitative easing didn't work, it only resulted in higher stock prices and London property prices. The result was support went to big banks, their wealthy shareholders and super-rich companies, especially in carbon-intensive sectors as heavily polluting C02 projects got funded.
The rest of the money got trapped in the financial markets, making the rich even richer, but doing very little to help all of us in the real economy. Meanwhile, at the same time the Bank of England was creating all this new money, the UK government was running out of money. In 2010, they cancelled a program to rebuild 715 schools. They also cancelled plans to build over 1,000 flood defence projects. Tens of thousands of construction workers become unemployed.
Imagine, instead of relying on private banks to create money to push up house prices or letting the Bank of England create money to flood financial markets, we could use the power to create money in the public interest, to improve our economy, to build better homes, better infrastructure, cleaner energy, more jobs or whatever we democratically decide is most important.
If the Bank of England had taken just £10 billion, 5% of what they initially created, and given it to the UK government to spend into the economy, the recession would have been over much sooner and hundreds of thousands of people could have been saved from years of unemployment. By spending £10 billion on building affordable homes, the government could have created up to 284,000 jobs. As the employees go out and spend their salaries, this would create even more spending and more jobs.
When new money goes into financial markets through quantitative easing, it takes £1.00 to grow the economy by just £0.08. But when new money goes into the real economy, every £1.00 created grows the economy by £2.18.
Last Thursday’s announcement by Andrew Bailey would suggest we have learnt the lessons of history. By allowing the Treasury to spend without increasing public debt, the Bank of England has ensured the government will not struggle to fund its spending on coronavirus and simultaneously undermined any arguments for coronavirus austerity before they've even taken hold. For years politicians used high levels of public debt as an excuse to justify brutal spending cuts. Recent history of 2008/ 2009 shows us that excuse is well and truly shattered.
The levels of public spending needed to fight coronavirus, support businesses in the real economy and protect people’s livelihoods during this crisis are unprecedented in living memory. By simply extending the government’s overdraft, the Bank of England has allowed the government to access new money without having to turn to private bond markets.
At environment4change we hope the UK government and the Bank of England rebuild our economy in a way that works for everyone. This means strengthening our NHS and care sector, a bold and ambitious programme of investment to tackle inequality, and the guarantee of a clean environment as a basic human right. We believe financial institutions can play a huge role in ensuring new money finds its way into the real green economy to help create a different kind of economy - one that is more stable and sustainable.
The crisis we are all in the middle off has also revealed the true backbone of our UK society, people often overlooked and undervalued: doctors and nurses, grocery staff, teachers, waste collectors, cleaners and care workers, to name but a few, are now getting the appreciation a long time overdue. I would also add to that those dress makers and engineers that have turned the hand to make Personal Protective Equipment and respirators. Very well done!