This is my very first blog and I want to tackle the misconceptions of the economic failure being the fault of the Labour party. Quantitative easing by the bank of England in theory should have worked if it was done responsibly and ended up in the right hands, which unfortunately it never did. Therefore it was certainly the banks fault of mismanaging the £375 billion that they created getting stuck in the financial sector. I will now go even further in depth.
Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target. In layman terms QE is an injection of cash into the banking system to stimulate lending.
In 2009 the government wanted to get more money into the economy there’s two ways to achieve this the usual one is solved by banks creating new loans (every loan a bank makes creates brand new money), but in 2009 there was a problem banks were refusing to make loans, they were terrified that there existing loans wouldn’t be paid so weren’t willing to make new ones. The other way is when the Governor of the Bank of England which then was Mervin King stepped in a direct quote from him was “A damaged banking system means that today banks aren’t creating enough money. We have to do it for them.” Therefore the Bank of England electronically created £375 billion which equates to £6000 per man, woman and child in the UK.
Now logically if the banks under peoples quantitative easing the, as proposed by Jeremy Corbyn. Rather than telling you why this is the best idea, I’ll ask you a question what would happen if people were given £6000 what would you do? Well you would spend it and we create revenue, spending would take us out of the deficit.
Instead of doing this they injected it directly into the financial sector and by flooding the markets with newly created money it increased share prices by 20%. The big idea was that people who owned shares would feel wealthier and then go out into the economy and spend more. As the Conservatives explain as “the money will trickle down from the wealthy” and everybody would end up better off and as we have seen over the last five years this has not worked and the promise of being out of deficit by 2015 was broken. Also most people do not even own shares in fact 40% of the stock market is owned by the wealthiest 5% of the population. By using this method these people became richer £128,000 if you think about it logically how on earth this would have helped? Because they didn’t go out and spend more they reinvested more money into shares to benefit from rising share prices and made a profit out of the misfortune of the entire country. As shown on the news when a banker was explaining how much he loves the financial crash as he has made a lot of money. Therefore quantitative easing did not work. An example is for every £1 created in this way only 8p trickled down to the real economy and 92p got trapped in the financial markets making the rich even richer, but doing very little to help anybody else.
At the same time the Bank of England was creating all this new money the government was running out of money and in 2010 they cancelled a program to build 715 schools and plans for over 1000 flood defence projects and tens of thousands of construction workers were unemployed and looking for work. Instead of using some of the newly created money to employ them to build good schools which would only cost £1 billion, the Bank of England made £375 billion just to flood the financial market. So the question is why does the government have to cancel essential projects as there is no money? Even though the Bank of England created more money than the entire government uses in six months. What if the Bank of England had taken a fraction of this money and put it into the real economy? This is an idea that is called sovereign money instead of relying on private banks to create money to push up house prices or letting the Bank of England creates money to flood the financial market. We could use the power to create money in the public interest to improve the economy leading to anti-austerity as we are proposing under a new Labour government and cabinet. Led by Jeremy Corbyn. We could have used the money to build better homes, better infrastructure, cleaner energy, more jobs or more importantly whatever we DEMOCRATICALLY decide. Now anybody reading this should surely agree that this would be a good idea?
If the Bank of England had gave £10 billion of the new money which is only less than 3% of what was available directly to the government for them to use the recession would have been over much sooner. By spending £10 billion on building affordable homes the government could have created over 284,000 jobs and as those new employees go out and spend their salary this would create even more spending and more jobs. So when new money goes into the financial market through quantitative easing it takes £1 pound to grow the economy by just 8p. Now under sovereign money for every £1 pound it grows the economy by £2.80 there is a much better way to use the power to create money. Instead of using it to prop up the financial market as I say owned by 40% of the wealthiest top 5%, or to push up house prices.
With an alternative Labour government we can make sure the power to create money is used for something that benefits all sections of society. For example schools, hospitals, houses, law enforcement and jobs! We are campaigning for a financial system that works for society not against it.
Ryan Worth – Disability Campaigns Officer