Why Minouche Shafik would be a bad choice as Bank of England Governor

The appointment of the next Governor of the Bank of England has become quite a merry-go-round. It reminds me rather of the Grand National at Aintree where we see many horses take the lead in the race but very few survive. This morning’s suggestion was even by these standards something of a surprise so let me hand you over to Simon Jack of the BBC.

NEW: told that Minouche Shafik is THIS govt’s preferred candidate for next Bank of England Governor. No announcement this side of election – cos it would be “politically messy” but if (a big if) this government secures majority – Egyptian born Minouche is current favourite.

For newer readers the surprise element comes from her past track record on the Monetary Policy Committee but two other issues are raised so let me address them. The first I have done so already on Twitter.

Just so I am not misunderstood having a woman as Bank of England Governor is a good idea but sticking to past policymakers the competent and intelligent Kristin Forbes would be much better than the incompetent Shafik,

Next is the issue of her nationality as the Bank of England has developed a habit of only employing women from abroad for such roles. This is an issue I raised when she was first appointed to the MPC as I found myself being criticised by @ToryTreasury which described her as British. They went rather quiet though when I quoted her describing herself as Egyptian and asked if they thought she knew better than they did? But both Kristin Forbes and the present Silvano Tenreryo were and are from abroad. I have no issue with appointing some from abroad but the occasional British woman would not go amiss! Also should they appoint a British woman perhaps they could look a little wider than they did last time. From Wiki.

The Hon Charlotte Hogg was born on 26 August 1970 in London, England. Both her parents hold peerages in their own right: her father is the 3rd Viscount Hailsham, a former Member of Parliament and hereditary peer as well as being a life peer, and her mother is the Baroness Hogg, a life peer . She was brought up on the family estate of Kettlethorpe Hall in Kettlethorpe, Lincolnshire.

Monetary Policy

If we step back in time to the 28th of September 2016 Minouche Shafik gave a speech at Bloomberg.

the process of adjustment can sometimes be painful. That’s where monetary policy can help, and it seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.

As I pointed out the next day this was a case of toeing the Governor Carney line. As I  had pointed out 2 weekend’s  before on BBC Radio 4’s Money Box the simple fact was that the fall in the UK Pound £ was a much bigger factor for the UK economy than the Bank of England moves. As of the latest update on our effective or trade weighted exchange rate back then we had received the equivalent of a 2.5% cut in Bank Rate or as I put it on the radio a “Bazooka” compared to the “peashooter” she and her colleagues deployed with a 0.25% cut. The £60 billion of QE was pretty much been offset by a rise in pension fund deficits and the Corporate Bond QE seems to be as much for foreign firms as UK ones.

She in fact highlighted the problem herself but rather oddly chose to ignore it with her policy prescription above.

For example, Bank staff have revised up their forecast for the mature estimate of GDP growth in Q3 to 0.3% from 0.1% at the time of the August Inflation Report.

So thing’s are better but the prescription is the same! Even worse she was unable to grasp that the situation she described was ( and still is ) part of the problem.

What is unusual about this particular loosening relative to previous cycles is its starting point. Despite many real economic variables having returned to around normal levels following the financial crisis the absence of any signs of overheating or inflationary pressure meant that at the time of the referendum Bank Rate was already at an all-time low of 0.5% and we held a stock of £375bn gilts on our balance sheet.

As to “any signs of overheating” she missed this as I pointed out.

UK broad money, M4ex, is defined as M4 excluding intermediate other financial corporations (OFCs)……The three-month annualised and twelve-month growth rates were 10.9% and 7.3% respectively.

Oh and something else was red-lining too.

Consumer credit increased by £1.6 billion in August, broadly in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.4% and 10.3% respectively.

In fact in spite of the fact that the estimates for GDP growth had been revised up Minouche could nor resist this.

Asked by Bloomberg Editor-in-Chief John Micklethwait if there was any positive impact from Brexit, Shafik paused. Her offering? The sunny summer enjoyed by Britain.

“The weather’s been really good since the referendum,” she told the audience at the Bloomberg Markets Most Influential Summit in London.

Time passes and it is easy to forget. But this was part of warming the UK up or giving Forward Guidance for a further Bank Rate cut to 0.1% and yet more QE in November. This did not happen because by then it was obvious even to those trying to turn a blind eye to it that the economic situation has been completely misread by the Bank of England. Those policy moves went into the recycling bin.

In an unusual development if we read between the lines it looks as though even the Financial Times agrees with me. This below from economics editor Chris Giles is some distance from the “rock star central banker” that Mark Carney was welcomed with.

With today’s perfectly reasonable BBC speculation that Minouche Shafik is a front runner for ⁦@bankofengland

⁩ governor, I am reminded how difficult it was to extract a clear view from her in an interview when deputy governor.

The latter sentence evokes memories of how Yes Prime Minister described such matters.

Doesn’t it surprise you? – Not with Sir Desmond Glazebrook as chairman.

– How on earth did he become chairman? He never has any original ideas, never takes a stand on principle.

As he doesn’t understand anything, he agrees with everybody and so people think he’s sound.

Is that why I’ve been invited to consult him about this governorship?

 

Comment

The situation is that we have had something of a litany of front-runners. This government is supposed to have favoured Gerard Lyons and Dame Helena Morrisey and Andrew Bailey was supposed to be a shoe-in before that. So the Shafik Surprise may quickly fade in the way she was moved out of the MPC to my alma mater the LSE. For these purposes I have ignored the rubbish she spoke about QE because pretty much everyone at the Bank of England quotes that and back in September 2016 she did perhaps inadvertently get something right.

BOE SHAFIKQE UNWIND DOES LOOK A VERY LONG WAY AWAY

Ever further away as we mull whether we will get weekly, then daily then hourly extensions of the term of Governor Carney?

 

Of the next Bank of England Governor, Bank Rate cuts and Metro Bank

It is time for us to peer again through the clouds and remind ourselves of the mindset of a central banker. In this instance it is the current favourite to be the next Governor of the Bank of England Andrew Bailey who has been working hard to establish his credentials for the role.

A whistleblower has heavily criticised the head of the Financial Conduct Authority for failing to investigate her complaints against Lloyds Banking Group, despite his assurances about the seriousness of the case. Sally Masterton wrote last June to FCA chief executive Andrew Bailey — the bookies’ favourite in the race to succeed Mark Carney as Bank of England governor — to protest about her treatment by Lloyds. ( Financial Times)

Indeed if the writing below is accurate he seemed keen to keep the matter quiet.

Mr Bailey took a personal interest in Ms Masterton’s case, encouraging Lloyds to settle with her financially. But he did not act on the serious criticisms she made about the conduct of the bank and its senior managers towards her, according to emails seen by the Financial Times. These concerned alleged breaches of the FCA’s rules.

This all seems to be something that Mr Hollinrake,  the co-chair of the all-party parliamentary group on fair business banking, either does not understand or is willfully misrepresenting.

“Anyone under consideration for the role of Bank of England governor must be able to demonstrate a willingness to tackle wrongdoing in the banking sector without fear or favour,” added Mr Hollinrake.

After all Mr.Bailey does not seem that keen on whistleblowers.

Last year the regulator was attacked for its decision to only impose a fine on Barclays chief executive Jes Staley after he employed private investigators to try to unmask a whistleblower. The FCA was also criticised last year for revealing the identity of a whistleblower to Royal Bank of Scotland.

In case you are thinking this is something new here is Sir Frank from Yes Prime Minster in the early 1980s.

We believe that it is about time the Bank of England had a Governor who is known to be both intelligent and competent. Although an innovation, it should certainly be tried.

The Treasury has endured these City scandals long enough.

Plus ca change c’est la meme chose.

Central Banker Thinking

A research paper on the Bank Underground site is rather more revealing than it intends so let us start with the subject matter.

As the UK economy went into recession in 2008, the Monetary Policy Committee responded with a 400 basis point reduction in Bank Rate between October 2008 and March 2009.

If this worked then we would not have needed the subsequent QE ( Quantitative Easing) and credit easing, nor would we have remained at the consequent Bank Rate of 0.5% for so long. But according to this research it was something of a triumph.

Although UK unemployment rose by around 3pp in the year following the collapse of Lehman Brothers, the extraordinary monetary stimulus carried out by the MPC surely protected the aggregate economy from a fate far worse………But even for the least affected regions, I estimate that employment growth was around 1.4pp higher than it otherwise would have been solely through this channel  ( pp = percentage points).

There is a catch here as there is an obvious moral hazard in an institution being both judge and jury on its own policy. But having noted that there is something revealing in the the area that leads to this result. It is of course the housing market and combines the banks too!

Although this easing lessened the impact of the recession across the whole economy, its cash-flow effect would have initially benefited some households more than others.

So we have a confession about exacerbating inequality which I guess they hope we will not spot and it leads to this.

Those holding large debt contracts with repayments closely linked to policy rates immediately received substantial boosts to their disposable income. Cheaper mortgage repayments meant more pounds in peoples’ pockets, and this supported both spending and employment in 2009.

As far as I can see there is no mention of the impact of cheaper borrowing for businesses and I would remind newer readers that at the time this was often badged as boosting inflation as well. It is easy to forget that the Bank of England went into something of a panic as the Retail Price Index went negative and feared the CPI would do the same. The irony here is that the RPI was driven into negative territory by the large falls in mortgage rates as it has them in it ( currently at a 2.4% weighting but logically it would have been higher then).

Here is the more detailed prescription of what happened.

Some mortgagors received a cash-flow boost as their monthly mortgage repayments fell in lock-step with policy rates as the nights closed in at the end of 2008 . Many chose to go out and spend part of this windfall, on goods made (and services provided) both at the national and local levels. And, as people finally got round to fixing their cars, made more trips to their nearby corner shop and splurged on meals out, we might expect this spending on locally-provided services to have supported local employment in the face of the Great Recession.

This can be broken down at the individual level.

Those who went into the autumn of 2008 with a mortgage linked to Bank Rate (on a so-called variable-rate mortgage) received an average favourable cash-flow shock equivalent to around 5% of their annual pre-tax income the following year:

Also on a more collective level.

My results suggest that a 1 percentage point accommodative monetary policy change led to around a 3.5pp increase in annual employment growth of businesses that relied on local custom between 2009 and 2010. These businesses made up around a fifth of overall employment.

 

Comment

There is a lot to get though here so let us crack on.This is a sensible reflection by the author Fergus Cumming.

This point estimate should be treated with caution and monetary policy operates through a number of channels that work over different horizons.

But this is not.

There are also good reasons to think that the cash-flow effects I find would likely have been approximately symmetric if interest rates had instead increased.

Can you imagine the impact of a 4% Bank Rate rise at that time? Personally I would rather not.

Next we can see that 2008 came as a genuine shock or if you prefer the forerunners to Forward Guidance had a nightmare.

Survey evidence shows that only 10% of households in August 2008 expected policy rates to fall substantially in the coming months.

However you try to spin it there is a problem for future monetary policy easing from this channel.

After a sustained period of mortgage rates close to zero, more than 90% of new mortgages are now fixed-rate contracts and so the average time-to-refinance on the stock of mortgages is increasing over time. Although the effects I estimate are likely to be approximately symmetric, the evolution of the composition of mortgages means that the direct pass-through of changes in Bank Rate to household finances is likely to be slower in the future.

No wonder they are so keen to discuss anything other than monetary policy these days.

Metro Bank

My subject of Wednesday has been in the news today. It has raised an extra £375 million of capital which is welcome but more worryingly it has received the equivalent of the board of directors expressing confidence in their manager after a bad run of results. From the Bank of England website.

The Prudential Regulation Authority welcomes the steps taken today by Metro Bank. Metro Bank is profitable and continues to have adequate capital and liquidity to serve its current customer base. It has raised additional capital in order to fund future growth.

They need to follow the advice of Tears for Fears.

Change
You can change
Change
You can change

 

 

 

 

UK Austerity and the next Governor of the Bank of England

Today brings into focus an area that has brought good news for the UK over the past couple of years. This has been the improvement in the public finances which rather curiously lagged the period where the economy recorded its fastest economic growth by around 2 years. Also some of the detail along the way has hinted at a better economic situation than that suggested by economic growth measured by Gross Domestic Product or GDP data. This swings both ways in my view as what were called the bond vigilantes will be happier with the state of play. But also those on the other side of the coin who would like more government spending and/or lower taxes would have fiscal room to do so.

Austerity

This has been a matter of debate for some time and let me start by saying there are several ways of looking at this. The harshest would be to actually cut government spending which we have not seen in the UK. Let me add more detail by pointing out that some areas clearly have but overall the story has nor been that as other areas spent more. The more realistic version seems to be restricting government spending in real terms which we have seen some of overall. If we look at it in terms of years then we have recorded on here two main phases firstly from around 2010 when the brakes were applied and from 2012/13 when the pressure on the spending brakes was loosened.

Also there was some tightening on the other side of the fiscal ledger of which the standout was the rise in Value Added Tax or VAT. There was a relatively brief cut from 17.5% to 15% but then a rise to 20% where in spite of the claims of a return to normal it is still at the supposedly emergency rate.

Having established some perspective let us look at this from the IPPR which compared us to these countries “This comprises Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Spain and Sweden.”.

We find that on average these countries spend 48.9 per cent of GDP on public spending, compared to just 40.8 per cent in the UK. Furthermore, whilst the UK’s spending has fallen by 7 percentage points – from around 47 per cent of GDP to 40 per cent of GDP – since the onset of austerity, the comparable fall across these countries is just 3 percentage points. Moreover, if the UK were to match their current levels of spending tomorrow it would be worth £2,500 per person per year, of which £1,800 would go towards social spending; meaning health, education and social security.

Okay if we break this down we see that the picture is more complex. Let me show you this by looking at the Euro area in total for 2018 for which we got figures yesterday. There the fiscal deficit was a mere 0.5% of GDP with spending at 46.8% and revenue at 46.3%. Furthermore many of the countries in the IPPR list ran fiscal surpluses in 2018

Germany (+1.7%), the Netherlands (+1.5%), Sweden (both +0.9%), Denmark (+0.5%). Austria (+0.1%).

So on that measure they are more fiscally austere than the UK which ran a deficit. As you can see things are more complex than they argue which is hinted at by the way they use tax revenue as a benchmark rather than total revenues which changes the numbers quite a bit. We have numbers for different periods but my 46.3% for the Euro area is rather different to the 41.1% for their sample and looks a swinging rather than a straight ball to me.

Of course spending is not a free good either. Could we match the spending tomorrow? Yes we could if we wished and for a while with bond yields where they are it would at first be no big deal, but even the IPPR realises it would have to come with this.

But in the UK, as IPPR has previously recommended, significant additional revenue could be raised through increasing the rate of corporation tax in line with the European average, reforming income tax but in a way that protects those on low and middle incomes, and changes to the way in which we tax wealth.

As to Corporation Tax I am dubious as one thing we have learned in the credit crunch era is the way multinationals pretty much choose where they pay tax or if you want the issue in one word, Ireland.

Moving on we see this and again the catch is that in the credit crunch era such Ivory Tower calculations are fine up in the clouds but down here at ground level they have often crumbled.

They find that the cumulative effect of austerity has been to shrink the economy by £100bn today compared to what it would have been without the cuts: that is worth around £3,600 per family in 2019/20 alone.

Today’s Data

The overall picture presented continues to be a strong one.

In the latest full financial year (April 2018 to March 2019), central government received £739.4 billion in income, including £558.6 billion in taxes. This was 5% more than in the previous financial year.

This again hints that the economy has been stronger than the GDP data suggests and follows the labour market theme of rising employment and higher real wages.

On the other side of the ledger the throwing around of the word austerity makes me uncomfortable when we are increasing spending in real terms.

Over the same period, central government spent £741.5 billion, an increase of around 3%.

Well unless you use the RPI as your inflation measure but even then it is roughly flat.

The combination meant this.

Borrowing in the latest full financial year (April 2018 to March 2019) was £24.7 billion, £17.2 billion less than in the previous financial year; the lowest financial year borrowing for 17 years.

Or if you prefer our credit crunch era journey can be put like this.

In the latest full financial year (April 2018 to March 2019), the £24.7 billion (or 1.2% of gross domestic product (GDP)) borrowed by the public sector was less than one-fifth (16.1%) of the amount seen in the FYE March 2010, when borrowing was £153.1 billion (or 9.9% of GDP).

As a single month March was not one for austerity as it looks like departments made sure that they spent their annual budgets so if some potholes were filled in around your locale that is why.

 while total central government expenditure increased by 5.7% (or £3.5 billion) to £65.7 billion.

The explanation is rather bare but if we look at the ledger we see spending on goods and services was up by £1.9 billion. So maybe there was some Brexit stockpiling too.

Comment

The last decade has seen a lot of debate over the concept of austerity involving quite a lot of goalpost moving, so much so that it is fortunate designers give them wheels these days. Whereas we do know what real austerity has been as @fwred made clear yesterday,

Today’s craziest chart goes to Greece, with a primary surplus of 4.4% of GDP in 2018, beating an already insane target of 3.5%. Jaw-dropping for those of us old enough to remember the whole story.

Or as The Nutty Boys put it.

Madness, madness, they call it madness
Madness, madness, they call it madness
I’m about to explain
A-That someone is losing their brain
Hey, madness, madness, I call it gladness, yee-ha-ha-ha

We have seen nothing like that but now face choices ahead as do we copy the Germand and go for a surplus? Or do we now pick out areas where we can spend more? With borrowing so cheap with our ten-year Gilt yield at 1.2% it is not expensive. As ever some care is needed as we have spent in some areas as I note in the IPPR paper than at 7.4% of GDP we spend the same on health as the countries they compare us too which completes something I recall Tony Blair aiming at back in the day.

Meanwhile this has hit the news. I have floated two candidates in Andrew Sentance and Ann Pettifor, but who would you suggest?

Although if Yes Prime Minister has its usual accuracy the choice has already been made and this is just for show