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FT Alphaville: Corbyn’s “People’s QE” could actually be a decent idea

August 7, 2015

The UK, with its people, energy, land and water . . .


The headline is copied from the title of yesterday’s article by Matthew C Klein, a contributor to the FT’s Alphaville: ‘daily news and commentary service giving finance professionals the information they need, when they need it’ – retweeted by Paul Gosling.

matthew kleinKlein says that if Jeremy Corbyn becomes leader of the UK Labour Party, one positive consequence will be ‘the ensuing discussion of the monetary policy transmission mechanism’:

The existing monetary policy tools have the ‘unseemly property’ of appearing to work mainly by making the rich richer and hoping that some of the extra wealth gets spent.

To rebalance the economy, “moving towards the high-growth, sustainable sectors of the future, the Bank of England could be given a new mandate to upgrade the economy to invest in new large scale housing, energy, transport and digital projects”.

Quantitative easing for people instead of banks? The bulk of the British economics commentariat erupted but Klein deems the core idea sound, possessing ‘an impressive intellectual pedigree’.

adam posenCorbyn’s plan to have the Bank of England fund government-directed investment in infrastructure could work – in 2011, American economist Adam Posen supported something similar when he was on the Monetary Policy Committee of the Bank of England, except that he focused on small businesses.

Posen thought that private lenders weren’t providing credit where he believed it was needed and recommended creating new public investment banks that could originate and secure loans into bonds that could then be purchased by the Bank of England, thereby funding new business investment.

Corbyn wants specialised “green” investment banks, housing authorities, and local governments to be able to finance infrastructure investment with funding support provided by the Bank of England. Klein comments on the Posen/Corbyn proposals: “We fail to see a significant difference”.

jeremy corbynNicholas Watts in the Guardian reports that Richard Murphy, Tax Research UK, who drew up the people’s quantitative easing plan for the Corbyn campaign, points out that we will get near the Bank of England’s inflation target of 2% only when we have established people with higher wages and increased productivity and the economy is “humming along nicely”. He adds that once you have people back in work on decent wages, you have to turn QE off because continuing at that point would be inflationary.

Klein agrees that if Corbyn’s preferred investments prove to be productive, they would help to restore some lost ground and lead to higher real wages for Britons and goes further, predicting that the expanded capacity due to extra investment spending may avoid inflation.

Quantitative easing for people instead of banks?

Corbyn, also quoted in the Guardian article, “It is in the long-term interest of the UK to rebuild a resilient industrial base . . . with its people, energy, land and water . . . ”.

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