Central bankers such as Mervyn King and Richard Fisher are acting like politicians whilst UK manufacturing is improving

Yesterday saw an improvement again in world equity markets as their recovery goes on. For example the US Dow Jones Industrial Average rose by 69 points to 12,161 a new post credit crunch high. European equity markets followed suit with the pan-European Eurofirst 300 equity index rising some 1% to 1177 making a rally of 7% in 2011 so far. Perhaps this was a sign of a further review of the US employment/unemployment numbers I discussed yesterday or hope following the fact that US consumer credit had risen by some US $6.1 billion in December. This credit increase included within it an increase in borrowing on credit cards which may help the economy in the short-term but is just as likely to unsettle those who worry about the implications for the long-term!

Central Bankers in the news

It is used to be that central bankers hid in the shadows, a bit like the Victorian dictum for children (“seen but not heard”). One of the features of this recession is that because of the way that their activities have increased they have come out of the shadows and become quite public figures. I have argued many times that policies such as Quantitative Easing have compromised central banking independence and the wide range of their interference in markets has compromised them and led to the creation of false markets. For example the way that the European Central Bank has purchased peripheral Euro zone government debt has often created a false market in the government debt of Ireland, Greece and Portugal. The US Federal Reserve by becoming the biggest holder of US Treasury Bonds has created a false market in its own countries debt. In fact if you think about it this is the main objective of the policy.

Few have been willing to point out that if anybody else did this it would be declared illegal! Even fewer have been willing to join me in pointing out that the world’s central bankers do not have the necessary expertise for this and that they are operating above their pay grade. But the New York Times joined in on Sunday with its view on the Governor of the Bank of England Mervyn King.

The New York Times on Mervyn King

A central banker need not be loved, but at the least he should command respect — and in Britain these days Mervyn King cannot count on either.

As for the issue on which he may have most closely staked his reputation — that Britain’s large banks must increase capital levels well beyond international standards — he so far has been ignored.

Mr. King, the donnish governor of the Bank of England, has been accused of presiding over the worst stagflation — a dreaded combination of stagnant economic activity and rising inflation — happening in any major developed economy.

As you can see he is under fire and the attack is not only on his policies as there is this quote “Mervyn is not blessed with any doubts about his abilities.” Of course the way things are going he should have doubts and this point seems horribly familiar to Ben Bernanke’s “100% confidence”. Spare us from those who are that sure please! Arrogance and failure do not make a good mixture.

The Chairman of the Dallas Federal Reserve Bank: Mr.Fisher

Perhaps the New York Times might have looked a little closer to home as let me remind you of my article quoting from a speech from Mr.Fisher back on October 20th last year.

The problem is that, presently, the efficacy of further accommodation using nonconventional policies is not all that clear.

In other words he has doubts because he is not sure what,if any,good such a policy would do. But then we got the most stunning part of the speech which said the following.

In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.

One might have concluded from this ( I certainly did) that Mr.Fisher would not be a fan of the new asset purchase programme called QE2. He was quit clear I think. However at the recent meeting of the FOMC which he had just joined as a voting member he voted with the policy. Yesterday in an interview with Bloomberg radio he said this.

You can never say never, but I cannot imagine a convincing argument for further quantitative easing after this round, given what is developing now in the economy.

The obvious reply to this would have been to quote his previous speech and point out that he said that about QE2 so why should anybody believe him if a QE3 started to head down the slipway. If these are his views he should have dissented at the last meeting it is no good talking of a fait accompli. After all should QE3 begin after the first vote he would again be facing a fait accompli!


As you can see the mainstream media is beginning to catch up albeit slowly with the problem of increased central bank intervention in the world. In some ways central bankers are now more like politicians and must expect to be in the limelight. I have put forward a proposal for the UK Monetary Policy Committee to be elected and maybe this should spread to other countries. Some responses have suggested that the electorate are not up to this. To this I have two main replies. Firstly this has been the response of every attempt to improve/extend democracy since it began. Secondly you think that politician’s are up to it? In my view we are at an unfortunate crossroads where politicians influence if you look at the increased share of governments in economies just at the moment we have politicians who in general have no experience of anything other than the political system.

If I may return to Mr.Fisher effectively promising one thing and doing another  in my view, makes him look much more like a politician than a central banker. Of course we live in a world where a politician has become a central banker as Dominique Strauss-Khan the head of the International Monetary Fund is a French politician who is expected to stand for France’s Presidency at the next election. Those who read the London Evening Standard may have seen an article by Jenni Russell yesterday which completely missed this point.

UK Manufacturing: A Recovery?

Over the credit crunch recession UK manufacturing took a dreadful pounding. According to the Office of National Statistics if 2006 output is equal to 100 then output in 2009 was 87.2. The worst point of the fall was February 2009 when the annualised fall in output reached -14.3%. However as information is being released it seems as though it is recovering strongly.

CBI Small and Medium Sized Enterprise Trends Survey

30% of the 366 respondents said the volume of output rose, and 17% reported a fall, giving a balance of +13%…….Output was lifted by an improvement in domestic orders growth, with 28% of firms reporting a rise in volumes, and 20% a fall, giving a balance of +8%. That is the fastest increase since January 1997.

So it would appear that the smaller companies sector is recovering well. If we think back to last week the Purchasing Mangers Index told us this. From February 2nd.

The Markit/CIPS survey for the purchasing managers’ index rose to 62 in January from 58.7 in December, the highest reading since the survey was created in 1992. Levels of new orders rose at the fastest rate in the survey’s history.

The latest figures from the ONS were for November 2010 and were also strongly positive.

Total manufacturing output increased by 5.6 per cent in November 2010 compared to the same month a year ago…….Manufacturing output per job was 8.0 per cent higher than the same quarter of 2009, up from growth of 6.8 per cent in the previous quarter. The increase in the growth rate is due to an increase in the growth rate of manufacturing output.


As you can see I hope for further good news when the December manufacturing numbers are released on Thursday. I wanted to point the apparent recovery out earlier to prepare the ground and because the day itself may be swamped by speculation about a possible rise in interest-rates. This recovery is significant in that manufacturing often recovers more slowly than the economy in general after a recession but this time is looking different. So we have one more example of this time it’s different! This leads me to the thought that those who keep arguing for the same old policies seem to be ignoring the fact that this time many things are different. The irony is that it is booms which come with the cry “This time it is different!” As it happens this pattern of a strong (early) apparent recovery is true in the United States too.

Also tomorrow we get some new Balance of Payments figures. Perhaps finally we will see signs of an improvement! However whilst a better manufacturing performance should help the 2007/08 devaluation of sterling has so far helped these figures very little.

UK Bank Levy

This morning the Chancellor has announced that this levy will be charged at its full rate of UK £2.5 billion a year for this tax year as well as future ones which will raise extra revenue of £800 million. As a concept I have written in the past that I feel that in effect charging banks an insurance premium for the implicit and explicit support that the UK taxpayer provides is a good idea. However there are potential flies in the ointment.

1. With interest-rates so low the taxpayer is in effect subsidising the banks as much of their profits will come from this. We are giving with one hand and taking away with another.

2. A way has to be found that means this levy applies to bank salaries and bonuses ( i mean for investment bankers not branch staff) rather than simply being passed onto the consumer and contributing to inflation.

3. With new taxes there is the danger of “revenue/spending creep”. This money should be used to pay off the deficit but is likely instead to go into the general exchequer fund and one thing we do know is that our political class loves to spend. So it could lead to an expansion of an already large public-sector.


9 thoughts on “Central bankers such as Mervyn King and Richard Fisher are acting like politicians whilst UK manufacturing is improving

  1. “Few have been willing to point out that if anybody else did this it would be declared illegal! Even fewer have been willing to join me in pointing out that the world’s central bankers do not have the necessary expertise for this and that they are operating above their pay grade.”

    Hi Shaun: well I have expressed similar thoughts previously, and I certainly join you, if there were any doubt previously about that!

    “In my view we are at an unfortunate crossroads where politicians influence if you look at the increased share of governments in economies just at the moment we have politicians who in general have no experience of anything other than the political system.” So it could be that you are also coming round to my view Shaun: that modern politics and economics are so intertwined that is difficult if not impossible to separate one from the other? This is because political ideologies are largely about how national wealth is shared out and generated. Political desire is therefore to influence and control economics so as to achieve that.

    • Politics and economics are as scientific as each other. Both are more like faiths.
      They deserve each other. The population deserve neither in their present (last 50 years?) popular forms.

  2. Great blog as usual.
    I think that there is another reason for the prominence of central bankers and that is the deliberate attempt by politicians to shift the blame for things going wrong on to two groups:
    1. The “independent” central bankers who can be blamed for inflation; and
    2. The markets (i.e. the wicked speculators who profit from our misfortunes) which push up our interest rates and in general ruin our lives.
    They have to blame these forces, as otherwise, we might look at the spending habits of politicians as being the root cause of both inflation and market interest rates.

    On the topic yesterday of the extraordinaty idea that the Eurozone woes have somehow gone away, do you not think that the same is happening here. Every day, we are bombarded with misery as the savage cuts are implemented (well, more accurately, the reduction in the speed of growth of expenditure yet to be implemented). Hardly a word is uttered now about the UK’s debt. We have Ed Balls lambasting the cuts and actually denying point blank that Labour left a structural deficit on the TV.
    It is almost as though there are now parallel universes:
    1. The real cold facts as reported by you and the bond markets;
    2. The Alice in Wonderland of politicians, where everything will be all right on the night if we buy all the debt through our central banks and proclaim that all is well.

  3. Quoting Drf: “This is because political ideologies are largely about how national wealth is shared out and generated. Political desire is therefore to influence and control economics so as to achieve that.” Oh, yes an extremely valid point and the elephant in the room is that the politicians want (demand) to spend first without too much cerebral effort spent on the “generating” side of the equation. An economy is too fragile a thing to be left to politicians; however they are what we have and it is the requirement of sites such as this one to re-educate our “masters” in order that they do better in the future – if possible- since they cannot do worse!

  4. Thanks for an informative blog Shaun.

    The levy looks like another tax. Someone will find ways of minimising the positions taken by UK institutions and therefore minimising the levy. Enron hid lots of risk ….

    Does the levy cover the cost of the risks insured ?
    It may be better to make the banks buy cover from an insurance company. They have a commercial incentive to reduce the bank’s costs and price the risk more accurately. This does assume that the insurance company will payout when needed and won’t go bankrupt ….

    • Hi Alex
      Yes there is a danger of the levy looking like a tax. Indeed the very nature of politicians is to spend it rather than save/invest it. I would suggest something like a sovereign wealth fund but we only have to look across the Irish Sea to see what can go wrong with that scenario!

      As to the amount then the £2.5 billion a year is nowhere near enough as KG has pointed out. The problem is that reform is required so that we offer protection for commercial banking for example by covering retail deposits but find ourselves covering much less of investment banking. I was and am a fan of the Volcker rules in this regard (again not perfect but a start….) Then the levy becomes a more realistic premium. We are back to the fundamental problem of the post credit crunch era which is that banking remains essentially as it was and that culture helped cause the credit crunch.

  5. Can we really believe these numbers?
    Also, ‘CBI survey’, bit like asking the banks to self-regulate! A national trend in SME activity using 366 respondents, we are either in worse shape than imagined and that number is a good representation or it is so small it’s really unrepresentative and again we see a permeation of sexing up any crumb of possible comfort to gain maximum PR value.

    • Hi Mac
      I am afraid that we could apply “Can we really believe these numbers?” to so much of the data we receive! I am more cautious about survey results that actual data but wrote on manufacturing in the UK as I did because there seems to be several data sources saying the same thing…

      It is however a good day to ask such a question when we get what are usually the most inaccurate statistics the monthly trade figures. I still shudder at the thought of the time when they really moved markets.

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