Lessons

[.green]Josh Gabert-Doyon:[.green] What do you think the response has taught us about the UK's economic institutions – the Bank of England and fiscal authorities – as a whole?

[.green]Frances Coppola:[.green] I think it has taught us two things. The Bank of Engalnd is able to move very fast and quite effectively. It had its fingers burned in the financial crisis obviously and it put in a lot of stuff since then that's actually able to react much more quickly and effectively than it did in the financial crisis, but that's because we've had recent crises and it had to learn.  

I think on the fiscal side the position is much less good. We have good ideas, good schemes, but actually delivering them is a mess because we haven't got the systems in place. We have nothing that enables us just to get money to people when they need it. We have nothing that enables us to provide appropriate support to small business when they need it. That is a serious problem. And I have to say, we're probably in worse shape than we were 10 years ago in that respect because of some of the changes that have been made have made us less able to support people in distress. Universal Credit, for example, has been pretty much designed to make it very difficult for people to get support. It's almost intended to put people off. That's not what's need right now. What's needed right now is just a means to get money to people with no questions asked. And we don't have any systems that can do that. We've also had people dropping off the radar, dropping out of the net, and they're very difficult to reach. And because we have downgraded the funds available to local authorities – and it’s often local authorities that are best placed to reach people who are on the margins like that – their ability to support people is limited as well. In my mind, one of the mistakes we're making at the moment is that we're not making enough use of local authorities to actually reach people on the margins. That's something government needs to look at, particularly in England, actually.

Corporate Behaviour

[.green]JGD:[.green] What kind of corporate behaviour has made it more difficult for our economic system to deal with this crisis? And what kind of corporate behaviour should we wary of during the recovery period?  

[.green]FC:[.green] The most obvious corporate behaviour that's contributed to this has been two things. First is the tendency of corporates, particularly in the last 10 years, partly encouraged by very low interest rates, to load themselves up with debt, and make themselves very fragile. There's been this idea that high leverage, high debt multiples are somehow okay because it imposes a discipline on management. But it also makes companies much less able to withstand sudden downturns like this. This is a very severe downturn, of course, and we are going to see an awful lot of companies really struggling with very big debt loads, and it's not clear to me why government should support them because they should not have leveraged up like that. I think that we're learning that resilience in a corporate structure is really important. We learned that lesson for banks ten years ago, but we haven't learned it for corporates yet.  

It's not like we haven't had warnings about this because this is what happened to Carillion actually, because if you have high-leverage on an asset-light balance sheet where the assets are almost entirely intangible, it means you have no resilience and you can't cope with anything. We've seen that happened to a few industries and, of course, now we're seeing it in swathes. The question for governments is how much companies like that should even be supported. Applying limits to the amount that governments will provide when a company is going down – really because it's breaking its debt covenants – I think is necessary, sadly.  

Maybe that's a lesson that really needs to be learned from this. And I've had arguments with private equity people about this who are very keen on high leverage, and I'm going: "No, it makes your balance sheets fragile". I think I would also argue that if a company is fully owned by a private equity firm that has loaded its balance sheet up with large amounts of debt that is really equity, it’s the private equity company that should take the hit. But they really shouldn't be doing that with publicly quoted companies where the shareholders are pension funds and things like that. It's not responsible, I actually think it's quite an irresponsible way of running a company. And you've noticed I've avoided all the tax haven stuff because that's a bit obvious, isn't it? Corporates locate themselves to avoid taxes. I wanted to hone in on a few other things. That's one of them: high leverage on corporate balance sheets.

Another thing is the tendency to use – like with Transport for London – the furlough scheme, for example, to keep itself alive, and furloughing employees not because the jobs are no longer needed, but in order to gain access to government funds. That's kind of worrying. With Transport for London, I found myself thinking: "but shouldn't the government just support them anyway since they're providing a crucial transport service?" I don't think we've quite thought through what exactly is essential, and therefore the level of support that government should be giving to certain industrial sectors and companies within that, independently of other initiatives. And also, whether government should be taking equity stakes in companies working those industries. I have argued, for example, that there should be a preemptive nationalisation of airlines.

Wealth and Ownership

[.green]JGD:[.green] In addition to airlines, is there more that you'd like to see in terms of large-scale transfers of wealth and ownership?

[.green]FC:[.green] Oh, absolutely. There's a lot of the airline industry that is nice to have and arguably belongs in the private sector and if it goes down, it goes down. But it does have an essential component. And we saw that with the collapse of Flybe, that actually we lost an important means of connecting regions within the UK when Flybe went down. That, of course, was before the virus. The airline industry is going to have to reshape itself, but there is that essential component, and we have to work out what's important and what isn't. There's the same thing with railway companies. We've privatised everything, and there was already a push to nationalise them before the virus and that's now become imperative. Same with bus companies. We might find the same even with taxis. Maybe we want to apply some pressure for there to be a public car transport network that is maybe moving towards a greener way of doing things like making efficient use of cars rather than everyone just buying their own. That's possible.

More broadly I think we're going to see one way or another quite a lot of financial repression. Because we're going to have a very high public debt. And historically the way we've dealt with that is one of several ways: Either austerity which hurts the vulnerable, but in a way the mess we're in now is because we've done that over the last ten years. We've chipped away at public services and left them insufficiently funded. Their infrastructure has failed, they're insufficiently staffed we've actually got to beef up our public services now, and that will take money. There's going to be a need for extraction of wealth from parts of the private sector to beef up public assets. How that's done is going to be an interesting debate. The likeliest thing is going to be very low-interest rates, negative interest rates, maybe wealth taxes, maybe increased taxes on high earners. Somehow there will have to be a reckoning. There will also be an intergenerational aspect to this. Unless we go down that route the cost of this will fall disproportionately on the children and the unborn of today, who don't have any skin in this game. It can't all fall on them. The wealth of this country is disproportionality held by the old.

[.green]JGD:[.green] I wanted to turn to Quantitative Easing (QE). This crisis is predicted to be a lot worse than the 2008 crisis and our response to it will determine how easily we can recover. What went wrong with QE following the 2008 financial crisis?

[.green]FC:[.green] Well I think we didn't pay sufficient attention to its distributional effect. The tendency with market-based finance when you have a central bank as a major player is that markets and banks tend to become cut off from the real economy. They see themselves as a thing in themselves. And the idea is that if you can influence how the markets can behave and how banks behave it will trickle down to the real economy. That was a big assumption with QE.

Secondly, the big assumption with QE - that kind of went with that was the assumption that it would be very powerful - is that it would be inflationary. Not the little bit of inflation that they were trying to generate to get inflation back up to target, but really seriously inflationary. That didn't turn out to be the case. And in fact, those of us who were looking at it at the time were saying "this is never going to be inflationary, you flooded the place with money but at the same depressing velocity and little of this is trickling out into the real economy it's all going into the markets and sloshing around the place and blowing up asset prices." And that, of course, tends to benefit asset holders. Now there's been some work by economists suggesting nonetheless QE did maintain employment, to some extent. I would argue quite strongly that it did prevent the disastrous collapse of asset prices that happened in the 1930s - it did ward that off. In that respect, it was successful. Where I think it went wrong was in seeing it as a silver bullet that would somehow kickstart growth. It can prevent the economy from collapsing but it can't by itself kickstart growth. That needs intervention directly in the real economy.

[.green]JGD:[.green] What's different about People's QE, and what should its role be in this present crisis?

[.green]FC:[.green] There are, broadly speaking, two forms of People's QE. One is monetary finance of governments, one way or another. The other is what I call Helicopter Money, which is a direct intervention by the central bank in the economy where instead of buying assets from market, central banks distribute money to households. That needs close cooperation with the fiscal authorities, therefore some people say it's no different than monetary finance of government spending. To which I say: it's a question of how you do it. It is actually possible to devise a Helicopter Money scheme that doesn't mean fiscal dominance. And we have in fact been devising such a scheme for the ECB, where monetising government debt is prohibited. We nonetheless concluded that Helicopter Money distributed directly by the ECB to Eurozone citizens is actually legal and possible. I would draw that distinction. It's a distinction I draw in my book.  

Right now, where we are at the moment, monetary finance of governments is what's needed.It's preventing yields and spiking, even in the Eurozone. Because in the end the ECB's mandate is price stability, and if the Euro collapses then we don't have price stability. As we saw in 2012 the ECB will do whatever it takes to keep the Euro from collapsing, and if that means buying up every scrap of debt in the Eurozone, it will do it. I think markets know that, and that's why we aren't seeing yields spiking despite the very considerable borrowing now that Italy and Spain are having to do. ECB has already put in extraordinary measures to enable it to buy up everything really. I know there's a limit to their pandemic emergency purchase programme, but limits can be extended, can't they?

In the UK, we have the Bank of England's announcement that the limit on the ways and means facility had been lifted. So, it's now an unlimited facility. And that the government will use it if necessary. Now they're saying they're just using that to smooth out government borrowing really, so we don't suddenly hit the market with a huge slug of gilts and cause spikes all over the place. It's actually better to have a facility that allows the government to borrow to spend and then detach to some degree the gilt issuance from the actual spending. The way that gilt markets work, the markets function better that way. Again, this is to do with financial stability, and that's what the Bank of England is doing. But where we're going to, everywhere, one way or another, is some form of monetary finance of governments, mainly I think through QE, where central banks are simply going to buy up more and more government debt. In Japan they've been monetising debt for quite some time now. But in the UK at the moment, the Bank of England is effectively buying everything that the government is issuing.

[.green]JGD:[.green] Could QE be used to support green stimulus, and would that be desirable in the aftermath of this crisis? What would be the conditions to support, for example, something like a Green New Deal?

[.green]FC:[.green] I considered this in my book because I think this could potentially be quite a good use of a QE programme, oddly enough.What you need is a green investment bank, which issues bonds, and you have a central bank which says: "right, those bonds are issued at whatever rate they are, and we stand ready to buy them to control the yields." That doesn't mean you start saying, as some people have argued, that your green investment bank, or your green projects even, should be directly financed by the central bank, or that the central bank should be directed to buy primary issues (although I wouldn't necessarily want to prohibit them if the central bank thinks that's the right thing to do), but that they should simply say: "we are going to control the yields on these bonds so that the government can invest long-term through a public green investment bank without the fear of speculative attacks that could derail the projects." And I think that's actually rather a good use of conventional QE programme. And I don't know if I would necessarily want to do green finance any other way. I think the power of the central bank to really stamp on any market tendency to make yield spikes is much underrated, and it's an ability we should be using more.

Institutional Framework

[.green]JGD:[.green] You've written before about the need for a strong institutional framework and the difficulties when it comes to divisions between fiscal and monetary policy. What kind of institutional change would you like to see take place in the wake of Covid-19?

[.green]FC:[.green] Well actually in the UK, suddenly, we're already seeing the kind of change that I would like to see. It's not widely known that after the Bank of England was made independent and was removed from the direct financing of government – when it was no longer the government's treasury agent – they kind of set up a new internal bank called the Debt Management Office. The relationship between the Bank of England and the Debt Management Office (DMO) has historically been a rather arms-length one, but now it's becoming much closer. And that's the way to go. You have a quasi-independent body within government (I'd actually like to see it independent of the Treasury, myself – it's in the Treasury at the moment and I would rather it was independent of it), that basically handles the ins-and-outs of government debt issuance and the drawing by spending departments, including local authorities, interestingly, because that's what the DMO does, working closely in cooperation with the Bank of England. That's a workable model. And it seems to be something we're creeping towards quietly. And I'm rather keen on it myself. It's looking like quite a good workable model to me.

Aftermath

[.green]JGD:[.green] I know we touched on this a bit but I was wondering if there were any other measures in the aftermath of this crisis, as we're dealing with a recovery, that you would want to see governments and central banks taking?

[.green]FC:[.green] Well the first thing is that when we are actually able to get the economy moving again, and it's going to be a long-haul – the idea that we're going to have a fast bounce back I think is utterly unrealistic – but when we are able to relax restrictions I think we will need exceptional support from the Bank of England. And to my mind, that means Helicopter Money. They should be putting in place the facilities now to make it possible to deliver that when the danger of the second peak is passed. The economy is going to have to stay partly in mothballs until then so it might be as much as a year, maybe. I think they should be planning now to be using Helicopter Money to get the economy moving and get the demand moving again because the demand will lead to supply. Now that will cause some inflation. And I think along with that should be a temporary lifting of the Bank of England's inflation target to allow for that so we don't get the inflation hawks coming in and saying "oh my god we're going to get runaway hyperinflation!" Because we're not. It's got to be sensibly managed, but it is a sensible use of Helicopter Money when your interest rates are on the floor, which they will be. It's a good way of kickstarting the economy.  

The second thing is that we have got to do something about the fiscal systems. We have got to get money to people. I've been a long-term supporter of universal basic income anyways, and I don't wish to get into the arguments with those who say it's going to be terribly inflationary, that it will deter people from work and that kind of stuff. We do need to have a serious discussion, to my mind, about universal basic income. But at the very least we need to put in place the system that can deliver money to people universally with no questions asked at need. Even if we just do it as a placeholder, universal basic income that gives people £20 quid a week or something like that, yes, even that can be flexed at need, topped up either by the government or by the Bank of England. One thing I've suggested is that we could use a central bank digital currency for that, delivered directly to wallets rather than there being a count so that it preserves the anonymity of cash. These are all things that need to be considered, but we have to streamline the support we provide to people in downturns. And I think that also means unwinding an awful lot of the austerity measures that have been put in place the last ten years. We're going to have to fund the NHS better. We're going to have to do something about social care. We're going to have to provide a better safety net. They've finally acknowledged that nobody can live on statuary sick pay, which is £90-something a week. But Universal Credit at the basic level, [Jobseeker's Allowance] JSA and [Employment and Support Allowance] ESA – is actually less than that. We're going to have to address that, we're going to have to have a comprehensive review of our social safety net to make sure it is adequate and that it is fast so that we don't design things that set ridiculous obstacles in people's way when they're literally people that have fallen on hard times through no fault of their own and need support.