The 0.0001% take the reins at the Bank of England

Yesterday was a rather extraordinary day in the life of the Bank of England which had a Back to the Future feel about it. The Bank of England has not had a person with a peerage at the helm since the period 1944-66 yet there was the equivalent of what is called in cricket ” a future England captain” in front of the Treasury Select Committee who is the daughter and hence I believe second in line to be whatever the daughter of both a Viscount and a Baroness becomes. This was of course Charlotte Hogg who was described by the Guardian thus.

Friends say the 42-year-old was destined for greatness from birth, but say she inherited a “stunning intellect” along with her establishment surname.

I am not sure I would want friends like that and the City slang for being well off or “minted” needs to be replaced with moated in this respect.

Charlotte Hogg grew up in a grade-II-listed moated country house where evenings were spent debating Thatcherite privatisations, economic policy and even European agriculture with whichever leading member of the cabinet had popped round for supper.

Twitter has its own way of covering such things.

Charlotte Hogg’s Family Tree needs to have a whole chapter to itself in Debrett’s… ( h/t @CoxeyLoxey )

If we move to what took place then one of my rules of thumb was in play. This goes as follows. If an establishment figure is reported as intelligent then the number of times that happens the more I subtract from their expected intelligence. In the way that Oliver Letwin went from a man with a “great brain” to one stuffing important papers in rubbish bins. I note therefore how often Charlotte is described as intelligent in the Guardian article.

QE

This section started badly when Charlotte was accused of misrepresenting changes in inequality as wealth inequality has risen since 2007. She was referred to the 2012 Bank of England paper on this and seemed vague about it. It got worse when Charlotte was quizzed on issues of how QE might ever be reversed which is supposed to be part of her remit as Deputy Governor for markets, her answer of “I do think that is quite a long way off in the future” got the reply that such an answer was not good enough.

There was a bit which was even worse and here it is.

Andrew Tyrie ” On balance do you think we would be better off unwinding it or letting it run off?”

Charlotte Hogg ” I don’t see the distinction between the two to be honest”

So apparently there is no difference between unwinding our holdings in  Gilts and letting them mature. So in the extreme case of the longest held by the Bank of England which matures in 2068 pretty much anybody can see the difference in unwinding it today and letting it run to 2068. Andrew Tyrie then suggested that the advice of the Debt Management Office or DMO might be sought presumably hoping that they would have a better grasp of the subject.

This was of course a tacit admittal that the Bank of England has no intention at all of unwinding any of it QE bond holdings which sat rather oddly with this statement from Miss Hogg.

Bank of England’s Hogg says is not alive and well at the . I think all MPC members agree on that. ( Andy Bruce of Reuters )

Also she does not appear to think that this from her written statement has anything to do with the prices and yields in the UK Gilt market.

Having been £85bn at the end of 2006, the total assets on the Bank’s balance sheet are now worth £519bn. The largest item is a £481bn loan to the Asset Purchase Facility – the vehicle through which gilt purchases, corporate bond purchases and TFS lending have been executed on behalf of the MPC.

If Charlotte actually believes what she says then I look forwards to her voting against any more QE which must be pointless as apparently Gilt prices and yields would be unaffected if it stopped.

Today’s data

This morning’s money supply data was another in a series which poses questions for Bank of England policy. The broad measure of the money supply rose by 7% and the lending measure by 5.6% so if we say the economy is growing at around 2% that leaves 5% unaccounted for which is likely to turn up in the inflation numbers sooner or later if UK economic history is any guide.

Also credit seems to be flowing if we look at the mortgage sector.

Lending secured on dwellings rose by £3.4 billion in January. Gross lending and repayments both increased and were above their recent averages .  Approvals of loans secured on dwellings for house purchase increased for the fourth consecutive month and, at 69,928, were the highest since February 2016.

It seems that the boom in unsecured credit is continuing.

The net flow of consumer credit was £1.4 billion in January . The twelve-month growth rate ticked down to 10.3%.

We are regularly told that the monetary policy easing and bank subsidy efforts like the Term funding Scheme are to get credit flowing to smaller businesses, so how is that going?

Loans to small and medium-sized enterprises (SMEs) decreased by £0.2 billion.

Now there seems to be quite a contrast in the response of household borrowing especially of the unsecured kind and business lending does their not? The former has pushed higher since these policies began in the summer of 2013 and some of it has surged whereas the latter has mostly fallen. Or to put it another way only the latter will see the use of the word counterfactual.

The Bank of England has of course been claiming that it saved the UK economy with its August moves so we should be seeing a benefit in small business lending except the growth rate in the last 4 months has gone, -0.2%,0.1, -0.3%,-0.2%.

Comment

So far the UK economy has done pretty well after the EU leave vote which of course is awkward in itself for a Bank of England which predicted an immediate downturn. Of course it was even worse for the Forward Guidance of Governor Carney who predicted an interest-rate rise in such circumstances as recently as January 2016 and then cut them. However so far so good as the Manufacturing PMI business survey told us today.

The survey is signalling quarterly manufacturing output growth close to the 1.5% mark so far in the opening quarter which, if achieved, would be one of the best performances over the past seven years.

The rub in Shakesperian terms will come later in 2017 from this.

“On the price front, input costs and output charges are still rising at near survey record rates. However, the recent easing in both suggests that the impact of the weak sterling exchange rate on prices is starting to subside, providing welcome respite with regards to pipeline inflationary pressures.

But of course by easing the Bank of England made this worse and not better. The reason it did so is that it has a Governor who even those who support him are thinking he appoints people who are “Friends of Mark” which of course I have labelled for some time as “Carney’s Cronies”. The saddest part is that the welcome introduction of more women to the Bank of England has been affected by this as there are plenty of intelligent capable women around. The point of having nine members of the Monetary Policy Committee is to benefit from different views not have them ruled like the nine Nazgul in The Lord of the Rings.

 

 

 

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30 thoughts on “The 0.0001% take the reins at the Bank of England

  1. So lending to households continues to rise and lending to SME’s continues to fall, what a sound basis for a vibrant economy. We can all sleep at night because the B of E are monitoring
    the situation! DOH!

  2. indeed Shaun

    and consider this

    Property consultants Knight Frank said the number of ultra-high-net-worth individuals increased by 6,340 to 193,490 worldwide in 2016, making up for a similar decline the year before.

    Researchers put the turnaround down to strong performances on stock markets.

    now who is running the country for who’s benefit ?

    Forbin

    • Hi Forbin

      The Bank of Japan or as it is known in the Japanese equity market will be pleased to know that all its buying of exchange traded funds is having “wealth effects” . Likewise the Swiss National Bank with the way it invests some (20%) of its enormous foreign exchange reserves in equities theses days and must therefore have been very happy to see the Dow pass 21,000 today.

  3. Like the cavalry officer stupid enough for even the other cavalry officers to notice, the “stunning intellect” remarked by her “friends” could just be what the tenth percentile IQ makes of someone they know in the ninth. Happens – especially in aristocratic circles.

  4. I think you let your animus at the individuals overwhelm your message at times.

    CH is a member of the Establishment and her preferment is a case of “Twas ever thus”. However, you can console yourself slightly in that she studied Economics and History at Oxford and therefore only has the Straight Flush of idiocy; I have the dishonour to have the Royal Flush of idiocy having studied PPE at Oxford.

    However, not letting my idiocy get in the way, I think you fail to understand two things about all this. The first is that the British system is all about suppressing conflict and “keeping it quiet”. The BOE and its personnel have appeared at times like Fred Carno’s Circus but the system can never admit its errors as foolish and as egregious as those errors appear; it’s all part of keeping a lid on things. Now I don’t defend this but I believe it to be a fact of life; unfortunate at times but not as dysfunctional as it seems.

    The second is that surely all policy decisions are trade offs and trade offs are the essence of economics. The various decisions they have made, particularly since Carney arrived are, certainly in my view, indications of progressive weakness and inability to affect outcomes. How can anyone in their right mind think that a 0.25% reduction in IRs after Brexit was going to be the difference between reasonable growth and the economic abyss? It is an absurdity but a gesture, arguably precautionary and all they could do. Like you I thought it was foolish but they made the call and, in terms of it being a gesture rather than a serious policy move was it wrong?

    All these policy decisions are trade offs but stating that there are adverse effects says nothing; the question is: is the trade off reasonable and that is, at the time it is made, a matter of judgement which only time will verify.

    • As a physicist from a red brick, this revolting peasant thinks the idiocy of members of the establishment should be called out at each and every opportunity.

    • ” the question is: is the trade off reasonable and that is, at the time it is made, a matter of judgement which only time will verify.”

      brought to mind

      The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all.’

      or in this case perhaps ..”who is to be the master — that’s all.’

      Plebs need not apply – unless they married a Royal I guess

      Forbin

      • I feel like a Ronnie Corbett figure here so as a
        Cof FE educated engineer, I know my place.
        Why should the past and present situation
        prevail, the peasants are revolting.

    • ‘I think you let your animus at the individuals overwhelm your message at times.’

      I disagree with you Bob.I think a little bit of animus actually directs the point at the root of the problem.This country and most Western countries have been taken to the edge of the precipice by a cultural,social and political elite that is completely out of touch with the people in whose interests they are meant to act.

      We desperately need some reform of a lot of things not least in the fact that there is an overwhelming amount of alumni from your alma mater running the country that haven’t necessarily got there on ability-George Osbourne.

      Twas ever thus,twas never right.

      ‘The second is that surely all policy decisions are trade offs and trade offs are the essence of economics. ‘
      Tade offs that seem to favour a small clique of central bankers and their friends.

    • I don’t believe an absurd gesture was all they could do, Bob. They could have done nothing and waited to see if their forecast of an immediate downturn was accurate.. but they don’t get paid for doing nothing – that makes them look like an expensive superfluousness.

  5. There is a distinction between intelligent and clever. I know quite a few few people of towering intellect but dear God they’re stupid. I too am often described as intelligent but fall under the heading of a little knowledge is a dangerous thing.

    We still live in an alpha male world where admitting ignorance is seen as weakness rather than the strength it is.

  6. Great post as always Shaun. But Oh dear, re the “stunning intelligence” of Ms Hogg, how history repeats itself, at least in regard to financial markets and the Bank of England’s apparent love of appointing incorrigible “sapient nincompoops” (Bagehot). Indeed, really scare yourself to death and read Charles Kindleberger’s classic “Manias, Panics and Crashes”.

    • Hi Rob and thank you.

      I enjoyed the reminder of the Bagehot phrase, nice language. Let me reply in a similar vein from Yes Prime Minister.

      “We believe that it is about time the Bank had a Governor who is known to be both intelligent and competent. Although an innovation it should certainly be tried.” ( Sir Frank Gordon )

  7. I’m glad you’ve called her out Shaun.If people like you don’t,then the little people don’t have a chance.

    There’s loads of the well connected sticking up for the 1%

    Good on you.Love it.

  8. Sorry,having got involved in the comments whilst making the food,I’d forgotten to make my original point-the unwinding of QE.

    How have the BoE got away with sitting on a £519bn balance sheet without anything more than a couple of leaden questions from a couple of the less watched committees in the HoC.I’d also like to mention the MSM’s ability to gloss over this whilst devoting chunks of headline time to UK house prices

    • Hi Dutch

      The media have two problems I think. The first is a lack of knowledge and the second is what is an increasing tendency to simply copy and paste official communiques. To be fair to the Treasury Select Committee it seems to have people who are at least trying to impose some discipline although perhaps as Bob J implies above it is all part of the “game”

      As to your first point it is my pleasure.

  9. Great blog as always, Shaun.
    At about 10:44 am Charlotte Hogg tells Steve Baker that the inflation targeting regime was introduced at the Bank of England “I think in the late 90s”. It was announced by Norman Lamont on October 9, 1992, so she was way off. It is a puzzling gap in her background knowledge, as it seems the Bank of England makes a much bigger deal of celebrating important anniversaries of their IT regime much more than the Bank of Canada does ours. In reality, the IT regime went through 11 years with homeownership costs in the target inflation indicator, with house prices having a considerable impact starting in the third year, followed by the switch to the UK HICP in December 2003, which was followed less than four years later by the bank run on Northern Rock. In Hogg’s mistaken perspective, presuming she has some knowledge of the later chronology, the sub-period of the IT regime before the switch to the CPI as the target inflation indicator was about the same length of time as the period between that switch and the start of the financial crisis, so not so much reason to think that financial stability would have been better preserved if housing prices had remained in the target inflation indicator.
    No-one on the TSC asked Hogg what her own views were on an appropriate target inflation indicator. There probably was no point in doing so as it seems her mantra is that the Chancellor of the Exchequer establishes the remit, and the Bank of England executes it, no questions asked. When Baker asked Hogg what economists had influenced her own views on monetary policy, the only person she cited was Sir John Vickers. As the book “Banking on the Future” notes: “John Vickers, when he was chief economist of the Bank of England, argued that while policymakers might want to draw on asset price information, asset prices should not be in the targeted measure of inflation, largely on grounds that the volatility would be transferred to the price measure, complicating measurement and accountability.” So it seems likely that Hogg holds views on this subject appropriate to one of Carney’s Cronies: leave housing prices out of the inflation indicator.

    • Hi Andrew and thank you

      That is a fascinating quote from Sir John Vickers. i would argue that “largely on grounds that the volatility would be transferred to the price measure” and of course we know from the shambles that measuring both Rental Equivalence and Imputed Rent has been that “complicating measurement” is in fact much simpler using house prices.

      There were various particular issues from the past that Charlotte was unaware of that should be considered basic knowledge for her post. As inflation targeting was originally known as the Eddie ( George) and Ken ( Clarke) show that narrows it down a bit! In addition to the seminal paper on QE that I quoted there was another issue about 2013 she did not know. Mind you as time started at the modern Bank of England in the summer of 2013 with Mark Carney’s arrival I guess no-one there will be too bothered.

  10. Yes Shaun, It is a bubble but you can only call it in hindsight. Your lost 5% is a canny insight, someone else mentioned the £519Bn that has been printed. The stock market and the housing market both SHOUT bubble. So as many point out, the job of Govt. and the BoE is to pretend it isn’t until we all discover its actually true. Then they will say they identified it some time ago. Anyway I think its still bubble until the balance of EU election run-offs. Get your applications in for more credit cards.

    Paul
    🙂

    • Hi Paul

      Yes they are of course “vigilant” as another word gets a change of definition! As to the stock market well and the beat goes on as the Whispers told us. From CNBC.

      “The Dow advanced about 300 points with Goldman Sachs contributing the most gains and closing above 21,000 for the first time. The 30-stock index first closed above 20,000 on Jan. 25.

      The S&P 500 climbed 1.4 percent, with financials rising 2.8 percent to lead advancers, and briefly broke above 2,400 for the first time. The index closed above 2,300 for the first time on Feb. 9.

      The Nasdaq jumped 1.4 percent.”

  11. The intelligence card is well and truly played.
    Just goes to show the lack of confidence that
    Some have in her abilities if they are trying
    to brainwash everyone with such rubbish.

    She will perform no better and no worse than
    any of her daft peers.

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