Saturday 6 August 2016

Unelected technocrats use the Brexit mess to launch more QE for the private banks

In the wake of the financial sector insolvency crisis the Bank of England Monetary Policy Committee (a tiny band of unelected technocrats) decided to take the radical step of creating vast amounts of money out of nothing and flooding the financial markets with it. The policy was called Quantitative Easing (QE) and in the end £375 billion in new money was created and flooded into the financial markets.

Post-crisis QE

There were plenty of critics at the time who pointed to the Japanese experience (Japan used QE to keep their zombie banks alive then suffered two decades of economic stagnation called "the lost decades") and complained about the negative effect of dragging interest rates down to the all time record low of 0.5% on things like savings, pension funds and the investment portfolios of insurance companies.

Times were difficult and unorthodox economic policies were certainly required to resolve a huge financial sector crisis that orthodox economic theories had completely failed to predict.

In hindsight Quantitative Easing turned out to be an incredibly poor method of stimulating economic growth. Instead of directing the windfall of newly created cash towards economically beneficial activities (infrastructure projects, jobs, business loans, research, house building) the private banks simply used it to continue their previous behaviour of inflating unsustainable speculative house price and stock market bubbles, gambling on in the almost completely unregulated derivatives casino and maintaining their obscene bonus culture.

The Bank of England's own evidence showed that 40% of the direct economic benefit of Quantitative Easing ended up going to the 5% of wealthiest households.

Direct Quantitative Easing

One of Jeremy Corbyn's most important economic ideas is that if the central bank is going to create money out of nothing then it needs to be injected directly into the economy rather than being given to the private banks to gamble with as they please.

Corbyn's idea is that newly created cash should be directed at economically beneficial projects (infrastructure projects, jobs, education, house building, industrial development ...) via a National Investment Bank (something I'd been advocating years before Jeremy Corbyn became Labour Party leader).

Of course Corbyn's idea makes a lot of sense because private banks can never direct the money to achieve the best outcomes for wider society because they have a legal obligation to ensure the most profitable returns for their shareholders. The priority of the private banks is to make profits for themselves, the priority of a National Investment Bank would be to ensure the best returns on investment for the wider economy.

Corbyn's Direct QE idea has predictably been attacked by the incredibly hostile Westminster establishment club and their attack-dogs in the mainstream media. They've repeatedly derided Direct QE as nonsense and ridiculed its proponents for supposedly "believing in magic money trees".

It's funny how in establishment minds the creation of money out of nothing to give to private banks to do with as they please is referred to as "unconventional monetary policy" but when someone suggests creating money out of nothing to invest in infrastructure, jobs and house building suddenly it's "believing in magic money trees"!

Post-Brexit QE

After 37% of the UK electorate voted in favour of a haphazard abandonment of the EU with nothing even resembling a coherent plan for what comes next the UK economy took a huge (widely predicted) hit. The Bank of England revised their growth figures for 2017 downwards from 2.3% to just 0.8%, which is the biggest downgrade in their growth forecast since records began!

The BoE response to this self-inflicted economic turmoil was to announce another huge tranche of QE for the private banks. £60 billion in the same kind of QE as before and another £100 billion created out of nothing with a stipulation that the banks actually lend it rather than hoarding it (although the punishment if they don't lend it doesn't seem to be all that clear), plus an additional £10 billion to buy up a load of corporate bonds.

The Bank of England are well aware that their first experiment with QE was a cash cow for the wealthiest individuals in society to milk, and that very little of it ended up directed towards economically beneficial stuff like infrastructure investment, industry, house building, education, research and development ... yet they're doing more of the same.

Even as they announced their "more of the same" tactics, the Bank of England admitted that their interventions would neither be able to prevent the calamitous post-Brexit decline in economic expectations nor prevent some 250,000 job losses.

It really does beggar belief that the Bank of England have decided to recycle the exact same monetary policies that failed last time around. Given the findings of their own report about the last round of QE. One conclusion is that members of the Bank of England Monetary Policy Committee have the intention of further enriching the already extremely wealthy and no real concern for the long-term prospects of the wider UK economy (otherwise they would surely be trying a different form of unconventional monetary policy). The other conclusion is that 
they're ignorant of the findings of their own report and they don't have a clue what they're doing, their policies being nothing more than mindless knee-jerk reactions to an economic situation they don't have the faintest clue how to actually resolve.

Either they're deliberately and cynically using the Brexit mess to serve the interests of the wealthiest minority, or they don't actually have a clue what they're doing. Neither explanation inspires any confidence that this tiny band of unelected technocrats are capable of steering the UK in the right direction.

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