This week is a crucial one for central banks with the US Federal Reserve meeting on Wednesday and Thursday and announcing its decision at 7 pm UK time on Thursday. It might make a momentous decision to raise official interest-rates for the first time since the credit crunch hit. More likely in my view it will defer the decision again as we return to a groundhog day of unfulfilled promises as opposed to the reality of ever more countries applying interest-rate cuts like New Zealand last week.
On the subject of interest or Bank Rate rises two members of the Bank of England have been conducting yet more Open Mouth Operations on the subject but before I get to them there has been a more direct challenge. The new Labour Party leadership wants to do something which does at least reflect part of the case I have often argued on here. Also it does provide a choice in the UK in terms of economic policy on a subject which has pretty much seen a consensus in spite of the obvious challenged of us living through a long-lasting credit crunch.
This is the name of the new Shadow Chancellor and if his Labour Briefing from October 2012 is any guide he would make both quite a splash and a genuine change.
The Bank of England’s supposed independence simply meant democratic government decisions being replaced by the influence of shortsighted bankers.
He also made this complaint.
Although banks have been nationalised and taxpayer subsidised, they remain out of effective control, failing to lend and stimulate the economy.
Now circumstances have changed as the UK then embarked on a much better phase which awkwardly for Mr. O’Donnell followed the introduction of the Funding for Lending Scheme by the Bank of England he would scrap! We do not know what he would do about my critique of FLS which is that it did stimulate mortgage lending and thereby pushed house prices higher as well as being yet another subsidy for the banking sector. Also that business lending has only improved for those who love the concept of counterfactual as in the real world it has shrunk. Also in the meantime some of the banking-sector has been sold-off. But there is a point in arguing that they do not act in our best interests and remain beneficiaries of an implicit subsidy as we would bail them out again assuming that Mr.O’Donnell which make the latter.
So what would he do about it?
In the first week of a Labour Government democratic control of the major economic decisions would be restored by ending the Bank of England’s control over interest rates and bringing the nationalised and subsidised banks under direct control to force them to lend and invest their resources to modernise our economy and put people back to work.
Back in 1997 a new Labour government saw its then Chancellor Gordon Brown announce this. From the BBC.
“I want to set in place a longterm framework for economic prosperity… I want to break from the boom bust economics of previous years.”
He gave the Bank of England the power described below.
It means the bank will now be free to decide monetary policy without taking the short-term wishes of politicians into account.
So if we returned to the old system it would be time for the Average White Band to reform.
Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time
Has the Bank of England actually been independent?
Maybe for a while but it found itself being sucked back into the British establishment in the way that one might see in an episode of Dr.Who. Back the day I recall the Jon Pertwee version being sucked into a sofa. Let me make my point by discussing what it has done in the credit crunch era.
- Reduced Bank Rate to 0.5%
- Introduced some £375 billion of Quantitative Easing some of which it is extending this very morning.
- Introduced the Funding for (Mortgage) Lending Scheme in July 2012 to subsidise banks and mortgage lending.
What more would politicians have done? Seeing this is as expansionary a monetary policy as the UK has ever run in both conventional and unconventional terms this is a moot point! If we move to “could have done” we have something very awkward for the views of John O’Donnell and Jeremy Corbyn as the veneer of independence has allowed policy to be easier than if politicians were in charge I think. Imagine if they had done all of this and the response….
Putting it another way we had speeches from 2 Bank of England policymakers over the weekend with more promises.From Martin Weale in the Scotsman.
As a result, it seems likely to me that the bank rate will need to rise relatively soon.
Also there was a more thoughtful contribution from Kristin Forbes.
If this plays out, monetary policy would need to be tightened sooner than based on the older models.
The play she quotes is apposite I think “Much Ado About Nothing!” However the underlying discussion about exchange rates made me wonder if she has been reading this website. But the underlying point that so far there has been no rise in interest-rate only talk makes me wonder yet again about the symmetry of policy.
Meanwhile as talk centres on interest rate rises there is this from Paul Lewis of Radio 4’s Moneybox.
NS&I is cutting the interest on its Direct Save ISA from 1.5% to 1.25% from 16 November. All customers affected will be given 60 days notice
The Ongoing QE Program
This gets little publicity but today the Bank of England is making a change to its QE program by reinvesting some £1.41 billion from a matured Gilt into other Gilts maturing between 2019 and 2022. So an extension of maturity which will be much more pronounced it tomorrow’s operation as last week on Tuesday it went as far as 2068.
Corbynomics and QE
Back on the 10th of August I analysed this issue.
One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital pro- jects:
Quantitative easing for people instead of banks.
The last sentence has obvious popular appeal as we know that the banks have benefited much more than the ordinary person. The catch is here is whether you believe that the Bank of England under direction of a new (Labour in this case) government could do better? Please do not misunderstand me I imagine that everyone can think of something that would be a good idea and needs public investment. The catch is that in practice governments get caught up in silly ideas such as the £6 billion and rising cost of ID cards in the UK. Or the expensive problems of IT in the National Health Service. From the BBC just under 2 years ago.
A report by the influential Public Accounts Committee (PAC) concluded an attempt to upgrade NHS computer systems in England ended up becoming one of the “worst and most expensive contracting fiascos” in public sector history. (Over £10 billion and counting…).
Let me start with the bit I welcome and it relates to a campaign I started on here back in September 2010.
Also I have a further thought and it does indicate quite a change. As the role of the Monetary Policy Committee has changed and expanded more than could have been forecast when it was introduced in1997 there need to be new checks and balances on its power. My suggestion for a change is that MPC members should stand for election as they are currently much more powerful than many of our elected representatives.
Thus I agree that we need more democracy at the Bank of England but my route would be direct rather than indirect. Personally I feel that putting politicians of any hue in charge might make things worse rather than better as they have some many different pressures on them. In a way this is how we ended up at the IMF in 1976 although care is needed as this is not a political point as the fault was as much the dash for growth of the preceding Conservative government as it was the Labour one in charge back then.
If we got full Corbynomics then if we look at say Ghana which in another form has implemented it at times then I would expect the UK Pound £ to fall maybe considerably. At that point things do not look so revolutionary as the UK establishment has done this over the past century. From Frances Coppola in CreditWriteDowns.
As Snoopy would say “Ahem!” Or Alicia Keys.
I, I, I, I’m fallin’
I, I, I, I’m fallin’
I keep on