The credit crunch has seen an extraordinary relaxation of past limits for monetary policy as central banks have marched forwards into the breach. However for some and this includes the Senior Fellow at the Institute for New Economic Thinking Adair Turner they have not done enough. Baron Turner is regularly featured in the media with such views and he has written a piece for the Financial Times which in terms of monetary policy has him singing along to Luther Vandross.
Never too much, never too much, never too much
I just don’t wanna stop.
This is far from the first piece of writing by Lord Turner suggesting such matters as we wonder if he gives it another go every six months or so. Of course if he really had the answer to economic policy one might wonder why he did not deploy it when he was the Chairman of the UK Financial Services Authority (FSA) from September 2008 to 2013. After all he cannot claim to have been dealing with the LIBOR scandal can he? His reputation for prescience must have taken a knock from him having been one of the major proponents of the UK joining the Euro being a joint author of the paper below.
Why Britain Should Join the Euro
The very prospect sends a chill down my spine and I am not indulging in a Eurosceptic theme here as anybody can see that the UK’s housing-sector would have boomed and then bust just like Spain and Ireland. In fact maybe worse. Also you may have spotted that this would have provided a monetary boost to the economy (before the inevitable bust) which seems to always be on Baron Turner’s playlist. Although you see in his world back then we had apparently ended boom and bust. How did that end up?
What is he suggesting this time?
There is no great surprise in that for monetary policy for Baron Turner we always need to sing along with this.
More, more, more
How do you like it?
How do you like it?
Get the cameras rollin’, get the action goin’
So what is his policy prescription?
the best way to do that, particularly in Japan and the eurozone, would be to deploy a variant of Friedman’s idea of dropping money from a helicopter. Government deficits should temporarily increase, and they should be financed with new money created by the central bank and added permanently to the money supply.
Actually Japan did give such a policy a go some time back when it gave individuals a tax rebate which at the time was equivalent to £142 if my memory serves me right. Baron Turner does not mention this however. Perhaps he is unaware of it or perhaps what happened next -they saved it- is an inconvenient answer. After all it hints at failure before he starts.
Let us continue with his policy prescription and the emphasis is mine.
Money-financed deficits would increase demand without creating debts that have to be serviced. This would lift either real output or inflation and allow interest rates to return to normal more quickly.
It is hard to overstate the intellectual bankruptcy at play here. So the outcome may be good (more output) or bad (more inflation). That narrows it down doesn’t it? Tucked in with this is the hint that perhaps Baron Turner sees inflation as not being all bad as it would help the economy deal with the problem he identifies.
The global economy is suffering the hangover from many decades of excessive private sector credit growth. In 1950 private credit in advanced economies was 50 per cent of gross domestic product; by 2007 it was 170 per cent.
As you can see higher inflation would at the aggregate level help with the debt problem he has identified. But if you are polite he glosses over and if you do not wish to be so polite ignores the fact that this would have economic casualties. This is quite common for the UK political and economic establishment which has always tried to cast a fog around the fact that the inflation the Bank of England “looked through” was in fact a major cause of the UK real wage crisis where the exact fall depends on the inflation measure you use but is of the order of 10%. Of course the UK establishment has also mounted quite a campaign against measures of inflation which give higher results such as the Retail Price Index. The minute they started such a campaign I was on my guard for further inflationary policies as it was a move that the apocryphal civil-servant Sir Humphrey Appleby of Yes Minister fame would make.
If we move now to the apparent consequence of higher interest-rates I am afraid that we are at joke levels here. So Baron Turner whose solutions in the credit crunch era (and indeed his Euro advocacy) always involve a loosening of monetary policy is now promising a tightening of it! Oh but it comes via a loosening.
Also if we are on a good path and getting growth why would we want to do this?
True, banks might amplify the stimulus by creating additional private credit, but they can be restrained with higher reserve requirements.
After all we would want a boom would we not? Or does Baron Turner think that a statist government deficit driven boom is the only way forwards? That is a bit awkward if one considers the place with big deficits and public-sector debts is the Japan that he criticises.
It was only yesterday that I analysed this subject and it is relevant when we are considering a subject such as debt monetisation. Whilst Baron Turner skirts the subject this is what he really means. When I looked at Ghana in the summer its central bank had tried this earlier in 2014 and the currency had plummeted. Now we never have simple cause and effect in economics but we have to ask the question which is what happens if Japan tries this and the Yen replaces it current decline (116 to the US Dollar today) with an outright plummet in response to such a move? Let me pick 150 to the US Dollar and just to keep the numbers round 190 versus the Euro.
But the Euro area needs it too and so it responds and the Euro plummets and we are back in the competitive devaluations which so marred the 1920s and we hoped to have the intelligence not to repeat. Another way of putting it is that they would be exporting deflationary pressure.
This hits straight on two fault-lines in economic theory. The first is whether monetary stimulus creates economic growth or inflation? If the growth case was clear-cut we would not still be debating the matter would we? After all we have had six years of extraordinary stimulus. If we look at my own country we have had this.
1. Base Rates cut to 0.5%
2. Major banks bailed out by the taxpayer to protect the precious banking system
3. Supplementary Liquidity Scheme as an implicit bank subsidy.
4. Some £375 billion of purchases of UK Gilts (government bonds) by the Bank of England.
5. Funding for Lending Scheme by the banks as a way of subsidising our banks via the housing and mortgage markets. The government added to this with Help to Buy.
Unlike some countries we did have a consumer inflation episode which many now want to gloss over. But the major inflation issue has shifted to asset prices or if I am more precise has been allowed to continue in asset prices. We see many stock markets at all-time highs and UK house prices have not fallen as I hoped they are now as an aggregate higher. If we return to the UK establishment they went to a lot of trouble to exclude house prices from the version of our official consumer inflation measure which is supposed to include housing. How did that go?
The National Statistics status of CPIH has been discontinued pending work by ONS to investigate and improve the method for measuring owner occupiers’ housing costs in this index.
If you read my past blogs you will see that this was perfectly predictable and of course no-one in authority is to blame.
So the success if we are being generous is patchy and even Baron Turner admits there are plenty of failings.
But there are dangers. Sustained low interest rates create incentives for highly leveraged financial engineering. They make it easier for uncompetitive companies to survive, which could stymie productivity growth. And they work by restarting growth in private credit – which is what led to our current predicament.
But never mind put your minds into neutral and turn up Elvis Costello on the radio.
Pump it up until you can feel it.
Pump it up when you don’t really need it.
The alternative of a reset to our economic system is always ignored. Indeed even yesterday’s headlines about Mark Carney and “ending Too Big To Fail” apply to something which at best will not be in force until 2019.
My campaign on rail fare inflation
This reached the BBC website yesterday which was nice to see.
I was kind of hoping for a mention but at least the RPICPI User Group got one.