Tuesday 2 July 2013

If we must create money, let's use it for something useful

It is refreshing to have a new governor of the Bank of England. It doesn't happen very often. Montagu Norman managed to hang onto the job for two whole decades between the wars.

He was one of Jung's patients (Jung famously said he was insane) and there is a strange story about how he crossed the Atlantic in disguise as a 'Mr Skinner' in 1929, for a secret meeting with American monetary officials.  The plan was supposed to have been to introduce a short monetary shock to force USA back on the gold standard. Instead it produced the Great Depression.

All of which is a way of saying that governors tend to be the most conservative of individuals, harking back to the way Things Ought to Be.

The same also seems to be true of some of the commentators.  I was struck by the normally sensible Hamish McRae in the Evening Standard talking about the dilemma about when to move back from the era of loose money (quantitative easing and so on) to the era of tight money again.  I'm sure Mark Carney will be worrying about this, but what really strikes me is how unworldly such a question is - how cut off from the realities.

Neither loose money nor tight money suits the eurozone any more.  The Germans need higher interest rates and the southern European states need lower interest rates.

Neither loose money nor tight money suits the UK any more.  London will soon need higher interest rates and Liverpool or Glasgow need lower.

In fact, there are many parts of the UK which haven't really noticed the effects of the downturn since the banking crisis not because they are too rich - but because nothing much has changed for ten years to lift them out of depression.  The banks long ago stopped lending there.

The truth is that actually single currencies don't suit anyone very well - not nations, probably not even cities, but certainly not whole continents.  More on this another day.

But for that reason at least, I'm sure quantitative easing will remain in place for some time yet, using the Bank of England's ability to create money - but then wasting it by putting it into bank reserves and, via there, bank bonuses, from where it is recycled into higher property prices.

It is a bizarre exercise in the theology of money, rendering the whole exercise pointless - bypassing the parts of the economy it needs to reach - in a tortuous process designed to pretend it isn't happening at all.

The key question for Carney seems to me whether, if we are going to create money, why we don't do something useful with it - like use it to build green infrastructure or for low interest loans for small business.  Just as Canada did in the 1940s so successfully, as it turns out.

So I very much recommend my colleague Josh Ryan-Collins' open letter to Carney pointing out the precedent.  I hope he takes some notice of it.

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