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……
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.
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….