Quantitative easing – give us the money!

The Bank of England has had a busy week. Along with its historic interest rate cut, it has also announced plans for quantitative easing.

Quantitative easing sounds very impressive, but for those unfamiliar with the term, it simply involves printing money, £75 billion to be precise, and giving it to the banks. Why? Well, here’s the cunning bit - IN THE HOPE that they’ll spend it, i .e. lend it to businesses to boost the economy.

Now, I may be wrong, but this plan seems to have a couple of inherent flaws.                           

1. £75 billion seems quite paltry. RBS alone has managed to rack up losses of £24 billion, with another £25 billion needed by HSBC from its shareholders, and a newly-discovered £10 billion hole in HBOS. These banks are able to chew through cash with alarming efficiency and the general consensus from industry experts is that the amount of QE needed to make any significant impact via them is closer to £300 billion.
2. The important bit is ‘in the hope’. Although the banks are being given this money, that is as much influence as the government   can have, i.e. they can’t actually make them spend (lend) it. Banks are desperate to rebuild their balance sheets, so they may just choose to deposit it in their coffers where it will never see the light of day, let alone go to help British businesses, and the whole thing will have been a very big and expensive waste of time.

If the end game is to stimulate the economy and boost manufacturing, surely even minimal lateral thinking would conclude that the best people to give cash to isn’t the banks but directly to companies themselves.

Let’s face it, any SME still standing after the last year must have some pretty good management, and is in a far better position to know where and how to invest funds in their business to get it going or growing than the banks are.

It could provide them quickly with the cash flow they so desperately need, and which the banks are withholding from them, to grow their operations and perhaps take advantage of new overseas markets.

The Euro and the Dollar are both giving a golden opportunity to British exporters. At around 1.12 to the pound, the Euro is still some 10% stronger than its 2008 average, making our goods and services attractive to the European market.

Failing that I have another suggestion. If the government is really set on printing and spending money, why not give the job to the people who really know how to do it best – the women of Britain. Give it to us and we can, and would, literally spend for England. In fact, I guarantee that between us we could blow the lot in one Saturday afternoon. Handbag and shoe makers, if nothing else, would be saved.

Technorati Tags: Quantitative Easing, RBS, 4X Currency Corporation, Helen Scott Currency

Comments

[Ralph Musgrave]

The definition of QE at the start above is sloppy: “Quantitative easing. . . . . involves printing money, £75 billion to be precise, and giving it to the banks.”

QE consists of a central bank printing money and using the latter by buy something which is very near money: gilts (or other top notch bonds). Doubtless banks are amongst the institutions giving up gilts in exchange for cash, but "giving money to banks" is hardly the definition of QE.

Having said that, the rest of the article makes a bit more sense: handing money to small and medium size businesses. But why not take it further and hand the money to source of all demand, i.e. the consumer? Once demand picks up SMEs automatically become profitable and viable and credit worthy. Problem solved.

There are plenty of reputable economists who advocate the latter, e.g. Warren Mosler. Also see my site (http://printingmoneyisgood.blogspot.com/ ) and scroll down to section headed “Sites which advocate channeling additional money towards households” on left.