Money creation programmes usually increase inequality and household debt. But there is an alternative, writes Fran Boait of campaigning organisation Positive Money

We are living in unconventional times, according to the European Central Bank (ECB). In March 2015, the ECB adopted an unconventional monetary policy and started a programme of Quantitative Easing (QE).

During the 18-month QE programme a staggering €1.1tn (£770bn) will be created. Right now, €60bn (£42bn) is being created each month by the ECB.

QE helps banks more than ordinary people

QE is used by central banks when their primary tool of raising or lowering interest rates is ineffective – which is currently the case due to low interest rates and a muted economy. The newly created money is used by the central bank, mostly to buy government bonds from financial institutions including pension funds, insurance companies and banks. Essentially, the new money is used to flood the financial markets.

This process of money creation differs from the way in that most new money is created, which is by private, commercial banks when they make loans.

The main effect of QE is to blow up a stock market bubble, making the rich richer, but doing very little for everyone else, as happened when the UK tried it from 2009 to 2011.

The ECB has learnt nothing from the UK

In 2012 the Bank of England released a paper stating that QE in the UK has increased inequality. The bank calculated that 40 percent of the gains from the increased value of shares and bonds went to the top five percent of households.

“The main effect of QE is to blow up a stock market bubble, making the rich richer, but doing very little for everyone else”

QE has kept interest rates low in the UK. But, even low interest rates aren’t enough to get banks to lend if they’re not confident in the economy and businesses won’t borrow if they don’t think they’ll be able to sell their products because people aren’t spending.

So, while there hasn’t been much lending to businesses, there has been an increase in lending to consumers and mortgage lending. This has resulted in steadily increasing household debt, which is now approaching record highs, leaving us vulnerable to another financial crisis. The average UK household will owe close to an unprecedented £10,000 by the end of 2016, according to analysis made in March this year by accountancy firm PricewaterhouseCoopers.

QE resulted in low interest rates, and high stock prices, as well as increased inequality and more people in debt.

It does not have to be this way

Many economists and civil society organisations are now calling for a new approach, which is being called QE for People. This is where the central bank creates new money, but rather than flooding financial markets, they instead lend the new money directly to the real, productive economy, either by distributing it via government spending or through direct payments to citizens.

QE for People bypasses the financial markets and gets money straight into the pockets of the people who need it the most.

Prominent advocates of a new approach to QE include former chief economist at the IMF, Olivier Blanchard, Labour leader Jeremy Corbyn and former Greek finance minister Yanis Varoufakis. Positive Money has been campaigning for this policy for the last two years.

QE for People would be much more effective than giving money to financial institutions. This policy would increase spending and income in the economy without increasing the level of household debt. In fact, it would allow highly indebted households to pay down their debts and improve their economic situation.

“QE for People bypasses the financial markets and gets money straight into the pockets of the people who need it the most.”

Lower household debt reduces financial fragility and the risk of another crisis. QE for People would stimulate the economy, create jobs, support businesses and increase tax revenue. It would do this without making housing even more unaffordable or blowing up dangerous asset bubbles in financial markets.

Unlike conventional QE, QE for People does not increase inequality. Instead, it improves democracy. Right now it is the private banks that decide where money is lent in our economy. QE for People would ensure that at least some new money would be spent by the government and used in the public interest.

We are facing big challenges – these are unconventional times that demand unconventional policies. However, these policies have to put people first and work in the public interest.

Positive Money is teaming up with civil society organisations across the Eurozone to launch a QE for People campaign. Join the campaign at www.qe4people.eu