Rarely has there been such a sad case of ideological conviction preventing intelligent people from staring the evidence in the face. In good times when there is lots of demand from business people willing to invest and then putting lots of highly liquid money into the banks will cause an economy to roar ahead. The banks will be falling over themselves to lend to businesses and those businesses will be able to employ lots of extra people so there will be a direct and immediate impact on the real economy. Indeed if any central bank was mad enough to print money like this during a boom it would have the sole impact of causing a horrible problem with inflation.
But we aren't living in a time of boom. We are living in the post 2008 world of severe economic crisis. Print money during a recession and there is a nasty tendency to push on a piece of string. You can supply as much money as you like. If banks don't trust businesses to pay back they won't lend to them. If banks are worried that they might need access to cash quickly because the stock market and oil prices are wildly fluctuating and there might be another crash then once again they won't lend.
Of course nothing is as simple or as absolute as this. You can't create that amount of money without doing something significant to boost the economy. When the US government decided to print $3,000,000,000,000 in quantitative easing it did have a positive impact. It stopped the banking crash dead in its tracks and the US economy moved from losing 400,000 jobs a month at the end of the Bush Presidency to having one of the lowest and most rapidly falling unemployment rates in the Western world towards the end of Obama's. When the Bank of England printed £375,000,000,000 in QE it counteracted enough of the Conservative party's austerity cuts to put the British economy onto around 2% growth for several years and won the Conservatives a reputation for rescuing the economy and the election.
In both of those cases little of the money went into fundamental transformation of the real economy, useful investment or even decent secure living standards for ordinary people. It went into a property boom. It went into a share price boom which then collapsed. It went to banks who then turned round to the governments that had rescued them and refused to reform adequately. As a result it went by without doing anything to alleviate austerity for ordinary people. Indeed it produce a very strange phenomena. The US and UK economies grew rapidly and looked successful on a statistical basis at the same time as the citizens of both countries found that their standards of living and the services they depended upon both went downhill. Ordinary people got nothing out of QE except for the avoidance of total system collapse. The banks survived, the city got back to prosperity but it is still a matter of very hard times indeed for ordinary working people and for ordinary businesses.
Therein lies the tragedy. All that lovely QE money and at the same time a horrible atmosphere of cuts and more cuts. Banks helped again and again to survive by central bankers desperately determined to keep the system alive. Ordinary people made to cut back again and again by governments determined to balance books. Books which had only fallen into deficit because of the collapse of those banks caused a downturn that generated 8 years of government revenue shortfalls. Banks were helped to rebuild their balance sheets. Companies - with the sole exception of the US car giant - were told it is a sin for government to help rebuild theirs. Ordinary people told they must balance their budgets and government telling us they must always do the same whilst we all watch free money flow out of the central banks into the hands of the investment bankers who caused the problems in the first place. No wonder voters are cross.
The lesson anyone normal would learn from all this is one that was taught as standard economics for over 40 years under the inspiration of John Maynard Keynes. In a recession you need to print money to get things moving and the best thing to do with it is to invest it wisely in transforming your economy. No amount of pumping money into the system via the banks will work if the banks are scared to lend. The state has to invest directly itself.
The only thing which has held the US and the UK back from doing this direct useful investment of QE money is ideology. They think it is morally wrong to use the ability of the government to print money in order for the government to invest that money. Apparently they think it will cause inflation.
Inflation is hovering around zero in the UK. We are not at risk of hyperinflation. There is, on the contrary, a very real risk of entering a period of nasty deflation. The politicians and economists of the early 1970s almost created a horrible problem of hyperinflation because they failed to see the signals until it was very late in the day. They had been trained by people who lived through the Great Depression and were fighting the wrong battle. The politicians and the economists of the last 8 years are in severe danger of giving us decades of economic misery because they are also fighting the wrong battle with the wrong weapons. What we need now, is to fight off stagnation and to adapt to a rapidly changing world economy that needs internationally managing. Trusting banks to do the right thing with billions of free money when they drove themselves to destruction using their own resources is not likely to be a very good way forward. It is also a strange idea of morality that gives free money to them and then decides that government is so poor that it can't invest.
The ECB has therefore got it half right. In a time of stagnation it really is necessary to create money out of thin air to get the economy moving and to help the 25% of people in Spain and Greece who are unemployed and the millions of others across the continent who are desperately worried about how they are going to earn a living and pay their bills. But they need to use this money wisely for long term transformation of the economy.
We need to move to low energy, low consumption economy in which 8 billion people across the world are able to live well, work and consume without wrecking the planet. We need to transform our economies onto a much more secure and stable basis and make our companies efficient in the new environment that the world economy has to operate in if it is to survive. We have a wonderful opportunity to make serious inroads on this task by using the billions that are gaily being created by central banks across the Western world. Why aren't we using Quantitative Easing resources to make this transformation instead of frittering it away on the financial markets in yet another unpredictable boom and bust?
Could it be that our leaders are constrained by following dated ideas that don't work in the new era?