Why is Mark Carney avoiding the “credit” for higher house prices?

We find ourselves in the middle of a concerted campaign by the Bank of England which is in a phase where it is barely out of the news and media. It was only yesterday we looked at the published views of its Chief Economist and now we find that Governor Carney has had plenty to say. There is one clear feature of these Open Mouth Operations from the Bank of England and that is that the headlines are about anything but monetary policy! Both seem very keen to discuss matters that are beyond their remit which to my mind is a confession that my critique that they made a policy error in August is troubling them.

Let me open with something about which the Governor and I can agree.

We meet today during the first lost decade since the 1860s

This first makes me think of his past claim that monetary policy was not “Maxxed-Out”, if so what has he been doing on his own terms? But let me continue with something else I can agree with because it is at the heart of my analysis.

Over the past decade real earnings have grown at the slowest rate since the mid-19th Century

Now that is a type of lost decade. But we immediately have a problem because our Mark is trying to deflect us away from a policy choice he has made which in my opinion will make the situation worse.

The MPC is choosing a period of somewhat higher consumer price inflation in exchange for a more modest increase in unemployment

Having highlighted real wages he then attempts to ignore this.

this resolution is expected to occur as imported inflation begins to weigh on people’s real incomes, slowing consumption growth.

He even gives us the economic equivalent of a straw (wo)man to deflect us from the situation above.

For example, returning inflation to the 2% target in three years’ time would call for rates around 100 basis points higher over the next three years. Compared to the MPC’s November projections, that would increase unemployment by around 250,000 people.

No doubt the economics department at the Bank of England will produce any simulation the Governor wants but some of this is risible. For example this is very different to him simply not having cut interest-rates in August. Also his policy horizon is not 3 years unless he is now choosing his own one. If we move onto CPI inflation heading towards 3%+ and RPI inflation heading towards 4%+ how does that go with this rhetoric Mark?

The happy medium is a monetary policy framework with a credible commitment to low, stable, predictable inflation over the medium term, as in the UK’s tried and tested arrangements.

Incredible more like……

Distribution problems

We are hearing a lot about this from the Bank of England which is a clear sign that reality is proving inconvenient for it. There is quite a shift implied in the sentence below and my theme that Bank of England Governors morph into the same person gets support from the re-emergence of the word “rebalancing” as the spectre of Baron King of Lothbury appears like the Ghost of Christmas Past.

we must grow our economy by rebalancing the mix of monetary policy, fiscal policy and structural reforms.

Is he now responsible for these too or sing along to the “It wasn’t me” from Shaggy? Let us take the advice he gives below.

Acknowledge current challenges and address them, wherever possible.

Quantitative Easing

This is a big problem for Mark Carney on a day he had just bought another £1 billion of UK Gilts. The problem is that it has helped the rich or if you prefer those who own assets. As central banks have majored on “wealth effects” as a gain from easy monetary policy they have provided their own confession to this challenge. Mark gives us examples of the effect in America and the world but is a lot more shy about the UK.

The picture in the UK is complex but in general suggests relatively stable but high levels of overall inequality, with sharper disparities emerging in recent times for the top 1%.

I am not so sure why he is being so shy as you see back in 2012 the Bank of England’s own research hammered the point home.

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Perhaps for Mark UK economic history only starts in June 2013. But if so he then has a problem because he seems a little shy about this as well!

Moreover, rising real house prices between the mid-1990s and the late 2000s has created a growing disparity between older home owners and younger renters

But house prices have been doing this on Mark’s watch.

Average house prices in the UK have increased by 7.7% in the year to September 2016 (unchanged from 7.7% in the year to August 2016), continuing the strong growth seen since the end of 2013. ( Office for National Statistics).

Surely he wants to take the credit for the wealth effects central bankers love? Or perhaps just not yesterday. Meanwhile ( and thank you to Andrew Baldwin for reminding us of regional inflation differences in yesterday’s comments) we see this in the official data.

In September 2016, the most expensive borough to live in was Kensington and Chelsea, where the cost of an average house was £1.4 million. In contrast, the cheapest area to purchase a property was Blaenau Gwent, where an average house cost £76,000.

I don’t know about you but the implications of that are an extraordinary distribution of wealth and resources?! Not every bit is his fault as capital cities especially London have been en vogue. But when we read of cheapest ever mortgage rates and the Funding for (Mortgage) Lending Scheme and now the MTFS a big arrow points at Governor Carney’s office. The banks always seem to pass go and collect £200 whilst the Go to jail, go directly to jail card seems to have disappeared from the version of Monopoly.

Does monetary policy float all boats?

There are obvious critiques of this above but let me add what is another major theme of mine and let me use Governor Carney’s own words to do it.

Few in positions of responsibility took theirs. Shareholders, taxpayers and citizens paid the heavy price.

QE and easy monetary policy bailed them out and ossified the financial system and thereby contributed heavily to this.

In the UK the shortfall, at 16%, is even worse ( GDP per capita)…The underlying reasons for the 16% shortfall of the UK’s productive capacity, relative to trend, are poorly understood.

I do not like projecting trends but in spite of the fact that doing so has been a disaster the Bank of England loves it, well for things that suit it anyway.


There are a litany of issues here. For example I am no doctor but I cannot think of any cure that takes eight years not to work can you?

Monetary policy has been keeping the patient alive, creating the possibility of a lasting cure through fiscal and structural operations. It has averted depression and helped advanced economies live to fight another day, so that measures to restore vitality can be taken.

8 years Mark? Anyway in these 8 years Mark has been busy marking his own exam paper.

What if the MPC had not acted? Simulations using the Bank’s main forecasting model suggest that the Bank’s monetary policy measures raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak. Without this action, real wages would have been 8% lower, or around £2,000 per worker per year, and 1.5 million more people would have been out of work. In short, monetary policy has been highly effective.

So in Spinal Tap terms Mark has awarded himself 11 out of 10. Or more likely some economist deep in the bowels of the Bank of England bunker has. On his road to being a supreme court of judge,jury and witness on himself he does not seem to have suffered from this “uncertainty is high”.

So there you have it a masterclass in a Sir Humphrey Appleby style speech where you attract favourable headlines and leave behind misleading messages. Oh and speaking of Yes Prime Minister I doff my cap one more time!

Leak inquiry into leaking of letter warning about leaks

Just as a reminder the purpose of a leak inquiry is merely not exist not to actually catch anyone. Otherwise it might catch the person who launched the inquiry….


25 thoughts on “Why is Mark Carney avoiding the “credit” for higher house prices?

  1. Very interesting as usual. It seems to me that the BoE’s mantra has just become QE,QE and more QE. This has lots of side effects (like trashing pensions), but does keep the cost of borrowing down which sorts out Carney’s two real clients, namely
    1. The government
    2. The banks
    This means that any number of stories have to be invented to hide the real reason such as
    1. We shouldn’t include house prices in inflation figures
    2. We should claim counter factual job creation numbers
    3. We should generally join in the establishment chorus of how well we’ve dealt with the financial crisis
    And then, they just hope to retire with knighthoods before anyone notices or it has to be sorted out.

    • Hi James

      The subject of house prices ( or asset prices) in consumer inflation is something close to my heart and something I have put a lot of energy into pushing. I feel at times a bit like Atlas trying to hold up the earth in my battles with the establishment. But bit by bit….

      The Yes Prime Minster view is that the Knighthoods are sometimes given out to put people off the scent via the illusion of achievement.

  2. Thanks Shaun for going through Carney’s speech with a fine tooth comb – I saw him on ITV news and had to turn off because I wasn shouting at the screen so much! I wanted Jon Snow to ask him if he had personally suffered ten years of no salary increase in real terms? But perhaps that’s not really fair.

    • Hi DoubtingDick

      i agree that there should be fairness and some care. I think that taking pictures of him commuting on the tube were an invasion of privacy. However it is material to wonder about who he is likely to meet and whether any of them have suffered at all from the credit crunch. I suspect dinner parties chez Carney are likely to be for the 0.01%.

  3. so the solution is simple

    if house prices are not included in inflation measures and when they are they are skewed to the lower end of representation

    then remove them altogether BUT at the same time remove them from wealth calculations

    if we do that , are we still “better off” ?

    As for Majick Markey , perhaps “I’m alright , Jack” come to mind ….

    in 2008 the Banks were crashed due to massive fraud , no laws have change and no one in power has been prosecuted and for some reason MSM and the Masters of the Universe seemed surprised the Banks are still bust …….

    Apparently the tax payer has a few more pennies to be wrung out of them………


    PS: the economic models they used didnt predict the outcomes we have seen , so why should I believe the same models if we had not used QE , etc?

    • Hi Forbin

      Thats a good point about the economic models. When I read the word “improved” in this context I cannot help but think of GDP and coke and hookers. What would HAL 9000 make of that? I don’t think there would be much chance of him opening the pod bar doors for us.

  4. I was under the impression that the whole basis of that nice Mr Osborne’s economic plan was to save us from a lost decade, all brought about by spending too much on the country’s credit card.

    From 2010:
    “In eight years time we would still be meeting here talking about what we would cut. A decade lost to debt.
    “That’s what’s on offer from Labour and my generation won’t stand for it.”

    Was Mr Osborne wrong? Say it ain’t so?? Why did nobody say anything at the time???

    Oh …


  5. http://www.tradingeconomics.com/iceland/wage-growth – select the 10 year view. They did have a difficult 2 years, but recessions happen. They are useful reminders that excess debt is harmful. Just how long are they going to keep the zombie banks on subsidy ?

    All the responsible politicians should be in the dock for bank subsidies, and their governments insufficient actions prosecuting banksters. Japan has tried the lost decade for over twenty years, bank liquidation recoveries take less than two years …..

  6. HI Shaun, I wonder – how far away is the second lost decade since the 1860s? Could it possibly be right after this one. It’s been said many ways and many times before but there can be little doubt that ultra loose monetary policy is a trap that’s very hard to escape from. Of course not everybody has lost but that’s no consolation for those who have (is it, Mr Carney?!!)
    The really depressing thought is that I may not live long enough to see the end of this brave new – dare I say, unknown – economic world. The late nineteenth century “long depression” lasted 30 years, did it not?

    What a pity the UK doesn’t have some of NZ’s problems. The lead items in today’s news are – the price of milk; 4 new supermarkets opening and speculation about what John Key might do next. A quiet day in paradise.

    • Hi Eric

      On the subject of the John Key resignation, was it caused by the Irish beating the All Blacks in Chicago? More seriously these winds do blow in the southern hemisphere but some miss you.

      Paradise? Maybe but quite a few seem to find there way up here for what they consider to be the excitement of London. Seems different for a born and bred Londoner (Waterloo) like me but of course “(s)he who is tired of London is tired of life”.

      • Was out in NZ in August. They could use supermarket competition – it’s a duopoly plus franchised smaller owner operated stores who can’t compete on price. European consumers benefit from Aldi & Lidl. Carney might even complain they create deflation …

        The social media on TPP I’ve seen was targetted at the anti-democratic rules which benefit the 0.1%. Basically a foreign company like VW could sue the NZ govt using German environmental test data on anti-protectism rules (and automatically win) if NZ tried to enforce diesel emission standards. Obama’s EPA was well enough resourced and politically supported to hold VW to account and protect public health. Dump’s plan to emasculate the EPA will kill people.

        NZ needs trade, food surplus and lacks the scale to efficiently manufacture cars.

        • Yep – food is expensive. I’ve always wondered why milk is nearly twice the UK price. Cars are cheap – everybody needs one. Fuel is cheap(er), insurance is optional. The last assembly plant (Ford I think) closed years ago. Cheapest supermarket is Pack ‘n’ Save – owned by one of the two major players.

          I do wonder how long NZ can go on borrowing from abroad in support of the housing market.

          And kiwi travel, Shaun – known as OE (Overseas Experience) is part of the kiwi coming-of-age ritual.
          Young kiwis are encouraged to see the world after education and before permanent employment.

  7. Great blog as always, Shaun.
    Carney said that in the middle of the 19th century, “Karl Marx was scribbling in the British Library, warning of a spectre haunting Europe, the spectre of communism”. The communists were there to put down the people they identified as villains, the capitalists. In his mind, at the present time, some unspecified parties have identified central bankers as the villains who are ruining society. So instead of “The Spectre of Monetarism”, shouldn’t his paper have been called “The Spectre of Corbynism” or whatever –ism he sees as quite unfairly castigating his kind? “The Spectre of Corbynism” would not only have been a much more logical title, it would have tested just how far he could transgress the normal discretion imposed on a central banker. If he had called the paper “The Spectre of Corbynism” it should have been grounds for immediate dismissal, but the man responsible for the “Dutch Disease” speech seems to break all the rules with impunity.
    I notice that Carney makes no reference, either in the speech or the footnotes, to fellow Canadian William R. White’s 2012 paper “Ultra Easy Monetary Policy and the Law of Unintended Consequences”. White presents a simple theoretical model with three classes of people, showing how ultra-easy monetary policies can promote income inequality. It appears that Carney doesn’t believe the model fairly represents the British economy under his guidance, but he has never said why, here or elsewhere.

    • Hi Andrew and thanks

      I will avoid the political details as usual but will point out that yes Mark Carney has been politicking again and now has even less cause to complain if he comes under political fire in return.

      As to his analysis it is something which belongs in the Mad Hatters Tea Party I think.

      “Yes, that’s it,’ said the Hatter with a sigh: ‘it’s always tea-time, and we’ve no time to wash the things between whiles.’
      ‘Then you keep moving round, I suppose?’ said Alice.
      ‘Exactly so,’ said the Hatter: ‘as the things get used up.’
      ‘But what happens when you come to the beginning again?’ Alice ventured to ask.
      ‘Suppose we change the subject,’ the March Hare interrupted, yawning. ‘I’m getting tired of this. I vote the young lady tells us a story.’

  8. ‘It has averted depression’
    ‘So in Spinal Tap terms Mark has awarded himself 11 out of 10.’

    This all rather presumes what history will say in twenty years.I suspect on both counts he is wrong.Firstly,monetary policy will be proven to have actually made things worse as it delayed the inevitable and destroyed chunks of the real economy in the process.Secondly,presuming my firstly holds,11 out of 10 might be kind

  9. Carney is simply towing the official IMF line which changed at the back end of last year from “Fiscal austerity and easy monetary policy” to “Spend spend spend in fiscal terms allied to ongoing easy monetary policy and a thought to be spared for structural reform”.

    They’re still wrong, monetary policy needs gradual tightening fiscal unfortunately needs to increase amidst rising inflation expectations (if only they’d done this back in 2009 -2014 when rates were collapsing) and the main effort needs to be put into structural changes particularly in the financial services area. The Doods-Frank Act is a step in the right direction although Trump intends to repeal it!! They’ve forgotten already that this financial depression occurred just 5 years after the last of Glass Steagall was dismantled. Prepare for a further financial crash.

    It beggars belief that back in 08 King & co went to Japan to learn how not to deal with a financial crisis in order to avert what was then a lost decade, came back and implemented the majority of Japan’s mistakes helping create a lost decade in the UK! .

  10. For all of the above critique, one thing that MC said rang true, namely that the aggregate statistics do not reflect peoples individual experience: and so another set of figures showing “economic growth” does nothing for the average punter. Indeed, it probably re-enforces the impression that someone else is getting richer while the rest of us are getting poorer. Indeed, mathematically aggregate growth while most people see no improvement will be dependent on increasing inequality.

    The growing resentment that this causes fuels political opposition – Brexit,Trump and now Italy.

    I would agree with MC that the proceeds of globalisation should be shared more equally. But I can’t see how this could be done by Governments (tax and spend?): and we appear to have reached the limit of a model in which jobs were exported to developing countries (like China) in return for lower consumer prices on the resulting imports.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.