The UK government hasn’t yet been able overcome its undergraduate belief in, and commitment to, markets free from government interference as the source of the most effective and efficient way to grow the economy. Unemployment has not yet reached the level, and persisted long enough, for that fundamental belief to be disturbed. But as unemployment grows, fears of further unemployment increase and result in general belt tightening which further reduces the prospects of economic growth. It is therefore only a matter of time before the government is forced to recognise its error.
Till then, and despite having made massive investment in the banking system to avoid Armageddon, the government will refuse to take control of the banks it owns. So, even though paid for by the tax payer, the banks remain free not to support the entrepreneurial businesses on which future employment growth is believed to depend. Any such interference in the free market would be anathema to this Chancellor. So, more quantitative easing, which it should be noted is a pretty fundamental interference, is likely to be effected without direction or control.
Times have changed since the notion that the markets would channel funds, via the banks, to those industrial projects which are most worthwhile and therefore profitable and job creating. The financial sector including the banks, was first brought into existence in the eighteenth century to provide long term finance for the building of transportation infrastructure such as the canals and subsequently the railways, which typically took around seven years from commencement of their building to earning their first revenues. Having been established, the financial system was an essential support for the whole industrialisation project. It existed to serve the real economy, creating jobs and funding economic growth.
But today investment is no longer focused on supporting the real economy. Money made available to the financial sector will, necessarily in this competitive, unregulated financial market, find its way to the most lucrative projects. These are not in the real economy. They are the financial derivative ‘products’ promising impossibly high returns with riskiness deliberately obscured, trades in which are now several times trades in real stocks and shares. That is the plug-hole down which most quantitative easing will disappear while ever governments refuse to intervene in financial markets. And it will remain in those derivative markets earning high returns for the banks, till the next bubble bursts and they have to be bailed out again.
But it’s worse even than that. Confidence in the real economy has been so far damaged that, even if the quantitative easing funds were made available to real economy firms, few would risk taking it while demand for their outputs is so limited. The first task of government has to be to increase demand, followed by channelling new funding to support the satisfaction of that demand.
The well-spoken young men of this coalition government seem slow to learn that the economics they were taught at university, and which their supporting civil servants also imbibed, doesn’t really work in practice. But they should work a bit harder to learn what might work. Or the poor and unemployed may be stirred to take control out of their hands.