The government is asking the Bank of England (BoE) to ‘print money’. The Times (19 Feb) has a useful guide as to what will happen:
1. New money will be created by the BoE who will buy up some government gilt-edged securities in the market.
2. Then they will credit the new cash to the reserve account at the BoE of the bank selling the gilts.
3. With these extra reserves at the BoE the banks will have more scope for lending out to firms that want investment money.
Will it work?
Firstly the banks have to take into account all the bad debts that have arisen due, for example, to the house price bubble that they lent out for earlier. If their reserves are still desperately low then they will need a lot of this 'printed money' to get back to a sensible level and for some time may have no spare capacity for new loans.
Secondly how many firms will come to borrow? We are in a recession and with few people and firms spending as they did, how many firms will invest if there are fewer customers and little profit out there in the foreseeable future? Firms are going broke.
What might work?
The thing that might get individuals spending is if they we were all given regular payments from the government. This is known as the Citizen's Income (called the Citizen's Royalty in The book The Free Lunch). The Citizen's Income Trust has worked out a scheme that is affordable for the country and would be in place of many welfare payments. Suggested figures for UK citizens: Standard £90; Child: £50 p/wk; Senior £110 p/wk. (2006 prices). Click here: Citizen's Income Newsletter 2006 Issue 1.
This crisis is an ideal time to launch such an idea. It would make a real financial difference to the poorest people. Because it would be regular it is likely that much of it would be spent and not saved like one-off tax related benefits. The economy may actually be helped through this device for fairness.
The Free Lunch – Fairness with Freedom has several other radical ideas that would go towards promoting the economic justice that this financial and banking crisis shows is sorely lacking. Click here: To visit the website.