Quantitative easing is all well and good, but why doesn't the government give the money straight to the British people and start a QE lottery?
By Richard Heller
As the Doors once remarked in another context, strange days have found us and our economy. The government and the Bank of England are trying to do completely different things with it. The government seeks to take money out of the economy by public spending cuts and tax increases to reduce the budget deficit. The Bank of England is trying to pump money into the economy by quantitative easing.
Strange name, strange idea. The Bank operates quantitative easing (QE) by buying government stock from banks and other financial institutions. That sounds awfully like a company buying its own shares (for which its directors may face disqualification and imprisonment), but central bankers are judged differently. The Bank pays for the stock by flicking a switch or two and creating new money which is automatically credited to the banks and other institutions. That sounds awfully like printing money, and the conventional wisdom is that this leads to Zimbabwe-style inflation and banknotes with 14 zeroes on them. But apparently that does not apply to QE. We are assured that our Bank of England knows what it is doing. It has already created £275 billion of extra money through QE. The latest batch of £75 billion (which represents more than ten per cent of current annual public spending) was created just a few days ago and credited instantly to financial institutions. The Bank is already contemplating another big dose of QE within a few months if the economy continues to falter.
Meanwhile the government persists with public spending cuts. One effect is that police budgets are being trimmed up and down the country. If the Bank and the government both know what they are doing, that implies that bankers are better at using the nation’s money than police officers. That might be true, but I would not like to be the minister who tries to sell that idea to voters.
In fact, many respectable economists reject the idea of simply hurling new money at the financial sector. They believe that far too little QE-created money reaches its intended targets, hard-pressed national businesses, and that far too much of it gets diverted into commodity speculation and generates inflation and poverty. There is fierce academic argument over the effects of QE and the only conclusion so far is that no one knows what it actually achieves. If it does work at all, the only guaranteed impact is on savers and pension funds, by depressing the yields on their assets. QE is particularly harsh to savers who were kind enough to lend their money to their government in difficult times.
The Bank itself has no idea what has happened to all the new money it has created. It does not “mark” QE-money and trace what banks and financial institutions do with it. The banks are quite free to sit on it and build up their capital reserves, and to be fair, they have been ordered to do precisely that. The banks are also free to use it to buy and sell more fantasy financial products, or speculate in commodity markets, or lend it to the Russian Mafia, or squirrel it away in tax havens, or use it to pay bonuses. All of these things can happen and there is nothing the Bank can do about it, or the government, or Parliament, or voters.
Given the uncertainty over the benefits of QE, it is not surprising that many people have suggested better methods for the Bank to create and spend the next instalment. Some point to the United States, where the Federal Reserve has bought up mortgage-backed securities and corporate bonds in an attempt to target new money on housing and American business. One especially attractive idea is to link new QE money to private sector research and development. Businesses would issue new long-term bonds specifically to finance R&D and sell them to the Bank. If the companies then failed to maintain their R&D spending they would be compelled to buy them back.
A more radical proposal is to give the next dollop of QE money directly to the British people, and trust them to spend it and put our economy back to work. I would like to suggest doing this by giving it straight to the National Lottery. Imagine a potential payout of £75 billion. Even spread over several months, it would offer monster jackpots and the chance to become a Lottery billionaire. Of course the Lottery winners would spend some of their money overseas, on holidays and property, but I believe that they would spend money within the British economy more quickly and more reliably than the present beneficiaries of QE. Moreover, the monster jackpots would have the secondary effect of generating massive additional sales of Lottery tickets. Virtually all of that new money would be spent in the UK economy, on sport, culture, heritage and good causes, and the Treasury would collect extra money from its cut of Lottery receipts.
The Bank of England was nationalized over 60 years ago. It officially belongs to us all. If it is allowed to create new money whenever it likes, it should give us all a chance to win it.
Richard Heller was formerly political adviser to Denis Healey and Gerald Kaufman. He has been a professional speechwriter for over 30 years. His new novel, The Network, is available for £9, including postage and packing, inscription and tissues for emergency use.
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