Global recession is on the horizon - this is how world leaders need to respond

A 'Green New Deal' could help ensure the recovery is more sustainable than the aftermath of the 2008 crash while also tackling the urgent social and environmental crises facing our planet

After the 2008 crisis, quantitative easing pushed up asset prices, meaning a big payoff for their wealthy owners (AP)

When world leaders arrived in Davos this week, there was no shortage of things to be worried about. On top of trade wars, Brexit, financial instability and slowdowns in the powerhouse economies of China and Germany, there is also the existential threat of climate change, which (encouragingly) ranked as the top worry in the World Economic Forum’s survey of attendees.

All this is before we even mention out-of-control inequality, with Oxfam’s annual estimate showing that the world’s 26 richest individuals now own as much wealth as half of the global population.

Suffice to say, the world economy is treading a dangerous path. It seems highly likely that there will be a global recession within the next couple of years.

When this happens, business as usual cannot be an option. World leaders will need policies which ensure the recovery is more sustainable than the aftermath of the 2008 crash and the decade of secular stagnation, unequal growth and reloaded risk that followed, while also tackling the urgent social and environmental crises facing our planet.

During the last global recession there was a failure among world leaders to coordinate a global fiscal response of sufficient proportions, which meant the world’s major central banks had to do the heavy lifting with extraordinary monetary policies, in the form of record low interest rates and quantitative easing (QE).

QE involved central banks creating trillions of dollars worth of new money ‘out of thin air’ to buy up assets from the financial sector. This flow of new money into financial markets had the effect of re-inflating asset prices, which had collapsed during the financial crisis, and increasing liquidity in order to get banks lending again.

The problem was that rather than using this new money to lend productively, banks predominantly stuck to the easy-profit route of bidding up property prices. In an ultra-low interest rate environment financial firms have also engaged in ever-riskier lending in the pursuit of higher yields. The result is reinflated asset bubbles and collateralised loan obligations to over-indebted companies, which echo the subprime lending behind the last crisis.

QE also had dramatic implications for inequality. All of this new money flooding into financial markets pushed up asset prices, meaning a big payoff for their wealthy owners. The Bank of England, which has created £445bn through QE, estimates that its policies made the top 10 per cent of households wealthier by £350,000 each. Meanwhile, the asset-poor were left with little more than the fairytale of trickle down economics.

All this is not to say that central bankers should have kept their hands clean. Central banks were forced to ramp up monetary policy as politicians shied away from their responsibilities to manage the economy with appropriate fiscal policy, instead opting to counter-intuitively "cut for growth" through austerity. With central bankers limited by time and by mandate, the first round of QE can be seen as a ‘necessary evil’ - doing nothing would have only deepened the recession.

But there should be no such excuses when the next downturn arrives. Further attempts to stimulate the economy through QE-fuelled asset price inflation will have diminishing returns, only creating more bubbles and further widening inequality.

A sustainable recovery will only come from policies which stimulate demand in the real economy. This is something which QE could be redesigned for.

Central banks’ power to create new money, as demonstrated by QE, is a powerful tool that must be put to much better uses.

This is an idea which has been put on the table in the UK. In the US rising Democrat Alexandria Ocasio-Cortez, and in France Nicolas Hulot, who resigned from Macron’s government, are also displaying the bold thinking required with their calls for a Green New Deal; a massive programme of spending on green jobs and infrastructure, which could be financed by central bank money creation.

But Green New Deals and other alternatives to QE will be most effective if there is an element of coordination between countries. Firstly, on a technical level, for any country other than the United States, creating vast sums of new money while foreign central banks keep a tight monetary policy could lead to unwanted pressure on their currency.

But perhaps more importantly, the problems facing humanity, from climate change to spectacular inequality, are not limited to one country and cannot be solved by one country alone.