I was a Miner, I was a Banker/I was a Quantitative Analyst/Between the Wars/I played at Glastonbury/In time of austerity
A bit of a follow up from last weeks look at the ways property wealth, property tax and pension wealth interact and how monetary policy can change how wealth is re-distributed.
While I was writing it Andy Haldane (did I mention he was my favourite Central Banker?) invited Billy Bragg to give a lecture on Monetary Policy at Threadneedle Street. This is the video of it:
Just to manage your expectations he doesn’t do “Levis Stubbs Tears”. Billy Bragg at the Bank of England may sound odd, but it was meant to expose Central Bankers to a broader range of views outside of their own bubble. There was a predictably mixed response, with people liking or disliking his speech based mostly on where they were politically before the speech rather than the actual content of it.
Billy’s big point, I think, is that the lack of accountability by Institutions is driving support for authoritarianism. This is spot on. This lack of accountability is a huge problem for public institutions and faith in democratic politics – politicians are mired in scandal and yet no-one resigns. Since Gordon Brown made the Bank of England independent in 1997 there has been an assumption that interest rates and monetary policy are politically neutral, but when decisions are taken that re-distribute wealth that can’t be apolitical. It’s worth reflecting on this next time someone suggests taking the NHS out of political control in the same way as the BofE.
He also talks about the way that the money spent on things like QE could have been spent more usefully on building schools or hospitals. I think that Billy is actually describing 2 similar but subtly different approaches.
The first is that the Government could borrow money very cheaply and spend it doing things that would help improve society and the economy. This is spot on. Over the last few years we could have borrowed cheaply, fixed every pot hole, every leaky classroom roof, bought a brand new set of state of the art NHS diagnostic kit. Not only would this have saved money in the long run, but it would have helped grow the economy too.
We could also have bought out any PFI deals signed at high interest rates before the Credit Crunch with a long time left to run on them. A couple of the NHS Trusts I worked for have done just that, using low interest rates and some of the financial flexibilities available to Foundation Trusts to buy out historic PFI:
I like the way that the FT describes both of them as the first. Just goes to show that even the best newspapers struggle to follow the boring detail of public borrowing and PFI deals.
The second approach is the possibility of using QE style asset purchases to do something more ambitious than buy Bank Bonds. We could, for example, issue Local Government Bonds, which the Bank of England could buy, and use this money to build Council Houses. This idea was promoted by John McDonnell under the heading of Peoples QE.
I’m a bit more sceptical of Peoples QE. The most obvious reason is that we could just use conventional public sector borrowing to achieve this, particularly when interest rates are low. It’s a solution to a problem which doesn’t need another solution. The reluctance to use cheap borrowing is because politicians don’t want to be honest about how much they are borrowing, and that doesn’t help improve accountability.
Both plans – traditional Government borrowing and Peoples QE – share some similar problems. When the Government spends capital it almost always needs a flow of revenue to go with it. A new Hospital needs on-going spend on Doctors and Nurses, Schools need Teachers, Roads have pot holes. The only areas of Government capital spend which don’t have this problem are things like Council House building where the capital spend brings in rent.
Having run public services myself there are very few uses for capital which doesn’t come with revenue consequences if only to fund the interest payments.
There is also an even nerdier problem with using Government spending or Peoples QE rather than traditional QE. The traditional QE model benefits from the magnifying effect of fractional reserve banking. The size of the lending that Banks can release into the economy is much greater than the size of the asset purchase.
But peoples QE has a more profound problem. While the Global economy is dependent on QE no-one knows when or whether it has negative long term consequences. It may be that it distorts capital markets, increases volatility, or decreases long term growth. It might even be that Andy Haldane is wrong and it increases inequality.
With conventional QE it is easy to reverse the process. The Bank can sell off the bonds it purchased and reduce the amount of QE. With unconventional or Peoples QE it is much harder to reverse the process if you need to reduce the amount of QE in circulation. If you have used the funds to build Council Houses the only way to reduce the QE is to start selling off the Council Houses. If you have used the funds to build Hospitals then they will have to be sold too.
It’s easy to see how this produces an almost impossible dilemma for a future Government. If QE is causing inflation, or making the poor into paupers but the only cure was selling off Council Houses or Hospitals how would a Government act? How would a Corbyn led Government survive this kind of dilemma?
This is a more conventional clip of Billy:
More to come tomorrow….