The Bank of England and Mark Carney are in denial mode

One of the features of the Brexit debate has been the role of the Bank of England in it. One thing that a supposedly independent central bank should do is avoid being accused of being on one side or the other of political debates. Also it has presented a view which is supposedly supported by the whole institution when with such a split nation that seems incredibly implausible. Thus the alternative view of independence and the reason for having external members, which is to provide different perspectives and emphasis, looks troubled at best.

On this road we see an organisation where all the Deputy-Governors are alumni of Her Majesty’s Treasury, which raises the issue of establishment capture. Also this from the Bank of England website suggests the use of another form of motivation to capture individuals.

Dr Ben Broadbent became Deputy Governor on 1 July 2014. Prior to that, he was an external member of the Monetary Policy Committee from 1 June 2011.

I am far from alone in thinking that this sets up all the wrong motivations and strengthens the power of the Governor via patronage. As to appointment of the absent-minded professor maybe one day he will demonstrate why unless of course we already know.

For the decade prior to his appointment to the MPC, Dr Broadbent was Senior European Economist at Goldman Sachs,

Mervyn King

There is something of an irony in the way that any sort of flicker of Bank of England comes from the former Governor the now Baron King of Lothbury although Bloomberg describe him without his new title.

Mervyn King, a professor at the New York University Stern School of Business,

If we move to his critique here are the details.

It saddens me to see the Bank of England unnecessarily drawn into this project. The Bank’s latest worst-case scenario shows the cost of leaving without a deal exceeding 10 percent of GDP.

Why is this wrong?

Two factors are responsible for the size of this effect: first, the assertion that productivity will fall because of lower trade; second, the assumption that disruption at borders — queues of lorries and interminable customs checks — will continue year after year. Neither is plausible. On this I concur with Paul Krugman. He’s no friend of Brexit and believes that Britain would be better off inside the EU — but on the claim of lower productivity, he describes the Bank’s estimates as “black box numbers” that are “dubious” and “questionable.” And on the claim of semi-permanent dislocation, he just says, “Really?” I agree: The British civil service may not be perfect, but it surely isn’t as bad as that.

The productivity issue is one that has been addressed at the Treasury Select Committee ( TSC) this morning. As I listened I heard Deputy Governor Broadbent tell us that productivity has been falling which is true but when it came to a rationale for further Brexit driven effects we got only waffle. Actually the Chair of the TSC Nicky Morgan was much more impressive by discussing the oil price shock of the 1970s as opposed to Ben Broadbent’s New Zealand based example from the same decade. Later questions on this subject had both the Governor and Ben Broadbent in retreat on the issue of how useful an example New Zealand will be especially as it coincided with a large oil price shock.

There are different arguments as to how long any Brexit effect would last. However one would expect at least some of the issues to decline and go away.

Bank of England evidence

If we move to this morning;s questions posed to the Bank of England there has been a clear attempt by Governor Carney to cover off the fire he is under with two methodologies.

  1. To say the Treasury Select Committee asked for the production of scenarios.
  2. To present it as a technocratic and scientific process where we were told 160 people were involved and 600, measurements were taken. We were guided towards some elasticities where the range was presented between 0.75 and 0.16 and told that 0.25 had been chosen.

He has a point with the first issue because they did do that when it would have been better to have asked the Office for Budget Responsibility. After all as it has been drawn from the same establishment base it would have been likely to have given similar answers if that was the purpose and kept the Bank of England out of it. The second argument is very weak as anyone familiar with the methodology knows that economic models depend more on the assumptions used than anything else. You do not need to know much about them to realise that they are an art form much more than they are a science. Usually of course a bad art form.

Next up was Deputy Governor Jon Cunliffe who has spent a career at HM Treasury as well as this described from the Bank of England website.

Before joining the Bank, Jon was the UK Permanent Representative to the European Union, effective from 9 January 2012.

When quizzed on this he told us this was in the past but a mere ten minutes later he was boasting about his experience. Sadly the inconsistency remained unchallenged as did his assertion that the higher cost of doing financial services business in Frankfurt as opposed to London was not going to be a major factor.

The issue of making this accessible came up with an MP just asking “I am looking for human speak” which added to a previous request for Governor Carney to talk like a human being rather than like an economist. This did not go especially well and to my mind left the interventions of the absent-minded professor as mostly waffle.

Sadly this from the Governor was not challenged though.

We are delivering price stability

Since inflation has been above its 2% per annum target for 18 months that is open to quite a bit of debate! That is before we get to the deeper issue of a 2% inflation target not being the price stability but is spun as. Also if we reflect that reality then one may be troubled by the next bit.

We will deliver financial stability.


There is a fair bit to consider here and as ever I do my best to avoid the politics and cover what has been said as accurately as I can as there is no official transcript yet. But let me return to an issue I raised last Thursday about the scenario where the Bank of England raises Bank Rate to 5.5% and other interest-rates go even higher.

BOE informing the masses. Carney tells that its controversial projection of Bank Rate going up to 5.5% on disorderly Brexit is mechanistic – a calculation from “a sum of squared deviations of inflation from target and output from potential.” Capiche? ( @DavidRobinson2k )

Nobody seems to have told the “squared deviations” that we are dealing with people who have consistently ignored deviations in inflation above target. Apparently though this is a complete success.

Carney adds that there was “a simpler, less-successful time”, when the Bank only focused on inflation…and we know how that turned out [it led to the financial crisis!].

That’s why we now have a financial policy committee to guard the economy, and that’s why the banks are ready for Brexit, the governor explains: ( The Guardian )




19 thoughts on “The Bank of England and Mark Carney are in denial mode

  1. While you admirably try to avoid politics, the problem here is that it IS politics. The numbers are a smokescreen and I have no doubt that, had Carney and the BoE been Brexiteers, they would have published data showing extra growth from Brexit of “up to” £4300 per household in 2030.
    The difficulty here is that we live in a massive club masquerading as democracy. For example:
    1. The incestuous nature of the appointments to the leaders of the BoEand MPC, the OBR, all quangos such as the CQC;
    2. The House of Lords. Does anyone really think that the current make up of failed MPs and other appointees and absurd over representation of Lib Dem’s and some bishops is democratic (or any better than the hereditary lot to be honest)
    3. The EU commission – does anyone remember the previous job of the first foreign minister of the EU – I think that she was previously chair of a health authority in England
    4. The IMF and World Bank
    5. The diplomatic service
    6. The oxford ppe mafia
    7. The enarques in France
    In other words, the reason why the BoE isn’t independent is that almost all areas of those in power or who make the news come from the same establishment. They appoint each other to jobs. They naturally select from their own life experience and so it goes on and you have the (establishment BBC talking in hushed tones to the independent OBR or the authoritative BoE.
    I have watched it happen – look at David Clementi for example now chair of the bbc. Previously chair of the Pru. Previously at Kleinwort Benson.
    In other words the BoE is just part of a giant network and it comes as no surprise to me that the same names such as Goldman Sachs come up. It’s a club
    Rant over.

    • Yes James…. and it’s a club with no elections. An established oligarchy versus Parliamentary democracy. Throw the People into the mix via a referendum and it’s not surprising the whole process looks like a mess when the view of the people is at odds with the view of the club.

  2. In 1971 the government published a White Paper on EEC entry (Cmnd 4715). In that paper they made no predictions either short or long term because they said that the ultimate outcome over the long term depended on how individuals and businesses reacted to the changed circumstances (See paras 45-48). Were they more stupid in 1971? Was it a lack of computing power? No, of course not; they took the eminently common sense view that we cannot forecast the future sensibly, at least not in the longer term.

    There is a distinction between a conditional and unconditional forecast: a conditional forecast is a forecast based on a single parameter changing but ceteris paribus; an unconditional forecast is a forecast of Y based on all the dependent variables X that can influence Y. Long term economic forecasts, as popularly known are the latter and are, in my view, unreliable to the extent of being pointless. Carney’s distinction between a “scenario” and a “forecast” is mere sophistry to hide the fact that it is shoddy piece of work based on an impossibility.

    Your mention of the “black box” is well taken. As you often chronicle one really does question some of the numbers coming out of institutions because there is an element of the “black box” in most economic statistics but this takes a back seat because we trust the institution. With this sort of exercise, as well as his prior record, Carney has diminished trust in the institution he leads and tarnishes other institution by means of “guilt by association”. Not a very good legacy.

    • Totally agree and I would add that Ted Heath was, at the time, fully aware of the intention of the future EU to become a federal state and omitted to tell the public. Many years later he admitted in an interview that he deliberately omitted this detail as he knew that voters would reject it. We were lied to then and we are being lied to now. Demos Kratia must never be allowed to derail the agenda of the elite. It was unpopular with the ruling class 2400 years ago in its birth place and it is unpopular now.

  3. I was guessing from your timeline that the BoE would be in for a little chiding this morning and I’m not surprised. Brexit has turned into a monster that is consuming all before it and I totally agree the BoE had no business doing Brexit projections except for internal use. There are many important economic and political issues being neglected as all focus is on this blasted Brexit fiasco.
    If your relationship with the BoE was on Facebook I suspect the status would be ‘it’s complicated’. So let’s have a song for the lovers…
    She says
    “I don’t want nobody else
    I love you”, She’s lying
    “There won’t be somebody else
    and that’s true”, She’s lying
    “say you’ll always be my friend
    sweet darling”
    Why does she pretend?
    Ain’t no doubt, it’s plain to see
    A woman like you’s no good for me
    Your heart’s beating at another door
    I’m a done fool for to ask for more

    • Hi bill40

      If we are doing songs then let us have one for the Dow Jones tonight.

      Now I’m free
      I’m free fallin’
      Yeah, I’m free
      Free fallin’

      Free fallin’, now I’m free fallin’, now I’m
      Free fallin’, now I’m free fallin’, now

  4. As we all on here know, Carney’s attempts to frighten the electorate with losing 30% of their biggest(and probably only asset) is risible at best and outrageous if supposed to be coming from an independent governor.

    His predictions of the fall in the pound will I think prove correct, but only because of his historical refusal to raise rates to control inflation(preferring instead to manipulate and fiddle the data to produce artificially low figures) and protect the £ as it would cause real pain and further insolvency for our already insolvent banks, who are always his first priority, however the fact that he has also predicted rates having to rise to over 5% means he is also a barefaced liar and renders his predictions of such future falls in house prices to be worthless .

    With the BREXIT process now dragging on and on(assuming as likely the vote next Tuesday will fail), I wonder if his contract extension will be extended again to help ensure BREXIT is prevented?

    • Hi Kevin

      If I reply to your two comments my first thought is that meetings in the future between the two Bank of England Governors will be frosty to say the least. Although as you say maybe “To Infinity! And Beyond!” ends up applying to the term of Governor Carney.

  5. I’m not sure it’s fair to attack the BoE for using back of fag packet figures,created out of thin air.It’s become a habit and the Establishments Tractor production figures have proved popular with the public.

  6. A general question: if we assume the usual suspects are to be planning to make a quick megabuck out of an ‘unstructured’ Brexit ( which as the default outcome looks to be the most likely to occur ), how long would it take for the personal pension industry to recover ?
    Given that pension risk for the insufficiently privileged has been devolved to the individual, I’m guessing this would not be a priority for whoever is in charge by the time the fog clears.

    • Hi arrbee

      It is hard to know how this will play out especially after today’s events with the Government being held in contempt of Parliament. But I agree that the circumstances of plebs like us will be at the bottom of the list.

  7. It is unlikely that Parliament will reject Mrs May’s proposals next week. But if they do then there is the backstop of simply reversing the leave process and going back to where we were in the beginning. Most people I have spoken to are suffering from Brexit fatigue and such a decision would be almost a relief for them. As so many have repeatedly said, “we will not be allowed to leave” period!

    • Hi shackec

      As the events get ever more extraordinary it is getting ever harder to know what will happen next. It is getting a bit like the opening to Stingray’s ” In the next 30 minutes anything can happen”

  8. Great blog as usual, Shawn. On Monday the TSC heard evidence from three non-BoE economists including Roger Bootle of Capital Economics, before going to a BoE witness. Bootle was dismissive of the BoE scenarios and thought that the UK’s prospects even after a no-deal Brexit were bright. The other two seemed to sing from the BoE “Brexit is bad” hymnbook. A majority of Britons voted for Brexit but the five senior BoE officials who spoke before the TSC all seemed to share almost cookie-cutter Remainer views. By the way, Bootle was wrong in saying the UK is the fifth or sixth largest economy in the world. Looking at GDP on a PPP basis for 2017 it is the ninth largest economy in the world, ahead of France in 10th place but behind Brazil in eighth place.

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