Last year, Adam Posen stood alone on the Monetary Policy Committee in predicting that Britain’s recovery was faltering. Now we’re back in recession, his advice on unconventional quantitative easing (QE) should be heeded. QE has been a modest success in preventing the economy from slipping into a depression. And, despite siren warnings, it has not been inflationary. But the measure has done little to boost bank lending – one of the key constraints holding back our economy. The Bank of England has purchased £125bn of bonds since last October but credit in the economy has risen by just £30bn. To remedy this, the government should allow the Green Investment Bank to borrow immediately, and use QE to buy up its bonds. This new capital should be used to lend to small firms and to kick-start infrastructure projects, for example in housing, low carbon energy and sustainable transport.
Will Straw is associate director of the IPPR.
The theory is that using QE to purchase gilts puts money in the hands of banks, which then lend it out – so causing a rise in the total money supply. But instead, credit growth remains negative, and most negative of all for small to medium-sized enterprises. The only effect has been that the government has been able to finance its deficits at very low cost: £375bn of QE has been enough to fund three years of deficits with printed money. The government bill for debt interest is unusually low, at the expense of savers. QE has no effect on credit because banks are being asked by regulators to hold massive amounts of equity capital, penalising lending. Bank regulation urgently needs to be eased if we are to get credit and the economy moving properly again. Meanwhile, QE must be stopped and reversed so that savers can once again get a proper return.
Patrick Minford is professor of applied economics at Cardiff Business School and a member of the IEA’s shadow monetary policy committee.