Credit where it's due: making QE work for the real economy


Giles Wilkes
March 2010

‘Quantitative easing’ was meant to boost private spending by pumping billions of pounds into the economy. But CentreForum argues that it has done little for ordinary people and businesses. Without serious reform, it will prove powerless in the face of a second dip into recession.

In early 2009, with interest rates at 0.5 per cent and the deficit hitting record levels, ‘QE’ was the only policy left for fighting the recession. By trying to increase the money supply directly, the Bank of England aimed to increase bank lending, lift up asset prices and restore confidence. In many ways it worked. Banks that were almost insolvent are now recording large profits, the equity market has soared, and house prices have reversed a frightening decline. It has clearly helped the government to issue a huge amount of debt relatively cheaply.

But while the policy may have prevented financial collapse, it has done little to make life easier for small companies and households. Now, with the real possibility of a second dip into recession, CentreForum argue that QE needs urgently to be redirected towards the thousands of firms up and down the country for whom the ‘credit crunch’ is an ongoing problem.


Giles Wilkes, CentreForum’s chief economist and author of the report, said:

“In deploying quantitative easing, the Bank may have forestalled a total collapse in our financial system. But QE has been less successful at stimulating the real economy. Now it needs reform if it is to restore the confidence needed for sustained growth. Money that is subsidizing the borrowing costs of the state should instead be helping smaller businesses and households.

“The Bank should start by targeting a high level of nominal growth until the economy is performing at its potential. This will reassure the private sector that liquidity won’t dry up in the near future, and so encourage more investment now. The second step should be for ‘credit easing’ to replace ‘quantitative easing’. The Bank’s independence of action on traditional monetary matters should be respected. But by putting taxpayer’s money at risk, QE is as much fiscal as monetary policy. So it is quite right for the government to direct the Bank to deploy the funds in the private economy, which is where it is really needed. For example, the money could help guarantee loans to small companies, or alleviate the dearth of financing for long-term infrastructure.

“With incomes stagnating and huge spending cuts in prospect, the Bank is right to ignore scare stories about spiralling inflation. It should even consider expanding the programme if the economy stays weak. What it should not do, however, is increase the size of QE without changing the way it works. It is time that politicians realised that QE is their business, and that failure to make it work properly will be their failure.”

Download the full report.