CBFSD Policy News 2012 1.Pub

Centre for Banking, Finance and Sustainable Development Management School Policy News 8 February 2012 Volume 3, Issue 1 MP & Banking Expert Call For Change to BoE Policy Replace Bond Purchases with Solar PV Purchases—SUMMARY As the Bank of England moves Professor Richard A. Werner, mote environmental protec- closer towards announcing an Director of the Centre for tion, to stabilise the econo- unprecedented third round of Banking, Finance and Sustaina- my, and to create hundreds ‘Quantitative Easing’, experts of thousands of jobs. Invest- are calling for this newly creat- ”Many would like money ment in solar PV and energy ed money to be used more efficiency, for example, would creation to be used to help Inside this issue: productively and effectively to reduce fuel poverty, cut cli- the wider economy and envi- achieve key social and environ- mate emissions, and get many Q: How does QE work? mental objectives. During the ronment.” people back to work.” Pro- Why do we need a last round of Quantitative fessor Werner and the Green third round? Why in- Easing (’QE’) the Bank of Eng- ble Development at the Uni- New Deal Group, of which ject the money only land purchased £275bn worth versity of Southampton: Caroline Lucas is a Member, of government bonds with “Many people would like mon- pointed out that money crea- into the banks? money it newly created. As ey creation to be used to help tion is a public privilege—so A: QE aims to expand the the Bank of England prepares the wider economy directly using it to benefit the public amount of money circulat- the ground to inject a likely and to implement some badly and the environment seems ing in the economy. There £50bn to £75bn into the econ- needed green projects that only right. They argued that omy, the UK’s Green Party would enhance the sustainabil- instead of giving money to are better ways than the MP, Caroline Lucas, and ity of the economy and im- banks who fail to lend it on, current implementation of Southampton University bank- prove the environment—as the central bank could pay for the policy. Giving the ing expert Professor Richard well as create new jobs.” billions worth of photovoltaic money to banks is not Werner, are calling for this Green MP Caroline Lucas said: and energy-efficiency installa- money injection to be used for “I warmly welcome this im- tions across the country. This enough. We now need green projects that directly portant contribution to the would reduce electricity ‘Green QE’ to create jobs improve the environment and debate. Professor Werner costs, create jobs and get the and the wider economy. long-term quality of life, while shows that it is possible for UK ahead in its plans to cut creating many new jobs. Said Green QE to be used to pro- carbon emissions. The Bank of Japan and the Bank of England have adopted a policy they FULL REPORT call ‘Quantitative Easing’. But they Time for Green Quantitative Easing have focused on giving more reserves to banks in the hope that How to Generate Green, Sustainable Growth at No Cost they will lend more money to the economy. They do this, because By Richard Werner, Professor of International Banking they know that most of the money in the economy is not created by the central bank but the commercial At the Bank of England’s Janu- servers will wonder whether in a brochure entitled “putting banks (’credit creation’). ary MPC meeting, several this is because quantitative more money into our econo- The Centre argues that while members supported further easing has been successful. my to boost spending”, the efforts to boost bank lending should measures to boost the econo- They will also wonder how Bank of England explained the be stepped up, the Bank of England my, suggesting that the Bank of quantitative easing is sup- policy as follows: “The Bank can kick-start the process and implement true quantitative easing by England could well announce posed to work, and whether creates money and uses it to boosting its own credit creation and this week a third round of what there aren’t better ways to buy assets such as govern- injecting money directly into the it has called ‘quantitative eas- spend our money and kick- ment bonds and high-quality wider economy. The most efficient ing’, following from the £200 start the economy. debt from private compa- and sustainable way of doing so is billion of money injected in In 2009, soon after quanti- nies…. resulting in more via a policy of Green QE, whereby the BoE buys green assets that 2009 and the £75billion last tative easing was first an- money in the wider econo- enhance the environment and re- year. If it does so, many ob- nounced, the Bank of England duce the carbon footprint. continued on page 2 Policy News It’s Time for ‘Green QE’… (cont’d from p. 1) my”. other. The drying up of wholesale bank credit after they have al- How exactly does this in- funds pushed several banks over lowed such disasters to happen, creased money enter the econo- the edge and is a problem that has and just when bank credit was my and how does it boost spend- not been fully resolved. already contracting. ing? According to the Bank of Consequently, the banks have As a result, we find today that England “Banks end up with more since 2008 been far more risk- banks carry excess reserves and reserves as well as the money averse than in prior years. Under often also excess capital. In other deposited with them. Increased such circumstances, bankers tend words, they are lending far less reserves mean banks can increase to cut back particularly lending to than they could presently lend, their lending to households and small firms – since considered given their reserves and capital. businesses, making it easier to individually, they each are riskier Enter ‘quantitative eas- finance spending.” than a larger firm in the same ing’ (QE). As the Bank of England Thus the transmission of this industry. Taken together however explains, it has been implement- policy is said to take place mainly a diversified portfolio of small ing it in order to give more mon- via the banking system. By this firms should be a safer bet, as they ey to banks in the hope that they token, we can measure the suc- tend to invest in producing new will extend more credit to the cess of quantitative easing by economy. Since banks already examining bank credit growth. A are lending far less than they broad measure, so-called M4 “The Japanese failure of QE could, and are sitting on excess Lending, contracted by between holds lessons for the UK. money, such QE won’t boost 3% and 4% on a year-on-year bank lending. It can to some Banks say there is no loan basis in the last quarter of 2011 – extent monetise government the worst performance on rec- demand. Small firms would spending, but remains modest in “The government’s ord. Over the past year, bank like to obtain credit.” size for this purpose. This has lending has stagnated and espe- been my long-standing criticism cially bank lending to small and of the Bank of Japan’s policies attempts at getting medium-sized enterprises has goods and services, not financial during the 1990s. contracted. Money supply M4 has speculation. But this argument also decelerated sharply. Thus it does not sway individual loan offic- The Lessons from Japan banks to increase would seem that neither QE nor ers or, rather, the automated The Japanese failure holds les- ‘Project Merlin’, the government’s credit scoring systems installed by sons for the UK, not least be- lending to small firms attempt at getting banks to in- Britain’s five banks, which neglect cause the Bank of England chose crease lending to small firms, have the systemic implications of collec- to model its policy on Japan’s been successful. tive bank behaviour. Thus banks ‘quantitative easing’. For almost have not been This should not come as a big have cut back lending to small an entire decade after the Japa- surprise. Until 2007, bank regula- firms. nese speculative bubble had tors (the Bank of England, the Meanwhile, the bankers pro- burst in 1990, the Japanese cen- successful.” FSA and the Treasury) stood by claim that they would like to in- tral bank maintained that it could as banks increased lending rapidly, crease lending to ‘creditworthy’ not do anything to stimulate the without much consideration for borrowers—in the view of the economy but lower interest whether the money was used for banks basically the large firms. But rates. This, I had warned earlier, sustainable, productive purposes these don’t need the money and in would not work as banks were (ensuring that loans remain per- any case are not dependent on burdened with bad debts and risk forming) or whether it was used banks for funding. So bank credit -adverse. The Bank of Japan re- for asset market speculation. If growth has stagnated and last year peated the banks’ justification left to their own devices, in good turned negative, meaning that that there was no demand for times banks find it more attrac- banks are on a net basis withdraw- bank loans among firms—the tive to lend for speculation, which ing money from the economy. large ones. So bank credit generates larger and faster profits This problem is not helped by the growth dropped to zero and for while requiring less work and ill-timed attempts by regulators to years even shrank.

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