Though a decade has passed since the crash, when it comes to policy ideas, the UK is still very much in crisis.
As politicians responded to the last financial crisis and accompanying recession by withdrawing public spending in the name of austerity, central banks were forced to step in with monetary stimulus to keep the economy afloat.
While the public has been told that there is no “magic money tree” for vital public services and investment, the Bank of England quietly created £445bn of new money through quantitative easing (QE), which was poured directly into financial markets.
QE, combined with a further IV drip of cheap money in the form of near-zero interest rates, may have been a prescription which stopped the UK economy’s condition worsening, but it was not without its side effects. This extraordinary monetary response did not address the underlying issues plaguing our economy, and may have actually sowed the seeds of the next crisis.
By flooding financial markets with more money than they are willing to invest productively, the Bank of England has hugely inflated the value of assets, such as stocks and property. This is great for the wealthy who own most of these assets – the Bank recently confirmed that the top 10 per cent of households are £350,000 richer than they would have been without QE – but not so much for the rest of us who have to pay more to buy or rent those assets off them.
As well as causing staggering inequality, the current approach to monetary policy is pumping up what is perhaps the greatest asset bubble in modern economic history, as the price of assets has rocketed, completely out of step with the real economy which underpins them.
In February we got a taste of what may be to come. Stock markets across the world plummeted merely at the suggestion that interest rates in the US could be on the up. There are very real fears that a withdrawal of monetary life support could be enough to burst the bubble.
The question on everyone’s minds should be: what happens when the next crisis inevitably occurs?
The Bank of England’s toolkit currently looks empty. There isn’t much room for interest rates to go any lower, so it is likely that QE will be relied on once again. But how can we avoid making the same mistakes?
What is needed is a rethinking of monetary policy, where the central bank’s power to create money is used in a way which is more sustainable, and benefits the many, rather than just the few. If the Bank of England moves to respond to the next downturn with another dose of QE for financial markets, progressives need to be ready to call for “QE for People” instead.
QE for People, or public money creation, could take a number of forms. As advocated by Lord Adair Turner, the new money could be distributed to citizens directly, in what is referred to as “helicopter money”.
This would allow households to pay off problem debts and increase spending, which has kept the UK from slipping back into recession since the Brexit vote, but is currently being funded by unsustainable private debt. Helicopter money would also avoid the unequal side effects associated with conventional QE, as each citizen would receive an equal amount, regardless of their asset wealth.
Alternatively, the money created by QE could be targeted towards more strategic investment. This could involve the Bank of England directly financing productive investment, or to ensure its independence is protected, the Bank could simply provide funds for the government to spend on public goods of its choosing.
Money creation could therefore give the government an opportunity to tackle structural issues, such as the unbalanced state of the UK economy and the productivity crisis, or to invest in public services, without committing the taboo of increasing borrowing.
One variant of this strategic option is “green QE”, where money creation is targeted to tackle the climate emergency. Though the Bank of England has rightly recognised the risks presented by climate change, its QE programme has actively served to hinder the fight against fossil fuels.
In 2016 the Bank introduced “corporate QE”, in which it spent £10bn on the bonds of big corporations. Nearly half of the companies eligible were in carbon-intensive sectors, producing 52 per cent of the UK’s greenhouse gas emissions. Instead of propping up environmentally unsustainable businesses, the money created by QE could be used to finance Britain’s transition to a low-carbon society.
Rather than making the rich richer, the BoE would be finally living up to its mission which “is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability”.
What the money is spent on should ultimately be decided by democratically accountable institutions. The goal at present should be to convince leaders and policymakers that there is in fact an alternative, and one which doesn’t simply kick the UK economy’s structural issues further down the line.
Fran Boait is executive director of Positive Money. You can find her on Twitter @franboai