A green end-goal for QE

At noon on Thursday 9^th December the Bank of England’s Monetary Policy Committee meeting’s decisions will be announced.

LWM’s co-founder, Colin Hines, sends news of a report released by members of the Green New Deal group and the consultancy ‘Finance for the Future’, which calls for the Committee’s discussions on when to introduce a further round of quantitative easing (the so called QE2) to include a different ‘green’ end goal for the expected electronic printing of more than a hundred billions pounds (QE1 ‘printed’ £200 Billion).

From the Press Release

‘Green Quantitative Easing: Paying for the Economy We Need’ states that the need to reflate the UK economy has not gone away and that there is an urgent need for action to stimulate the economy by investing in the new jobs, infrastructure, products and services we need. There is no sign that this will happen without government intervention, the report therefore proposes a new round of quantitative easing – a Green QE2. 

Green QE2

Green QE2 would use the tens of billions of borrowing do three things: 

a. The government would need to invest directly into new green infrastructure for the UK.

b.The government should work in partnership with the private sector, working through a new National Investment Bank, to create new opportunities – and especially green ones – for the UK.

c. The government must liberate local authorities to green their local economies for the benefit of their own communities, and it can do this by providing a capital fund for them to use when working with the private sector on joint venture projects.  

These proposals will together inject the money into the UK economy that can kickstart economic activity in this country, reinvigorating government, local government, the private sector and household economies and in the process result in a truly greener country. 

The final proposal of the report considers tackling the costly government debt incurred during the PFI process. This would be achieved by using the Green QE2 to cancel this £56 billion debt immediately and to pay off the money owed. Future generations of taxpayers would thus be rid of the need to have to pay for the past mistakes in government finances. The sums involved are estimated over the decades to total a staggering eventual cost of £252 billion. The around £200 billion ‘saved’ could then at least in part be allocated instead to continue to finance Green New Deal initiatives over the decades to come. There would be no further PFI projects, at present projected to initially cost £13 billion, as building and infrastructure programmes would in future be financed through the National Investment Bank proposed in the report. 

‘Green Quantitative Easing: Paying for the Economy We Need’ also found that no one is sure for certain whether the first £200 Billion round quantitative easing worked and suggests that several things did happen: 

1. The banks profited enormously from the programme, which is why they bounced back into profit so soon after the crash – and bankers’ bonuses never went away.

2. The entire government deficit in 2009/10 of £155 billion was basically paid for by the quantitative easing programme.

3. There was a shortage of gilts available for investment purposes as a result of the Bank of England buying so many in the market. Large quantities of funds were invested instead in other financial assets including the stock market and commodities such as food stuffs and metals. This has impacted on inflation, which has stayed above the Bank of England target rate’

4. Deflation has been avoided, although the relative role of quantitative easing in this versus the previous government’s reflation policies is unclear.

5. Interest rates have remained low. 

However, one thing has not happened, and that is that the funds made available have not resulted in new bank lending. In fact bank lending has declined since the quantitative easing programme began. 

The report’s author Richard Murphy stated: 

‘Quantitative easing programme might be considered a short term success, but the report notes that the benefit has been captured almost entirely by the financial services sector, whilst further asset boom and bust cycles are, at least potentially being recreated with resultant risk to the economy. These are undesirable long run outcomes when the real aim is to get the UK economy working again. For that reason the next round of quantitative easing needs to be green and to improve conditions in the wider economy.’ 

Contact details 

Richard Murphy, Director – Finance for the Future, +44 (0) 777 552 1797 

Colin Hines, Convenore, GreenNew Deal Group, +44 (0) 773 816 4304

Strengthening the local economy

 

An LWM associate recently sent news of Birmingham’s Green New Deal to a senior Labour politician seeking policy input, with a printout of the relevant LWM blog. 

News of  a far longer link was also sent.

The Aston Reinvestment Trust is a project with which LWM’s co-founder Pat Conaty was closely involved. 

Adrian Cadbury tells how, during the Aston Democracy Commission, which he set up and chaired, local people brought forward the problems caused by the withdrawal of banks and building societies from Aston because the amount of business being transacted did not warrant the expense of maintaining these branches. People were having recourse to money lenders who often charged exorbitantly high interest charges and to pawnbrokers. 

He went on to say that with help from a consultant at the Birmingham Settlement, Pat Conaty, the Aston Reinvestment Trust (ART) was set up as a revolving fund in which money repaid would then be lent to others. Its objective is not to make a profit but to extend its ability to meet the small business need for loans.  Applicants would have to show that they had been unable to access funds from banks, that their business was of ‘social benefit’ and formulate a business plan showing their ability to repay the loan.

Steve Walker, Chief Executive of ART, describes ART’s mission: “addressing poverty through enterprise using money invested in ART by individuals and organisations to support those in the local community who are able to create local jobs for local people”. The latest information:

The country’s 70 Community Development Finance Institutions [CDFIs] are seen as a force for social change, with a pipeline and infrastructure ready to deliver finance where it is needed around the country.

Stabilising a Europe of tottering regional banks

In September the Independent Banking Commission appointed by the Cameron government published an issues paper and we have responded by bringing to their attention the regional pattern to the UK banking collapse of 2008. This has crucial implications for the bank reforms that are needed in the UK. But the regional dimension of 2008 has hardly been mentioned in public policy discourse – including in the Commission’s issues paper. 

In short –

Although we explain our concerns in detail on a more extensive webpage, in short, we have concerns about the UK banking system that no-one else is addressing. The UK banks that needed the injection of public money as shareholdings in 2008 were mainly those banks which had developed out of regional banks and building societies over the course of the last generation.

The outline map below shows the principal banking groups that were part of this story.

By the end of 2008 only 2 of these banking groups were not under some serious degree of control by the government company United Kingdom Financial Investments.

Lloyds TSB had become closely involved with already tottering institutions in the final months of 2008. However, HSBC and Barclays, the more archetypal London (city) banks, did not collapse in any comparable way. Nothing of this is referred to in the issues paper published by the banking commission. Box I on page 14 would have been where we might have expected to see some reference to the dynamics of the banking collapse.

This collapse resulted from the provincial financial bodies apparently taking ‘globalisation’ to mean that they could borrow huge sums of money in New York and then lend it excessively in a way that bid up property prices in the Celtic territories of the UK, and even more so in provincial England.  The importance of ‘regional’ ambitions can also be seen in the crisis in both Spain and Germany.

The Regional Crisis in Germany

In Germany it was  the regional banks that got into the sort of difficulty where they needed some sort of rescue. Hypo in Munich and the Saxon Bank were the first to have difficulties. But unlike the UK where the regional great champions could no longer borrow from the New York markets, here it was a case of the German Banks having loaned money to the New York markets and there was now a question mark over how much of it they would get back. The first 2 banks to have to admit they were in serious trouble, Hypo and Sachsen, had been seriously lending money on the New York market through subsidiaries in Dublin, Ireland.

It was in the weekends following  the UK banks being taken over by government that other regional German banks had to admit that they were in difficulties, and these are referred to in the outline map below.

Although it was regional banks in both countries that got into difficulty, we must not over look the important difference. Our UK banks were relying on the US money/secondary mortgage markets to fund their lending and even their cash flow.  Unlike the German banks that ended up in need of state help, none of the UK banks collapsed because of any gambling of their savers’ money on any more esoteric market than their standard lending – based on the UK residential property values as collateral.

Path to reform

As these UK banks are re-organised and sold off by the state, we want to see the future banks that emerge from this mess reporting to the authorities on a region-by-region basis. This would be the basis of the future structural separability of the parts of larger banks we would like to see. Whether or not they become more regionally owned any time soon, we want their financial health evident and policed on a region-by-region basis.

This would allow banks to be taken in and out of any necessary public custody on a more limited and manageable basis: manageable in both managerial and affordability terms. This would limit the risks to the government’s fiscal position. The banks ‘living wills’, in which the commission are interested, should be written in such a way as to facilitate them being dismantled on a regional basis. Our website also includes pages outlining other ideas on the regionalisation of central banking.

Over time, regionalised separability would foster the development of a more decentralised and less monopolised financial sector. Structure related surcharges on the most centralised banks would probably need to have a role in this process. This regional separability would be a solution more relevant to our national banking crisis than the more discussed issue of a supposed need for ‘casino banking’ to be separated from savings banking.

We hope our regionalisation proposals could be of use to the commission in finding a politically acceptable way forward. The Commission was set up because the Conservatives would not agree to the Lib-Dems’ idea of how the banks should be broken up. On the face of it, it does not seem likely that they should now come round to this concern over ‘casino banking’ through any further examination; but neither do we see any logical reason why the Lib-Dems should now rally to the Conservative – or even a conservative – approach.

Our distinct take

We recognise that our proposals are competing for attention against very wealthy and established interests: interests themselves funded hugely by – amongst other sources – the taxpayer.  We will follow the Commission’s deliberations as far as resources permit and will look to make further contributions to those considerations when we know more about the direction taken by their thinking.

Andrew Lydon

Alternative Inflation Report – Bank of England failure ?

The highest rate of inflation among the original G7 members, is our UK inflation rate. Although there is much doubt about how representative the official UK figure is, no one really believes the official figure underestimates inflation.

This month’s comparable inflation figures are currently

United Kingdom        3.2 %

Canada                           1.9  %     (September  figure)

Italy                                1.7  %

France                           1.6 %

Germany                       1.3 %

USA                                 1.2  %

Japan                            -0.6 %    ( September  figure)

Over a decade after inflation and interest rate management was taken out of the hands of politicians this is an unexpected predicament. The whole logic of the hope of the 1990s was that the UK would have a sounder monetary system if politicians and their short-term agendas were taken out of this level of economic management. That was supposedly the lesson of experience overseas.

In 2010, one now has to ask whether price stability would have been better served, had it been something for which Gordon Brown, Alistair Darling, George Osborne or David Cameron had still been answerable every week at Question Time. This would have been a question that would have been asked for some years now, had not the entire political class rallied behind the Monetary Policy Committee system that New Labour used to claim was its most important reform.

UK inflation has now been above its target for a very prolonged period. By contrast none of the other G7 has above target inflation. The standard G7 target is 2 % or less. An inflation rate of zero would be seen as the ideal. But here the UK is the odd man out. Our central bank would have to explain itself if the inflation rate was less than 1 %. Such a rate would be treated as as form of deflation, something to be averted here in the UK, unlike in other countries. Other countries trust their inflation indices and if inflation is reported as being about zero, that would not be regarded as a potential economic crisis but as an achievement.

The UK inflation indices are currently being reviewed by the UK Statistics Authority and we have been making representations to them about how our inflation indices can be more securely based. Details of the lessons from other countries can be found in our September report.

Should global inflation not fall back as the Bank of England hopes, the UK would be further blighted by already having the highest inflation. In our previous reports we have emphasized how global food, energy and resource prices are being driven up by ecological and population pressures. Being geared to respond to this sort of inflation will become the main challenge of economic policy across the planet.

However, the recent concern over ‘Currency Wars’ needs to alert us to another aspect of the global price shift that none of the mainstream economic commentators have picked up on. The US wants the Chinese to allow the Yuan to rise against the Dollar and other major currencies, so that Chinese made goods are not under-priced in comparison to other producers (and especially the US). However, this must necessarily mean that the price of the goods China manufactures will then rise alongside food and resource prices. Against this background, the Bank of England’s confidence that inflation is temporary, even if an increasingly long ‘temporary’, seems very complacent.

One of the major reasons why the Bank has got away with such complacency, is the very poor scrutiny they come under from the mainstream media. Most months the announcement of the official inflation figure is accompanied in many media by an economist from the banking sector telling us that inflation is not the real worry, and that interest rates need to be kept down. At the moment the profits and bonuses in the banks are largely the result of them being able to borrow off the public at the historic lows and lend out at much higher rates.

This usually goes unquestioned  by the media, adding to the confusion over inflation in this country and the negligence with which it is addressed. It is at its most objectionable when the BBC allows the bankers to spread this confusion through a media service paid for by taxpayers. This month BBC 24 had on the economist from the investment bank Investec, last month it was his counterpart from HSBC.

The BBC tends to say that the difference between the Consumer Price Index (CPI) rate of inflation and the Retail Price Index (RPI) rate of inflation is that housing costs are included in the RPI. But this is an over-simplification bordering on misrepresentation.  There are housing costs in both indices. When we look back on the biggest house price bubble in British economic history over the last decade, no one can argue that even the RPI  registered the cost of housing in such a way as to prompt the adjustment of interest rates to curb it.

By contrast in the USA,  once house prices reached 4 times average houshold income in 2005, this cost had such weight in  the US Consumer Price indices that it raised the inflation figure. This raised the alarm with the central bank that prompted the interest rate increase that brought their relatively minor house price boom to an end. House prices fell back to below their long term trend of  3 times household income. That American Consumer Price Index is an index that can be properly said to take housing costs into account. The current high level of our RPI inflation has nothing to do with the fact that our UK houses are still over 4 times average household income. While the RPI might talk the talk about taking housing costs into account, it does not walk the walk  in the way that  the US  consumer price indices do.

Stephanie Flanders, the BBC’s economics editor is listed as a member of the ONS’ s advisory committe on the inflation indices. ( Their current report can be found as the  15th document on the list that can be found by clicking here.)  This advisory committee has resisted change to these poorly constructed indices since before the 1990s.  They are now proposing the most minimal of changes to the current indexing system while supposedly accepting that housing costs must be better represented in the index. There is a graph on Annex A-9 of their report which shows how neither of their preferred options for change regarding housing would have changed the inflation figures during the ‘boom’ by very much and so would not serve as any alarm in future. Their new figures would not be significantly different, whatever the advisory committee say.

In any event, properly involving housing costs in the indices is only part of what we want to see. Regionalising the indices is even more crucial as we explained in last month’s report.

Andrew Lydon

Regional Prosperity & Inflation Project

Birmingham: the city of a thousand big business satellites?

John Clancy is Director of Media Futures, who speaks of initiating the ‘Brummie bond’ debate and of an interest in land value tax as a way of raising funding for front line public services. 

In a recent Birmingham Post blog, he wrote:

“Birmingham was a city of a thousand trades – it has become the city of a thousand big business satellites which badly serve the market and the consumer with a creed of shareholder value which has perverted the very point of business.” 

Referring to ‘the mess we are in’ 

“Failure was across the piece: failure of the market, of markets, of the marketplace, of global markets, of global finance, of credit systems, of the light-touch regulation to keep the market supposedly as free as possible. Had the private sector been left to itself (as true free marketeers should argue) and the taxpayer not stepped in to save it, there would have been widespread, catastrophic private business collapse across the West Midlands and descent into a long-lasting depression. That’s what the real free market would have brought us.” 

Clancy describes the banking sector as an ‘oligopoly verging on a cartel’, advocating government entering the marketplace and providing banking services itself – lending direct to businesses instead of trusting the market to deliver. 

The city’s public and private sector are interdependent 

Stressing that the relationship between the public and private sector is, and must be, symbiotic, Clancy emphasises that one cannot exist and thrive without the other – neither can be independent. The outsourcing of services and employees from the public sector means that more of the ‘private sector’ is actually functioning as quasi-public sector business. 

It has been said that local councils/the public sector do not create wealth, but Clancy points out that a teacher does create wealth, doctors and nurses create wealth, a local government officer creates wealth; bin men and women create wealth. 

Could BCC once more be a key player? 

In an earlier blog, he reminded readers that in the days of Chamberlain-style corporate municipal activity the council played an integral part in the provision of goods and services: “Whether providing gas, clean water transport or establishing museums, galleries and libraries, it was a corporation to be reckoned with economically and otherwise. It had real power. And the region’s economic power led by the likes of the Birmingham Corporation was central to the nation’s economic growth.” 

Clancy concludes: “In the West Midlands we need the public and private sectors to join together to create a mutually respectful business environment and patterns of economic activity which will allow the West Midlands to fulfil its economic potential as a region.” 

Many would agree that the city’s Green New Deal/Energy Savers project is such a joint creation.

“The business models and business approaches of the South East which we have relied on for too long, and the big businesses and big finance headquartered and controlled from there are not of this nature, and are becoming alien to the business culture needed in the West Midlands.” 

Rewire the financial system . . . 

“We have to start by ensuring that significantly more of finance, wealth, pensions and savings which start off in the West Midlands actually stay here, circulate here and are invested here, and primarily in the SME sector: rewire the financial system to retain it . . . 

“We do not want handouts from the South East.”

Working for a Green New Deal

LWM’s co-founder, Colin Hines, continues his work as convenor of the Green New Deal Group with Larry Elliott, Tony Juniper, Jeremy Leggett, Caroline Lucas, Richard Murphy, Ann Pettifor, Charles Secrett and Andrew Simms. 

Recently, Colin has been working to get private finance involved constructively with Green New Deal type initiatives particularly in Birmingham, the first local authority to set one up. 

Spend on a Green New Deal  

Nine months ago the group published their second report: The Cuts Won’t Work: which explains why spending on a Green New Deal will reduce the public debt, cut carbon emissions, increase energy security and reduce fuel poverty. Public and private investment in a Green New Deal to make all UK buildings energy efficient, will generate jobs, business opportunities and safe havens for investors by putting in place the green infrastructure our future economy needs. 

The need for Green Quantitative Easing 

The report advocates the need for Green Quantitative Easing as a response to the anticipated serious economic downturn, “as a response to the serious economic downturn the clowns in government are engineering”. 

Cuts: the callous con trick 

In an August report, Cuts: the callous con trick, Green MP Caroline Lucas, tax expert Richard Murphy and Colin document why any reductions in the deficit still needed once the economy is in better health can be paid for by fairer taxes, not cuts. It sets out a range of options for changing the tax rules so that more than £40bn in additional taxes could be raised each year. HM Revenue & Customs are pursuing a programme of job cuts which will ultimately reduce their own staff by 20,000. This should be reversed in order to tackle tax abuse. 

When Colin came back from his August break, he started to write a short polemical book – over which a veil must currently be drawn.

What has PricewaterhouseCoopers in common with Localise West Midlands this month?

A Birmingham Press article reports that PricewaterhouseCoopers [financial services] now commends a trend towards regional procurement  – ‘value-sourcing’ – using the term value in its financial sense. As the Press’s website is under development, an online link to the full article can be seen on the Midlands Business News site. 

PwC spokesman Neil Philpott said: “The comparatively low value of sterling is tempting businesses to consider sourcing their goods and services closer to home and the relative drag of the UK’s recovery means there is sufficient capacity in the local economy to meet this demand.” 

As the cost of imports is estimated by PwC to have risen by 30%, manufacturers and service providers in the Midlands can now compete on cost as well as quality and service. 

Neil Philpott notes that other benefits of sourcing goods from the region include shorter lead times on contracts, proximity to local markets and no fluctuating currency rates, providing greater certainty on costs. In the short-term, therefore, the region will meet the ‘Total Best Value Sourcing’ requirements. 

Localise West Midlands advocates long-term local sourcing of food, goods and services by individuals and businesses. Added to the environmental, social and economic benefits of this strategy is the financial advantage of the ‘multiplier effect’- the multiplied impact of money entering the local economy and circulating within it.

Own Goal: Lessons for the West Midlands in the Globalisation of Football Finance

Localise West Midland’s latest report: Own Goal: the Globalisation of Football Finance, has officially been launched to the press today!

Since the founding of the first official football club in 1857, professional football has grown into a national obsession; teams are regarded as social and cultural institutions by their supporters, embodying a locality’s passion and identity. Today, the English Premier League is one of the world’s wealthiest and most successful sports leagues, as lucrative broadcast and sponsorship deals have permitted exponential growth of its top clubs over the past 17 years.

However, as the viability of these vast finances begins to crumble, ‘the people’s game’ is becoming exposed as an unsustainable, global industry. Larger teams are becoming disconnected from their localities as fans are alienated by burgeoning debt and foreign ownership, whilst smaller teams are becoming unable to compete, forced to plunge into debt in order to retain a viable squad and support base.

The recent rise of the Manchester United Supporters’ Trust and the massive financial implosion of Portsmouth have now placed these issues firmly under the media spotlight, with the UEFA proposing new regulations to be phased in over the next few years to curb economically irresponsible spending by clubs.

Part of a series looking at lessons from localisation for the West Midlands economy, the paper examines the impacts of globalised finance upon British football and discusses the benefits of returning to a more traditional, supporter-led model of ownership in the region. Findings indicate that by returning control to supporters, significant impacts can be made upon increasing competitiveness, redefining local identity and facilitating sustainable wealth distribution.

By relocalising financial structures and partnering with local institutions and organisations the game can retain and enhance its ‘glocal’ appeal, channelling international funding into supporting locally viable and stable clubs that remain grounded in the passion of the sport. There are lessons from this for the wider West Midlands economy where local ownership with global links can be a winning combination.

Listen to LWM’s Anna Watson on BBC Coventry and Warwickshire tomorrow at drive time discussing the findings of the report in relation to Coventry FC.

The report will shorty be available at the Localise West Midlands website.

Anna Watson

Why do local economies matter?

Anna White of Share the World’s Resources explains, referring to the work of Localise West Midland’s co-founder, Colin Hines.

Some of the points made  [examples modified for UK readership] 

Around the world, there is a growing movement to pull back from the relentless march of corporate globalization by re-rooting economic and social activities at the community level. 

In many ways, including setting up farmers’ markets, box schemes, community supported agriculture, credit unions and – in USA – the revitalization of community banking, people are reclaiming the economy from large profit-driven corporations and building sustainable, local alternatives. 

A broad definition of localization – this trend towards small-scale, community-oriented businesses – is defined in Localization: A Global Manifesto, by Colin Hines as “a process which reverses the trend of globalization by discriminating in favour of the local”. 

This does not mean “walling off the outside world” or creating self-sufficient groups cutting themselves off from the monetary economy. International trade, travel and cultural exchange would continue, but locally-controlled, diversified economic activity would be reoriented towards meeting the needs of the community first. 

You can read the article here.  It was first seen in the ISEC’s Local Futures website.

Setting up locally owned and run pubs and shops

Co-operative and Community Finance has pledged to provide up to £2m of new loans to help 50 communities set up and run their local pubs. 

A new programme – led by the Plunkett Foundation – will provide grants to communities matched with loans from Co-operative & Community Finance and a contribution from the communities themselves. The programme will also provide a range of advice and support to communities to help them through the process of setting up a community-owned pub. 

Co‑operative & Community Finance has been working with the Plunkett Foundation for three years on a similar support programme for community-owned shops. 

Regional examples 

The Birmingham Post reported that village residents have opened shops in Yarpole, Herefordshire; Cleeve Prior, Worcestershire and Long Marston and Barford in Warwickshire. A local group in Wigmore, Herefordshire, set up a shop as part of a scheme to cut down on carbon emissions; it proved a huge success, with business doubling in the six months since it was opened. 

People living in Claverdon, Warwickshire, set up a co-operative village shop to replace one that closed because of economic pressures. Lord Digby Jones of Birmingham, whose wife volunteers at the shop, said: “Village shops are at the very heart of communities and we must make sure they stay that way.” 

Community-ownership is already working for the 233 village shops now being run as co-operatives and it is hoped that some of the 40 pubs closing down each week will be saved, as communities come together and buy their pubs as community assets.