What would happen to the Bank of England under Corbynomics?

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.

John McDonnell

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.

An Irony

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.

  1. Reduced Bank Rate to 0.5%
  2. Introduced some £375 billion of Quantitative Easing some of which it is extending this very morning.
  3. 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


20 thoughts on “What would happen to the Bank of England under Corbynomics?

  1. Hi Shaun,

    The thing that needs addressing is our current account deficit as to fund this we are in the words on Genesis ‘Selling England by the pound’. Taken to its logical conclusion all UK industry and assets will eventually be foreign owned.

    I know the Conservatives have a current policy of doubling exports over the life of the current parliament, but this smells much like a 5 year Soviet tractor plan. A good soundbite which will be quietly forgotten once targets are missed.

    The reality is we are not very good in this country in supporting entrepreneurs compared to the US with its venture capital, venture-fests and other private sources of funding, Germany have their local family owned banks that back local industries. Even France is better than the UK as it is much easier for many unpopular, unfashionable and un-floatable sectors of UK industry that The City won’t touch for their French equivalents to get public funding on the Paris Bourse. We need to improve on the business education, help and mentoring of young and new entrepreneurs so we have a higher that 10% success rate after 5 years.

    Energy is a major problem for UK heavy industry with much already (which has in many cases increased their CO2 footprint) been taken over and moved abroad. Germany has again got round this by loading all of the Green costs on to private consumers, so they pay much more for electricity and gas compared to their industry counterparts.

    What is important for wealth creation is the development of products and services that have a one to many capability which can light, medium or heavy engineering or services like apps, computer games or insurance. Our ever increasing one-to-one minimum wage services can only continue to drag down overall UK productivity.

    On US interest rates with a global showdown in progress I suspect it will be a hold with the BOE following suit. We will know when were are at the end of the current business cycle and into a proper recession as the ECB will raise theirs!

    • Hi Rods

      As to finance I remember that my late father had quite an enmity towards the banks. When things were going well and he didn’t need much finance they tried to force loans on him, when it was tougher they tried to take back what they had previously given and wouldn’t loan when he needed it! Energy policy may not be a triumph either as the issue of a cold winter may mean that there simply is not enough power and cuts will be forced on UK industry. Not much of an industrial plan in those two issues is there?

  2. “my critique of FLS which is that it did stimulate mortgage lending and thereby pushed house prices lower…”

    I think you meant to say …pushed house prices higher….

    The price of housing seems to correlate more with access to mortgage finance than to housing supply despite what the MSM would have us believe.

  3. The Bank of England has become something of a parody of itself in my eyes.

    Emergency IR’s that last…..errr 7 years and counting.Tasked with moderating the inflation rate to 2%,they set IR’s below RPI for years to ‘save the economy’……/save the banks.I’d be interested to know from anyone,whether there has been an inflection point where they exceeded their initial remit.

    From what I can see,their solution to debt problem has been to blow an even bigger asset bubble than the one they helped create.

    Their much vaunted-at the time- independence,has done nothing really other than line the pockets of the bankers the FCA (and predecessors) were charged with regulating.

    Time for a change,I’m all for elections to the board.

  4. Corbynomics ! , Oh God help me

    He will do as his is told or be…… dealt with …..

    Governance of the People by the Banks for the Banks …….

    Democracy ? hate to say it , but we have a lip service one , its called parliamentary democracy, where the parties use a whipping system to bully through what a few top people want.

    Back to economics – frankly until we change the mental attitude the finance class has towards industry then we will just keep declining

    until in the end our issued paper cannot be paid back , we ‘re good at collecting taxes so thats got a little while to go yet


    Why is it when I read early British history and see Ivar the Boneless and think of Dave Cameron? 🙂

  5. Hi Shaun,

    A very well respected research house, supposedly having the ear of the Fed, has been arguing for low rates and no increases. If a “political” statement is made by the Fed this year, this group (unaffiliated with any i-bank) expects a lot of volatility and a swift reversal.

    As for the UK. Didn’t the B of E take over some of the roles that the FSA were meant to be carrying out in 2010? Didn’t Carney in a speech also show explicit support for Government policies when he first took office at Threadneedle? One could assume that they are independent when it comes to pay recognition, and highly accommodative when it comes to policies…

    As for Labour’s opinion on the B of E, I offer up one Robert “R” Kelly;

    “If I could turn, turn back the hands of time
    Then darlin’ you, you’d still be mine

    Funny, funny how time goes by
    And blessings are missed in the wink of an eye
    Why oh why oh why should one have to go on suffering
    When every day I pray please come back to me”

    • Hi Harry A

      Yes the tripartite regulation system in the UK that Gordon Brown set up supposedly on advice from Ed Balls was a disaster. He doesn’t often get blamed for that which was as bad as the gold sale. He does however get blamed often for things in which he was mostly a passenger. Odd world isn’t it?

      Anyway yes the Bank of England now has the job.

      As to political Governor’s it was Mervyn King who associated himself with austerity. I do not recall Mark Carney being especially political here probably because he got singed fingers on that front back in Canada.

      I think you may have broken new ground as I don’t recall R Kellys songs getting a mention until today.

  6. Banks ARE lending.
    In the past week I have got a Post Office MasterCard which has an initial credit limit of £2500 and balance transfers at 0% interest for 18 months with NO handling fee and NO card charges.
    So I can spend on my cashback credit card for my normal shopping up to 95% of that limit, at effectively negative rates, and bank the cash for 18 months in a joint account paying 3%.
    I have also had an offer of balance OR MONEY transfers (where the money goes into a named current account) from my TESCO mastercard (Credit Limit £9500) at 0% interest for 20 months with a fee of 2.99%. This was offered unsolicited!
    Money is being pushed at me, and the reason is that banks cannot, will not, and indeed dare not, take any risks with loans, because they are still insolvent.
    This is having a negative effect on the whole economy, as business-lending is, by its very nature, risky.

    • Sorry. To continue:
      To me this shows that economic policy of the last decade, regardless of who was in power, is an utter failure, and whilst Corbynomics may be questionable, they are unlikely to be worse.

      The greater the number of self-obsessed, self-serving, career politicians with absolutely no moral scruples, who resign from the shadow cabinet, the better imv.

      • Hi therrawbuzzin

        Yes the FLS is still working in terms of personal lending which is highlighted by Zummerzetmans mention of 95% mortgages returning. But not for business lending.

        “Consumer credit increased by £1.2 billion in July, broadly in line with the average monthly increase over the previous six months. The three-month annualised and twelve-month growth rates were 8.3% and 7.5% respectively. ”

        “Loans to non-financial businesses increased by £0.7 billion in July, compared to the average of £0.0 billion over the previous six
        months. The twelve-month growth rate was -1.2%. Within this, loans to small and medium-sized enterprises (SMEs) decreased
        by £0.1 billion, compared to the average monthly increase of £0.2 billion over the previous six months. The twelve-month
        growth rate was -0.4%. ”

        As to our politicians Yes Minister satirised the state of play over 30 years ago so it feels like an ever present problem.

  7. I count myself as a floating voter, but Corbyn’s desire to implement 60% taxes, his disarmament policies and state control of business mean I won’t vote for his policies.

    I only hope that his leadership can start a robust and healthy debate/discussion on which policies have merit, but Labour risks marginalising itself if it ignores the political center ground.

  8. Hi Shaun

    I think your suggestion of elections to the MPC is a good one. As you say the record of the BOE since independence is patchy and your suggestion may well bring a breath of air through the institution.

    The CBs have too much of an air of the Plunge Protection Team these days for me and they seem to have strayed well beyond their original core function with propping up markets being a key concern, whether by intention or as a collateral consequence.

    One of the dangers of an independent CB is that the politicians abdicate responsibility and, in effect, leave the CBs as guarantors of aggregate demand. Of course when things are well they will take the credit but the CBs will be the scapegoats when things are not so good.

    • Hi Bob J and thanks.

      As they interfere more in things then central banks find themselves in quite a mess as you say. What do the Bank of Japan and the Swiss National Bank think they are doing buying equities and that is before we get to the Peoples Bank of China.

      Your last paragraph preety much describes the Euro area.

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