The economist who invented the concept of quantitative easing claims the strategy isn’t working in Britain because the Bank of England stole the name but failed to implement the policy correctly.
Richard Werner wrote an article for a Japanese financial newspaper explaining how he believed the Japanese government could stimulate growth by borrowing from banks rather than issuing government bonds.
At the time, the standard economic tool for the job was adjusting interest rates.
Speaking to the BBC, Werner explained that almost all the money in a national economy is generated by private bank lending and that by borrowing from banks, governments could trigger economic revival.
The Bank of England’s handle on quantitative easing (QE) lets the Bank issue credits, but buys government bonds from commercial banks rather than from the government directly.
When the Bank of England started talking about QE, I thought had to speak up to clarify the original definition is quite different.
“In Britain, at least the theory increases the reserves of commercial banks to give them money to lend, but the best way to grow the economy is to increase bank credit by governments borrowing from banks,” he said.
“That generates credit. Money supply expands with demand, employment, tax revenues and you move into a virtuous circle.”
Werner argues QE is failing in Japan and Britain because the focus is not on commercial bank lending, which means money supply is not expanding despite the £375 billion pumped into the economy by the Bank of England’s QE policy.
Werner is also critical of Britain’s banking structure that he feels has inbuilt weaknesses that create uncertainty in times of economic problems.
“Five British banks hold 90% of deposits,” he said.
Only looking for big deals
“These banks want to do big deals that pay big commissions. They don’t want to know about small businesses because the deals are not big enough, so these firms are credit-rationed in favour of big business.”
He explains in Germany, around 2,000 small banks hold 70% of deposits and are more open to calls for borrowing from small firms.
Werner also explained how the term ‘quantitative easing’ was coined.
His original article was written in Japanese, and included the standard Japanese words to describe quantity.
The Japanese article was translated into English literally, and the translator came up with QE.
“It’s become a household name anyway and I should get some kind of royalties for that,” he said