How to waste £375 billion
In the years following the financial crisis, the UK wasted £375bn on a failed scheme to
stimulate the economy and end the recession.
This was one of the biggest missed opportunities in history.
Here’s how it happened.
In 2009, the government wanted to get more money into the economy to start a recovery.
Now, there are two ways to get more money into the economy.
The usual way is to get banks to make more loans.
Every loan a bank makes creates brand new money.
So when people borrow more, more money is created.
But there was just one problem.
In 2009, banks weren’t lending.
They were terrified that their existing loans wouldn’t be repaid, so they weren’t willing
to make new ones.
So if banks aren’t creating enough money, the Bank of England can step in to create
money instead.
As Mervyn King, then-Governor of the Bank of England explained:
“A damaged banking system means that today banks aren’t creating enough money.
We have to do it for them.”
[Mervyn King]
From 2009, the Bank of England started a scheme called Quantitative Easing.
They electronically created £375bn of new money, to stimulate the economy.
That’s nearly £6000 for every man, woman and child in the UK.
But instead of giving this money to the government or even to ordinary people, the Bank of England
put this £375bn straight into the financial markets.
By flooding the markets with newly created money it pushed up share prices by 20%.
The big idea was that people who owned shares would feel wealthier and would then go out
into the economy and spend more.
The money would trickle down, and eventually everyone would end up better off.
But most people don’t own many shares.
In fact, 40% of the stock market is owned by just the wealthiest 5% of the population.
These people became richer by £128,000 per household.
But they didn’t go out and spend more: instead, they put even more money into the financial
markets to benefit from rising prices.
So Quantitative Easing didn’t work.
For every £1 the Bank of England created in this way, just 8p trickled down to the
real economy.
The rest of the money got trapped in the financial markets, making the rich even richer, but
doing very little to help anybody else.
Meanwhile, at the same time as the Bank of England was creating all this new money, the
government was running out of money.
In 2010 they cancelled a program to rebuild 715 schools.
They also cancelled plans to build over 1,000 flood defence projects.
At the same time, tens of thousands of construction workers were unemployed, sat at home desperately
looking for work and for something useful to do.
Instead of using some of the new money to employ them to build good schools – which
would have cost just £1bn - we let the Bank of England create 375 times this amount just
to flood the financial markets.
So why does the government cancel essential projects because “there’s no money”,
even though the Bank of England was able to create more new money than the entire government
spends in 6 months?!
What if the Bank of England had taken just a fraction of the money they’d created,
and put it into the real economy?
This is an idea that we call Sovereign Money.
Instead of relying on private banks to create money to push up house prices, or letting
the Bank of England create money to flood financial markets, we could use the power
to create money in the public interest – to improve our economy, to build better homes,
better infrastructure, cleaner energy, more jobs or whatever we democratically decide
is most important.
If the Bank of England had taken just £10bn – less than 3% of what they actually created
– and given it to the government to spend into the economy,
the recession would have been over much sooner, and hundreds of thousands of people could
have been saved from years of unemployment.
By spending £10bn on building affordable homes, the government could have created up
to 284,000 jobs.
And as those new employees go out and spend their salaries, this would create even more
spending and more jobs.
So when new money goes into financial markets through Quantitative Easing, it takes £1
to grow the economy by just 8 pence.
But when new money goes into real economy, then every £1 created grows the economy by
£2.80.
There is a better way to use the power to create money.
Instead of using it to prop up financial markets or push up house prices, we can make sure
the power to create money is used for something that benefits ordinary people.
We’re campaigning for a financial system that works for society and not against it.
Join us at: positivemoney.org