By wallyg
Since the financial crisis began, nef has called for more effective use of Quantitative Easing (QE) to support the real economy and fund investment in low-carbon infrastructure. In common with many other monetary experts, we see this as both eminently desirable and entirely possible. The Bank of England and HM Treasury finally seem to be coming round to this view, according to last week’s announcement of ‘Funding for Lending’. So why am I totally unenthusiastic about this scheme?
Because this is just flogging a dead horse with a different whip. Banks aren’t lending because:
- Most firms do not have the confidence to invest, because the economic prospects are dire.
- If they do, banks lack the confidence to lend to them, because the economic prospects are dire.
- On top of this, British banks mostly lack the skills and incentive to lend to SMEs – this is a long-term structural problem about which we have written extensively and nothing to do with lack of liquidity or funds.
- They know (but are yet to fully admit) how precarious their assets are, particularly in property loans and potentially in derivative instruments, and need to build up capital against the inevitable write-downs.
- Consumers are overburdened with debt after years of stagnating real incomes, aggressive marketing of personal credit within a ‘have it now’ culture of materialism and a credit-fuelled house price (and hence mortgage) boom. The last thing we need is to encourage them to start borrowing more. They need more income, not more debt.
QE of £325bn – a staggeringly large figure – has delivered record low interest rates, easing the burden on some existing borrowers, including the government, but little else.
Increasing the stock of money does not help. What we need is to kick-start the flow of money.
If the Bank of England is the ‘lender of last resort’, who is the ‘investor of last resort’? There are only really two candidates:
- The government
- Agencies that are incentivised to invest into productive job-creating sectors within a context of stable long-term government policy – explanation below!
The Maastricht Treaty outlaws the Bank of England from lending directly to the government, so this is out of the question for now, at least until that treaty totally unravels.
Suggestions that QE is used to bail out people rather than banks, or that the government itself issues new money, are well worth consideration but I will leave them for a future blog.
Here I will just stick within the conventional framework of creating new money to lend to projects that will yield a return to repay the debt with interest, but in this case the money being created by the Bank of England. The Bank of Canada directly funded investment instracture for many decades up to the 1970’s and this idea is far from new.
The estimated £550bn over ten years that we need to build modern, clean and efficient economic infrastructure can be delivered through institutions such as the Green Investment Bank, or a UK version of the German state investment bank (KfW), or housing associations, or other institutions that have expertise in investing prudently in certain sectors of the economy. Such investment can be incentivised by government policy and regulation. The point is that investment in new housing stock, retrofitting old housing stock, energy efficiency, renewable energy generation all yield positive economic returns. They also yield positive social and environmental returns, so what’s not to like?
What’s not to like, apparently, is that this would involve the government in ‘picking winners’, and given that, as we all know, the free market never allocates funds badly (especially banks) but civil servants always do, this is somewhere that the government chooses not to go.
The new Funding for Lending scheme at least opens the debate about what QE could fund, and who the Bank of England could lend to. That the existing banks are the first name on the list is depressing, but unsurprising. Funding for lending will fail, because once again it is attempting to use a broken banking system to fix a broken economy.
However, on a more positive note I confidently predict that in time the government and Bank of England will get over their obsession with not being seen to be ‘picking winners’.
After all, what would you rather do – risk picking a winner and at east have a chance of success, or guarantee being a loser?
