Finance for the Future Green quantitative easing

1 Finance for the FutureGreenquantitative easing :Paying fortheeconomywe needRichard Murphy and Colin HinesGreenQuantitativeEasing2 Green Bricks in the Wall:Making quantitative easing GreenIn March 2009 the Bank of England began a programme of quantitative easing in the UK. Asthis report notes, there are complicated ways of explaining the programme or an easy easy summary is that, in effect, the Bank of England granted the Treasury an overdraft butto keep the European Union happy had to do so by buyingGovernment gilts issued by theTreasury from UK commercial banks, pension funds and other financial were three reasons for doing keep interest rates low; provide banks with the money they needed to lend to business and others to keepthe economy make sure there was enough money in the economy to prevent deflationhappeningNoone was sure whether quantitative easing would work, and as we note, no one is sure forcertain whether it has worked.

2 We do however suggest in this report that several things banks profited enormously from the programme, which is why they bounced backinto profit so soon after the crash and bankers bonuses never went away; entire government deficit in 2009/10 of 155 billion was basically paid for by thequantitative easing programme. If you wanted to know how the government met itscosts, now you do; was a shortage of gilts available for investment purposes as a result of the Bankof England buying so many in the market. Large quantities of funds were investedinstead in other financial assets including the stock market and commodities such asfood stuffs and metals. The USA also undertook quantitative easing at the same timeas the UK,which meant thatdespite near recessionary conditions commodity pricesfor coffee and basic metals such as copper have risen enormously.

3 Thishas impactedon inflation, which has stayed above the Bank of England target rate; has been avoided, although the relative role of quantitative easingin thisversus the previous government s reflation policies is unclear; rates have remained , one thing has not happened, and that is that the funds made available have notresulted in new banklending. In fact bank lending has declinedalmost steadilysince thequantitative easing programme quantitative easing programme might be considered a short term success, but as we note,the benefit has been captured almost entirely by the financial services sector whilstfurtherasset boom and bust cycles are, at least potentially being recreated with resultant risk to theeconomy. These are undesirable long run outcomes when the real aim is to get the UKeconomy working again.

4 For that reason we cannot support a further round of quantitativeeasing in the form used in need to reflate the UK economy has not gone away though: there is an urgent need foraction to stimulate the economy by investing in the new jobs, infrastructure, products andservices we need in this country and there is no sign that this will happen without governmentintervention. For that reason we propose a new round of quantitative easing or Green QE2 aswe call QE2 would do three things, First it would deliver the Green New Deal the innovativeprogramme for investment in the new economy the UK needs as outlined by the Green NewDeal group in its reports for the New Economics Foundation. This would require three government would need to invest directly in new infrastructure for the government needs to invest in the UK economy,in conjunctionwith the privatesector, working through a new National Investment Bank; government must liberate local authorities to partner with the private sector togreen their local economies for the benefit of their own communities, and it can dothis by providing a capital fundfor them to usein the form ofequity that bears theresidual risks proposalswill togetherinjectmoney into the UK economy that can kick start economicactivity in this country, reinvigorating government, local government, the private sector andhousehold economies and in the process deliver a Green New also makeone further recommendation.

5 The first round of quantitative easing bought backdebt in the form of gilts. That had unfortunate consequences,but there is one form ofgovernment debt that could be bought back with untold benefit for the UK economy resultingfrom its cancellation and that is the debt due under 56 billion of PFI schemes. Werecommendthat the Green QE2 be used to cancel this debtimmediatelyandto pay off themoney owed and so rid Future generations oftaxpayers of the need to have to pay forthe pastmistakes in government finances. The sums involved are estimatedover the decadesto totalastaggering eventual cost of 252 around 200 billion saved could then at least inpart be allocated instead to continue to Finance Green New Dealinitiatives over the decades would be no further PFI projects as building and infrastructure programmeswould in Future be financed through the National Investment these programmes provide liquidity and jobs for the UK economy the combinationthat is needed now.

6 And as we explain, both will be self financing. This is building the neweconomy on the back of Green QE2 an environmentally sustainable, integrated economic,industrial and financing policy for the 1 What quantitative easing is, and how the banks havebenefitedThere are two ways to explain quantitative easing . One is the hard way. The Financial Times hasdone that, and we have used their explanation in an appendix to this report. The other is the easyway. And that s very easy indeed. quantitative easing is, when all is said and done, the Bank ofEngland granting the Treasury an is, however, a problem in the Bank of England doing that: under the European Union'sMaastricht Treaty it is illegal for the Bank of England to lend money to the Treasuryii, even when thegovernment wants to do it. So the truth is that quantitative easing simply disguises what is actuallygoing on in a rather complicated fashion works like this.

7 First, the Bank of England has been issuing bonds to High Street andinvestment banks, which they buy. These bonds are called gilts in the technicallanguage of themarkets, and that term will be used in this report. Those bonds pay for the government s debt. Butbecause the Bank of England does not want to take money away from the banks for reasonsexplained below,the Bank of England then buysbackgilts from those same High Street andinvestment banks that havebought thegilts issued by the principle this looks like a simple in and out operation for the High Street and investment banks,and so it would be if the gilts bought by the Bank of England were those that had just been issued bythe Treasury. However, nothing is quite as simple as that in this world. The reality is that, as far asanyone knows, and Bank of England have been a little cagey about this, the gilts they have beenbuying are not the same as the ones that the Treasury is selling at the same point in time.

8 Thiscomplicates things quite a lot, and also explains why the High Street and investment banks are sokeen to be part of this explanation, just likealmost everything else in this report, revolves around money, and in thiscase how the High Street and investment banks can make money out of the Treasury. The technicalexplanation of this process is in Appendix 2 to this report. Suffice to say here thatbecause the Bankof England has pushed interest rates on gilts to their lowest levelfor many decadesthey have, as adirect consequence, pushed gilt prices to record highs. That means that the banks and pension fundsthat have sold government gilts to theBank of Englandas part of the quantitative easing programmehave made profitssincethey would have bought these gilts previously at a lower much profitas being made in this way ishard to guess. It would beof enormous benefit toknow. Whatwesuspectisthat a significant part of the 200billion of spending on QE was turned,almost immediately into profit by UK based banksand we in turn suggest that it wasthis fact, andlittleelsethat restored bank profitability and bank bonuses in would argue that this may have achieved apositive result: the banks aremore liquid as aresultand that was one of the planned outcomes of quantitative , however, do not agree,as is noted anyone know whatquantitative easing achieved?

9 Debate rages about what quantitative easing achieved. The precise answer is that no one knows. AsAlistair Darling, who was Chancellor of the Exchequer at the time that the programme wasundertaken has saidiii:It (QE) was one of the many measures to get confidence back in the (monetary policycommittee)minutes, eventhey are 200bnofQE wastheright time to take [We were]concerned about I still Chancellor and theBankcame to see me againthen I would want to see someassessmentofwhathas happened. Inthecurrent climate I can t see any problem with itbeing a public report.[The question is ] where is this money? We needa Treasury/BankofEnglandevaluation as towhere it is. Is it in circulation, or is it sitting inbankvaults?If the former Chancellor of the Exchequer does not know these answers to questions about theprogramme he permitted it could be argued that anysuggestion about the outcome of thequantitative easing programme is pure speculation.

10 To some extent, we have to agree. That,however, takes us no further forward, so we offer some more concrete explanations in the sectionsthat 1:Recapitalising the banksIf our suggestion that the banks made considerable profit as a consequence of quantitative easing isright,then it can be argued that had a significant benefit. During 2008 the UK suffered from banksthat wereunable to Finance theiractivities due to a shortage of liquid capital-or money, to put itbluntly. Many people, bankers included, have suggested that theCity of London made a substantialprofit from the quantitative easing programme for the reasons explained in appendix 2. Becausemost of the banks in question had considerable tax losses available to them it is highly likely that notmany of the banks paid much tax on the profits theysubsequentlymade from quantitative easingsothis cash went straight to their bottom lines,and boosted their balance have strongerbanks as a consequence, better able to resist the pressure of any Future financial storm that mighthit justification for quantitative easing was the lowering of interest rates.