The last 24 hours have seen something of a flurry of activity from the Bank of England. Yesterday Nishkam High School was the latest stop in what was supposed to be a grand tour of the country by its Chief Economist Andy Haldane. The was designed to show that he is a man of the people and combined with the expected ( by him) triumph of his shock and awe Sledgehammer QE and “muscular” monetary easing of August 2016 was supposed to lead for a chorus of calls for him to be the next Governor of the Bank of England. Whereas in fact he ended up revealing that at another school he had been asked this.
“Two questions”, she said. “Who are you? And why are you here?”
According to Andy this is in fact a triumph.
Several hours of introspection (and therapy) later, I now have an answer. The key comes in how you keep score. If in a classroom of 50 kids you reach only 1, what is
your score? Have you lost 49-1? No. You have won 1-0.
Perhaps that is the dreaded counterfactual in action. Could you imagine going to Roman Abramovich and saying that losing 49 games and winning one is a success? Of course you would be long gone by then. Anyway there is one girl at the “Needs Improvement” school who has shown distinct signs of intelligence as we note for later how Andy’s somewhat scrambled view of success might influence the bank stress tests released this morning.
What about monetary policy?
Andy has a real crisis here as of course he pushed so hard for the easing in August 2016 then a year later ( too late for the inflation it encouraged) started to push for a reversal of the bank rate cut and then voted for that earlier this month. Here is how he reflects on that.
The MPC’s policy actions in November were described as “taking its foot off the accelerator” to hold the car
within its “speed limit”. This was intended to convey the sense of monetary policy slowing the economy
slightly, towards its lower potential growth rate, while still propelling it forward overall.
According to Andy such a metaphor is another triumph.
It was a visual narrative. Because most people (from Derry to Doncaster, Dunfermline to Dunvant, Delphi to Delhi) drive cars, it was a local and personal narrative too. The car metaphor was used extensively by UK media.
Some are much less sure about Andy’s enthusiasm for dumbing down.
Andy Haldane cites the MPC’s recent use of the “car metaphor” as a success in attempting to engage the public. Which is fine. But I’d like to hear his thoughts on damage caused by bad/inaccurate metaphors (eg. “maxing out the country’s credit card”) ( Andy Bruce of Reuters )
Also there was a particularly arrogant section on inflation which I think I am the only person to point out.
This unfamiliarity with economic concepts extends to a lack of understanding of these concepts in practice.
For example, the Bank of England regularly surveys the general public to gauge their views on inflation.
When given a small number of options, less than a quarter of the public typically identify the correct range within which the current inflation rate lies. More than 40% simply say that they do not know.
Perhaps they find from their experience that they cannot believe the numbers and once you look at the data the 40% may simply be informed and honest.
Bank stress tests
The true purpose of a central bank stress test is to make it look like you are doing the job thoroughly whilst making sure that if any bank fails it is only a minor one. Also if any extra capital is required it needs to be kept to a minimum.This was illustrated in 2013 by the European Central Bank. From the Financial Times.
The European Central Bank has appointed consultants who said Anglo Irish was the best bank in the world, three years before it had to be nationalised, to advise on a review of lenders. Consultants Oliver Wyman, which made the embarrassing Anglo Irish assessment in 2006 in a “shareholder performance hall of fame”, has since been involved in bank stress tests in Spain last year and Slovenia this year.
To do this you need a certain degree of intellectual flexibility as Oliver Wyman pointed out.
Today one sees that differently.
Here is the scenario deployed by the Bank of England. From its Governor Mark Carney.
The economic scenario in the 2017 stress test is more severe than the deep recession that followed
the global financial crisis. Vulnerabilities in the global economy trigger a 2.4% fall in world GDP
and a 4.7% fall in UK GDP.
In the stress scenario, there is a sudden reduction in investor appetite for UK assets and sterling
falls sharply, as vulnerabilities associated with the UK’s large current account deficit crystallise.
Bank Rate rises sharply to 4.0% and unemployment more than doubles to 9.5%. UK residential
and commercial real estate prices fall by 33% and 40%, respectively.
Everybody at the Bank of England must have required a cup of calming chamomile tea or perhaps something stronger at the thought of all the hard won property “gains” being eroded. But what did this do to the banks? From the Financial Times.
In the BoE exercise, RBS’s capital ratio fell to a low point of 7 per cent – below its 7.4 per cent minimum “systemic reference point”, while Barclays’ capital ratio fell to a low point of 7.4 per cent – below its 7.9 per cent minimum requirement.
Regular readers will not be surprised to see issues at the still accident prone RBS which always appears to be a year away from improvement. Those who have followed the retrenchment of Barclays such as its retreat from Africa will not be shocked either. Students will also be hoping that falling below the minimum requirement will be graded as a pass by their examiners!
One move the Bank of England has made is this.
The FPC is raising the UK countercyclical capital buffer rate from 0.5% to 1%, with binding effect from
28 November 2018. This will establish a system-wide UK countercyclical capital buffer of £11.4 billion.
This sounds grand and may be reported by some as such but it is in reality only a type of bureaucratic paper shuffling as the banks already had the capital so reality is unchanged. Oh and we cannot move on without noting the appearance of the central bankers favourite word in this area.
Given the tripling of its capital base and marked improvement in funding profiles over the past
decade, the UK banking system is resilient to the potential risks associated with a disorderly
We see the UK establishment in full cry. No I do not mean the royal marriage as that is not until next year. But we do see on what might be considered “a good day to bury bad news” with the bank stress tests occupying reporters time this from the Financial Conduct Authority.
The independent review found that there had been widespread inappropriate treatment of SME customers by RBS…….The independent review found that some elements of this inappropriate treatment of customers should also be considered systematic
We may end up wondering how independent the review is as we note it has only taken ten years to come to fruition! People who were bankrupted have suffered immensely in that dilatory time frame. Next on the establishment deployment came as I switched on the television earlier whilst doing some knee rehab to see the ex-wife of a cabinet minister Vicky Pryce expounding on the bank stress tests on BBC Breakfast. If only all convicted criminals saw such open-mindedness.
If we return to Andy Haldane then he deserves a little sympathy on the personal level after all it must be grim doing a tour of the UK when the purpose has long gone. It is revealing that his list of supporters has thinned out considerably although most have done so quietly rather than taking the mea culpa road. At what point will the criteria for success or failure that would be applied to you or I be applied to the Chief Economist at the Bank of England?