Having slashed interest rates to effectively zero percent two years ago, the Bank of England (and other central banks) had lost the use of their trusted weapon of choice. Instead they had to turn to unconventional measures, such as quantitative easing (essentially printing money). Quantitative easing was successful at achieving some of its goals: large firms’ borrowing costs were reduced and share prices and commodities rebounded, pushing up revenues and profits. However, it had no effect on wages. Despite £275 billion being pumped into the economy, the average family continues to face worsening living standards. And so we have the bizarre scenario where taxpayers’ money has been used to increase the wealth of the wealthy by 20%, at a time when the wealth of the country has declined by more than 5%. Incidentally, giving vast sums of taxpayers’ money to the wealthy increased public debt, which the coalition government decided should be tackled by sacking lots of ordinary workers (raising unemployment to record levels), and cutting support to those citizens who need it most. Regardless of the cuts, however, it is safe to say that the benefits of quantitative easing were not evenly felt. Ironically (or tragically), the segments of society that did benefit were the ones who caused the financial crisis in the first place.
In order to avoid a full-blown depression, it was necessary to both bail out the banks and engage in quantitative easing. However, both actions were implemented badly. We, the people, bought huge stakes (sometimes 100%) in failed banks, paying over the odds by most estimates. However, despite providing them with cash (at great expense to ourselves), the banks we own (as well as the ones we don’t) failed to increase lending. And so Adam Posen, a member of the Monetary Policy Committee responsible for conducting quantitative easing, has called for the creation of a state bank that will lend to small and medium sized businesses in need of cash, and therefore help fight the recession. Even George Osborne tacitly acknowledges the need for a state bank by getting his civil servants, untrained in banking, to underwrite business loans with taxpayers’ money (a policy he describes as ‘credit easing’).
This government seems to be either unable or unwilling to join the dots together: 1) businesses are in need of cash to keep the economy going, because banks aren’t lending to them. 2) As a result, policy makers are calling for a state bank with enough money to make loans to those businesses that need it. 3) We own several banks, and have provided the banking sector with £275 billion.
Would it not make sense to use that £275 billion, drummed up at the taxpayer’s expense, to lend, via the banks that we own, to the businesses that need the cash flow to keep people employed and so help us weather the recession? This would help to solve several of the problems facing the UK economy – in particular the lack of lending and the unequal effects of quantitative easing – which have squeezed the 90% of the population already struggling, whilst making the wealthiest even wealthier.
What happened instead? Well, the ‘good’ part of Northern Rock, which was and is profitable, was sold for a £400m loss for no apparent reason. In fact, the loss to the taxpayer was even more than the headline £400m, as £250m of the £747m being paid for Northern Rock comes from Northern Rock’s own capital, which is effectively (you guessed it) taxpayers’ money. Market conditions could not have been worse for the sale, the timing of which is nothing short of mind-boggling, with no other explanation than spectacular short-termism on the part of the coalition. Kept in public ownership, Northern Rock would have continued to make a profit to pay the taxpayer back for its bailout. Meanwhile, Northern Rock could have been the people’s bank, with extra loan-making capacity made available from past or future rounds of quantitative easing to make specifically targeted loans to Small and Medium-size businesses and the population as a whole, minimizing the impact of the recession on both. When market conditions returned to normal, Northern Rock (with its expanded balance sheet and bolstered assets) could have been sold at a profit rather than a huge loss, repaying the taxpayer for its bailout. The proceeds of the sale could have stimulated the economy further via tax cuts or government investment. Instead an opportunity was not only wasted, but butchered – with £650m of taxpayers’ money handed to the buyers of Northern Rock: a combination of Richard Branson, an astronomically rich US speculator, and Abu Dhabi. To say the public is being short-changed would be an understatement – we’re being robbed.