Using QE to rebuild the UK economy - the Canadian way
Photo credit: wallyg
July 1, 2013 // By: Josh Ryan-Collins
Dear Governor Carney,
QE is being written about in the media as your great challenge. If you want more of it, as your predecessor did, how do you counter the argument that it is a policy with diminishing returns, just as likely to pump up house prices or financial assets as it is to trickle through to the real economy? If you want less, how do you unwind QE without creating turmoil in the financial markets, as has been the result of the recent announcements of the Federal Reserve?
We suggest a third, ‘Canadian way’.
In 1944, The Canadian government and recently formed Central Bank faced an enormous reconstruction challenge. One of the solutions was to create a new public bank – the Canadian Industrial Development Bank (IDB) – to support an SME sector desperate for funding with WWII having just ended.
Where was the money to come from given sky-high public deficit? The answer was simple: the Central Bank used its power of money creation to capitalise the IDB which would then lend to SMEs as needed. From 1944-1972, the IDB authorised 65,000 loans totalling $3 billion for 48,000 businesses, employing almost a million people. Not a single penny of taxpayers’ money was needed.
Today we’ve released a new report, arguing that the Canadian example should be adopted and taken further. Instead of buying government bonds and relying on financial markets and our sickly banking sector, the Bank should use its power of money creation to buy assets in intermediaries with a remit to invest in the real economy: bonds in the Green Investment Bank and British Business Bank, financing the Green Deal or capitalising a Public Interest Company to build much needed affordable and social housing.
Even with no additional QE purchases, a total of £100bn of QE purchased government bonds will come up for renewal in the next 5 years, equivalent to the government’s entire capital spending plans over the same period, announced last week by Danny Alexander.
How to achieve this whilst maintaining the Bank’s independence on monetary policy? Create a new body – the Monetary Allocation Committee (MAC) – that would be in charge of deciding how best to distribute Bank of England QE money. The Monetary Policy Committee (MPC) would remain in charge of the quantity of Central Bank money created, retaining its primary inflation remit. The MAC would staffed by independent experts but accountable to the Treasury and Parliament rather than the Bank, given its more fiscal remit.
The fact is that the Bank of England, through schemes like Funding for Lending and the Financial Policy Committee is already blurring the line between monetary and fiscal policy. Our proposal makes the division transparent and democratically accountable.
The result would be win-win-win: create sustainable growth and jobs, boost productivity and boost exports, all without increasing the public debt. What’s not to like?
Our open letter to Mark Carney, new Governor of the Bank of England.