by Summary:
This is the uncut version of the final chapter of my book, "The Case for People's Quantitative Easing". It was written May/June 2018, so is slightly out of date (though I have updated it in places). But I believe its conclusions are right. So I am publishing it now to coincide with COP 26. I've also included an updated version of the original postcript of the book, which seems to me to be very relevant now - not least because the first part of the Dune epic has just been released! There is scientific consensus that climate change is radically changing the nature of the planet, with profound implications for the future of humanity and indeed for life on earth as we know it. Already, the effects are becoming apparent: ice caps are melting, sea levels are rising, global temperatures are the
Topics:
Frances Coppola considers the following as important: central banks, climate change, PQE, QE
This could be interesting, too:
This is the uncut version of the final chapter of my book, "The Case for People's Quantitative Easing". It was written May/June 2018, so is slightly out of date (though I have updated it in places). But I believe its conclusions are right. So I am publishing it now to coincide with COP 26. I've also included an updated version of the original postcript of the book, which seems to me to be very relevant now - not least because the first part of the Dune epic has just been released! There is scientific consensus that climate change is radically changing the nature of the planet, with profound implications for the future of humanity and indeed for life on earth as we know it. Already, the effects are becoming apparent: ice caps are melting, sea levels are rising, global temperatures are the
Topics:
Frances Coppola considers the following as important: central banks, climate change, PQE, QE
This could be interesting, too:
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This is the uncut version of the final chapter of my book, "The Case for People's Quantitative Easing". It was written May/June 2018, so is slightly out of date (though I have updated it in places). But I believe its conclusions are right. So I am publishing it now to coincide with COP 26.
I've also included an updated version of the original postcript of the book, which seems to me to be very relevant now - not least because the first part of the Dune epic has just been released!
There is scientific consensus that climate change is radically changing the nature of the planet, with profound implications for the future of humanity and indeed for life on earth as we know it. Already, the effects are becoming apparent: ice caps are melting, sea levels are rising, global temperatures are the highest on record and the incidence of extreme weather events is increasing. According to the former Governor of the Bank of England, Mark Carney, climate change threatens both financial stability andlong-term prosperity. Yet since the 2008 crisis, central
banks themselves have inadvertently contributed to global warming. In 2017,
researchers at the Grantham Research Institute on Climate Change and the
Environment found that corporate bond purchase programmes operated by the Bank
of England (the CBPS) and the European Central Bank were skewed towards
high-carbon sectors:
“Calculations made using publicly
available information indicate that 62.1 per cent of ECB corporate bond
purchases take place in the sectors of manufacturing and electricity and gas
production, which alone are responsible for 58.5 per cent of Eurozone area
greenhouse gas emissions, but only 18 per cent of gross value added (GVA). For
the Bank of England, manufacturing and electricity production – responsible for
52 per cent of UK emissions – make up 49.2 per cent of the eligible benchmark,
but only 11.8 per cent of GVA.”
Citing this research, British
thinktank Positive Money accused the Bank of England of “policy incoherence”,
saying it was taking monetary policy decisions without considering their
environmental consequences. Positive Money demanded that the Bank stop buying
bonds issued by fossil fuel companies and disclose the carbon risk of the
assets currently on its balance sheet.
Central banks’ eligibility criteria
for corporate bond purchases discriminate against green ventures and renewable
technologies because these are viewed as higherr isk than older, more carbon-intensive
industries. Protecting the central bank from credit and market risk trumps
environmental considerations. Once again, central banks’ approach to QE is
having unfortunate distributional effects.
Corporate QE amounts to a subsidy
to large corporations, many of which are already cash rich. We know that
corporations don’t use this money to invest for the future. They buy back their
shares and give their executives big bonuses. Corporate QE is thus not only
environmentally unfriendly, it is of questionable economic benefit. It would be
far better for central banks to support small businesses and new ventures.
There are several ways in which they might do this:
capitalise SME lending banks and underwrite SME
- loan securitisations, as Adam Posen has suggested
- buy bonds issued by a sovereign wealth fund that takes direct stakes in small businesses and new ventures
- reduce capital requirements and cut funding costs for SME lending by commercial banks
- lend directly to SMEs and new ventures, or take equity stakes
At the very least, then, central
banks need to rethink their approach to corporate QE. There is absolutely no
need for central banks to buy bonds of companies in carbon-intensive
industries. Helicopter money and support for SMEs would not only be greener, it
would be a more effective stimulus.
But
greening the global economy will be phenomenally expensive, and there is verylittle time left in which to make a significant difference. There are growing calls for more direct
action by central banks.
A report for the United Nations Environment Inquiry identified three reasons for central banks to involve themselves in measures to
mitigate climate change:
- the risk that climate change poses to financial and economic stability
- insufficient incentive for widespread and effective private sector initiatives (“market failure”)
- powerful role of central banks in countries where financial markets are underdeveloped
Of these, only the first currently
seems to be accepted by central bankers as a reason to support green finance.
Carney, for example (ibid), talks about the vital role of insurance in mitigating
climate risks, but never mentions market failures. He specifically rules out
central bank involvement in financing of green initiatives, saying “it is not
for a central banker to advocate for one policy response over another. That is
for governments to decide.” Once again, the engineered divide between government and central bank seems to render
potentially powerful policy interventions politically impossible.
One of the market failures
identified by the UN report is the underdeveloped nature of green bond markets,
and indeed of green finance generally. Central banks could use QE for the
People to help the development of green bond markets. They could underwrite the issue of public and private sector green bonds.
As many green initiatives are likely to come from small businesses and innovative
new ventures, some of these green bonds might take the form of SME
securitisations, as already discussed. And central banks prevented by law from
buying primary issues of sovereign bonds could still act as primary dealer in a
nascent green bond market if public sector green bonds were issued by a public
investment bank rather than directly by the government.
Positive Money (ibid.) calls for what it
calls “overt monetary financing” (OMF) of green initiatives:
…the central bank would buy zero-interest-bearing, perpetual bonds from HM Treasury to finance government deficit spending on green projects. Such a policy would best be used in a recession, where the stimulus from money finance is more certain than the impact of debt-financed deficit spending. This would reconcile support for prices with decarbonisation – and might well be necessary as the climate crisis sharpens. The OMF transmission mechanism would be more direct than QE since the financial sector no longer plays the role of intermediary.This might be one way of using central bank firepower to support green initiatives, low-carbon technologies and renewable energy projects undertaken by governments and public investment banks around the world. But alternatively, we could simply rely on central banks' ability to absorb without limit the bonds issued by governments, investment banks and even the private sector. If central banks tell the world that this is their project, no financial market player would dare try to raise the cost of financing it.
But responsibility for mitigating climate change belongs to everyone, including wealth owners in the private sector. It cannot all fall upon governments. Denying the private sector a role in the financing of green initiatives would be as counterproductive as denying central banks a role. Central banks need to shed their fear of credit risk and stand ready to support private as well as public sector actors.
Climate change is the biggest challenge facing humanity today.
It is essential that we put our divisions aside and refrain from creating
unnecessary barriers to green finance. There are many forms of QE for the
People. If governments and central banks can conquer their fears and agree to cooperate,
it may not be too late to use QE for the People to help save the planet.
A final thought
A Ray of Hope - The Mint
Fear is the mind-killer. Fear is the little-death that brings total obliteration.So says Frank Herbert, in the science fiction novel “Dune”.
The failure of the
Great Experiment was caused by fear. Fear brought about the Great Unfairness.
And because of fear, the world is now in the Long Stagnation.
But how long will
this stagnation last? Populist forces are rising around the world, as people
who have suffered a decade of wage stagnation and insecurity rebel against the
“elites” they blame for their plight. Even before the pandemic, those elites started to respond by
opening the spending taps. And now, unprecedented government and central bank spending has brought an abrupt end to the age of austerity. Will it bring
about renewed growth? Possibly. But we are paying a heavy price. Barriers are
going up everywhere. Inflation is on its way back, not because of QE but
because of tariffs, trade restrictions and supply chain disruption.
If we had not
allowed ourselves to fear the consequences of distributing money to people, the
world might have been better prepard for a pandemic, and we might now be in better shape to fight the greatest enemy the human race has ever faced.
But it's not yet too late. Let governments and central banks cooperate with each other
and with the private sector to create money when it is needed and distribute it
to the people who need it. That is their job. That is QE for the People.
Related reading:
A Ray of Hope - The Mint
The Case for People's Quantitative Easing - Coppola, Polity Books
Dune - Frank Herbert