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Posted by Andrew on 27th October 2011
Will quantitative easing solve the financial crisis?

The recent announcement that the Bank of England considered £75bn of quantitative easing (Telegraph, 19thOctober) raises the question of ‘what impact is £75bn going to have (a second round of quantitative easing) when so much has already been put into the nation?’. As I previously discussed, we face the problem of this money sitting static with the funds and banks rather than being invested on infrastructure projects which the nation so badly needs.

Is there now going to be Government pressure that will force the banks to distribute funds, particularly to small business, to revitalise the economy and increase employment? I suspect not! Will the government split retail banks from investment banks, so that the investment banks can take risk but without affecting everyone else and the retail banks provide the slow and steady platform that is needed? I don’t think this will happen either.

The major funds are essentially looking for short-term return on investments, a return over three to five years. The need within society, however, is a 30 – 40 year investment pattern, covering everything from health care to infrastructure, to introducing new forms of energy. All of these challenges are technologically capable of being handled, but it’s their financing that prevents major infrastructure investment from being pursued.

Are the banks risk averse? – If they were, they would put their money into longer-term bonds that would support major capital projects guaranteed by the state concerning returns on investment. More concerning is the culture in the City and Wall Street typified by fund-manager’s bonuses based on short-term transactions. Business is on a quarterly cycle – and every organisation is fundamentally judged this way.

With this new round of quantitative easing, it seems that all that will happen is the creation of paper, which guarantees inflation. What we will end up with is more of what we already have in the UK –inflation but with the average wage going up only around 1.7 per cent. As I wrote in a previous blog post, we are simply going to see more protests.

People question whether these trends are understood by government. They are, and explicitly. The problem is that our governments do not have the courage to tackle the City or Wall Street, so we are back to the issue of who can handle the funds and the banks? Two types of population– the press, and the citizens who are fed up with the hardships they are facing and are taking to the streets.

So, how to change a whole system? When a whole system attracts people who hold a short-term view they are easy to label as selfish, but I think these same individuals are acutely aware of the vulnerabilities and lack of sustainability of shareholder capitalism as it is being exercised today. So the very individuals who are running the system are conscious that this cannot continue forever. But they don’t know what to do, nor how to change it?

It is important to define the nature of the problem. This is not a problem of finance; it is not one of return on capital over the short or long term. The problem is a political one, which asks ‘How do we change a fundamental aspect of the structure of our society to something different?’

It is perhaps worth noting that through history, some of the most successful revolutions have occurred at relatively high levels of national wealth. So we have to look at where wealth is concentrated and who is reaping the benefits from a distribution that is unequal. If we look at this distribution, we might be able to determine if we have a political issue or not. In my view our challenges and problems are political, and this is where the problem lies.

Those who have the political will to do something are being marginalised. The political representatives on the various committees in Parliament are really trying to help the nation by drawing to the government’s attention the nature of the country’s concerns. Government is criticised but in a constructive way through reports, analysis and the interrogating of witnesses, but they are getting nowhere.

Just as the will in Parliament to deal with the issue of an over-concentration of capital is forced onto the back benches, the will in the community is being forced into the streets. The lesson from history is that where there is a will, it meets with resistance. Capital does not want to share its benefits and will fiercely protect its assets for as long as it can.