It has long become clear that the financial crisis has been on a scale deeper and larger than many people have suspected. It has also been exacerbated by muddled policy responses from all Governments and policy makers. Whilst the need to control debt is not in doubt, capital expenditure projects should be pursued and tighter bank regulations need introducing (with much clearer splits between retail and investment banks); all economies are still struggling.
Step one: better Quantitative Easing
Quantitative Easing (QE) – effectively the printing of money to buy up Government debt, and shore up the banking sector, helping banks’ balance sheets. It has not really got money flowing through the economy. A bolder step, which Australia tried in 2009 (and helped it avoid recession), is to direct QE, not at the banks, but directly at the taxpayer. This can be in the form of temporary tax cuts or even just a cheque from the Government. This BBC article explains the concept in more detail.
There are inflationary risks, and we can’t print our way out of trouble (although by definition you’d be against QE in general then), but in an economic downturn, the inflationary risks are low. There is also the problem that this doesn’t solve the global problem.
Step two: the international community must work together
So another necessary step is for the entire world to do this at the same time – globally coordinated action. Effectively the recession is a global crisis and to solve this it requires a global solution.
At the moment most Governments are cutting back on public spending, this is taking demand out of the economy as private investors are not filling the void. Beggar thy neighbour tactics are appearing with more protectionism and greater focus on “national” interests, understandable in the current climate, but economically futile.
Instead the international community must work together. As Franklin Roosevelt said at the opening of the Bretton Woods summit in 1944:
The economic health of every country is a proper matter of concern to all its neighbours, near and far.
But what do I mean? Obviously coordinated attempts have been attempted before in trying to save financial markets and individual country credit ratings with loan guarantees. These have generally not worked as they are designed purely to appease the lending markets. Instead, we need these three steps:
- If there is to be QE, all countries should do it at the same time, in the same way and the same proportion so that relative to each country, there is impact on currency values, or inflation. The markets will be less likely to threaten one country than another.
- Common sharing of risk is needed to tackle the markets so a “Euro bond” or even a “World bond” should be introduced. This will mean one interest rate on debt, so the UK will have the same interest rate as Iceland or Germany and Greece on its borrowing. Without the sharing of risk, I struggle to see how countries can stand up to market forces (countries get picked off as we have seen in the Eurozone).
- Accelerated regulation and approval of new (and green) technology. We all know that the world is changing environmentally, that fossil fuels are harder to find, there is no lack of rhetoric but the lack of action is depressing. There should be international agreement on areas such as air emissions, carbon capture technology, renewable energy targets enforced, environmental standards brought in for construction, focus on sustainable farming; support in all these areas for developing countries. All this backed up with regulation and firm investment commitment. If a world standard is set, enforced and developing countries supported, all countries will be better off in the short run (increased investment, new industries started) and in the long run (environmentally and lower cost of intervention).
The EU, UN, IMF, World Bank and, more importantly, individual Governments must act decisively and together to get the world economy back to full health. It means taking unorthodox measures, but extraordinary times require an extraordinary response. John Maynard Keynes understood this in the 1930s and 40s and we need today’s policy makers to have the same vision.
* Phil Ling is an Executive member of Merton Liberal Democrats and Treasurer of Chinese Lib Dems
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10 Comments
There are some serious issues begining to become visable within the EU, we are in a difficult situation unless we start to think of ways forward. Some very unhappy people , things are far from what they should be.
You’re right on target. We need to correct the deficiency of demand in the economy. QE hasn’t worked because at the same time as issuing QE, the banks’ reserve ratio requirements were increased which is why, as you point out, the QE funds are sitting in the banks and achieving nothing. This giving it with one hand whilst at the very same time taking it away with the other is an amazing policy combination.
I agree that QE needs to get to the consumer who needs to have a large incentive to spend it. Well off Lib Dems who have been spared the mansion tax can do their duty to the nation by spending their savings. Keynes would be delighted. Tax credits would help, but only if they were not counted as increased national debt. Despite the howls from the monetarists, this is entirely possible. Even Gavyn Davies and Adair Turner are beginning to realise this (see http://blogs.ft.com/gavyndavies/2012/10/14/will-central-banks-cancel-government-debt/#axzz29ptcqSkU ). I prefer a citizen’s income as the deficiency of demand is going to be with us as long as productivity grows faster than real wages. You needn’t fear inflation. The amount of the stimulus simply has to be calculated to equal the gap between output GDP and aggregated consumer income, a task our worthy Treasury can just about manage. You’re also right that we need coordinated G20 action to prevent the bond dealers and credit rating agencies dictating to our real economies from their blinkered self interested perspectives.
One can only hope that our dear policy makers listen, instead of blindly pursuing the same old policies which don’t work because they fail to address the crisis at its roots.
On 1. yes but it would need to be as a set quantity not as some kind of tax credit
On 2. yes to the retoric but to your version of the detail absolutly not.
It’s good to try – heaven knows governments seem incompetent – but I’m not convinced by these proposals.
What would people do with a temporary tax cut or a cheque? Some might use it to reduce their debt, which does not stimulate demand. Others might save it, which also does not stimulate demand. Some might spend it immediaely. What happens when the tax cut stops, or the cheque is spent? Everything goes back to how it is now!
Different countries face different sizes of problem, so having them all do the same QE doesn’t look right. There’s been enough trouble about eurobonds, setting up a world bond system would look impossible – even getting the UK to cooperate with the Eurozone is impossible, in spite of the fact the a healthy Euro is good for us! Why are green polices relevant? – did the absence of green policies cause the crisis?
Psi clearly doesn’t stand for ‘specific’ ! I agree with Richard Dean that the green issues are worthy but peripheral to this main point. Each country is different and should calculate its own GDP/consumer income gap and fund that outside its PSBR with a citizen’s income. And yes people would have to spend it, so it could be either a time limited validity payment, or be accompanied by low or negative interest rates to deter saving 🙂
Thanks for the comments. I think it’s the principles of how to get demand into the economy and how the international community to work together that is key. Current QE isn’t working, but if the money is directed at people then they choose how to spend it, even if it’s only paying off debt (as money will still shore up banks).
Maybe a world bond won’t work but Bretton Woods provided stability for the immediate years after WWII, but we wouldn’t go back to that now. We must think more boldly. I studied economics and it was very much neo-liberalism at a macro level and the result is economic policy making which is limited in scope/ambition.
It’s natural, to want to fix things if they are broken, and the global economy is without doubt, seriously broken.
We undoubtedly have many intelligent people around the world ‘head scratching’, their way to develop economic theories that will get us back on track, to ‘Business As Usual’. And this fascination with ‘helicopter drops’ of imaginary money, is the latest incantation to remedy the situation. We have had several QE’s of pretend money parachuted into the system, and now we’re led to believe that the helicopter simply dropped it in the wrong place ; that if only we were to drop a few hundred notes into everyone’s back garden, (or 1’s and 0’s), into their bank account, the engines of the economic super tanker, would turn once again.
But would it?
Things often happen in our lives, including serious health issues, that the word ‘problem’, doesn’t fit. And the many astounding advances in technology, have allowed us to be seduced by the idea that solutions always exist, despite the fact that life experiences, on occasion proves otherwise.
Our language has a variety of words that have a better handle on the situation we find ourselves in. Such words include dilemma, predicament, impasse, riddle. Some of these words differ to ‘problem’, in that they ~ Have No Solution. Heresy ! there is always a solution !! Actually, sometimes there isn’t.
Phil Ling, broaches a very important point when he says ” We all know that the world is changing environmentally, that fossil fuels are harder to find, there is no lack of rhetoric but the lack of action is depressing.”
Phil’s comment on fossil fuels being harder to find, I believe, is key to understanding where we are right now. Economic growth is a relatively new phenomenon, and it is no coincidence that it has occurred in lockstep, with the last 400 years of coal and oil use.
As Phil rightly points out, fossil fuels are becoming harder to find, and will become more scarce and expensive over the coming decades. And that is why we have (not a problem), but a dilemma with no desirable or palatable solution. Economic growth ascended (over 400 years), in lockstep with the use of cheap, abundant, affordable coal and oil. And economic growth will stagnate and begin to descend, in lockstep with more difficult to find, extract and increasingly expensive coal and oil.
That is in fact what the world has been experiencing now, since 2007. Even the powerhouse China, is not immune, as its growth begins to fall into single figures.
I have to apologise here and agree with Phil that it [this message], can be depressing. At least until we shift our thinking from the denial stage. And we must, shift from the denial stage, because there are things we can and must do. But futile economic QE ‘incantations’, to get back to Business as Usual, is NOT one of them.
Lord Turner is perhaps doing what any political job seeker does – promising more that he will deliver. And the BBC’s Stefanie Flanders seems to be embellishing David Miles. QE does appear to be working – but for a different purpose.
By raising the reserve ratios required for banks, and simultaneously using QE to provide the money to do so, it seems that the banking system becomes stabilized in the sense that everyone sees it as adequately funded, so panic reduces, and runs don’t happen. This perhaps also sends a strong message that if any bank runs do start, either randomly or managed by the financial services industry, they will be met by further support from the government.
QE might not be increasing demand – but perhaps it wasn’t designed for that. Did the government diagnose the problem, two years ago, solely as a problem of confidence in the banking system? It has done what would have been needed if that diagnosis had been correct. But it seems the diagnosis was wrong. In essence it may have wasted two years solving the wrong problem!
John Dunn, you appear to claim that because some problems are not solvable, that we shouldn’t try? You don’t explain why the various solutions proposed to resolve the crisis won’t work in your view. Resources have always been scarce : this has always been a fundamental assumption of economics. It ‘s why prices are positive. We need not and should not accept austerity and the recession it brings. It will hit some people very hard. There are policy solutions, they will work, and they should be applied.
Geoff :
I can only take the horse to water.
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