22nd May 2012
Regular readers will be aware that over the period of the credit crunch I have been very critical of the role of the Bank of England and in particular the role of its Monetary Policy Committee. They have made many policy errors in my view and have also misrepresented both events and language in various failed attempts to defend themselves. We have seen the meanings of words like “temporary” perverted in its attempts to explain why yet again inflation is above target whereas in reality Governor Mervyn King ended up writing nine letters in a row to the Chancellor of the Exchequer to explain why inflation is more than 1% over its official 2% target. As he only has to write the letters quarterly that represents a substantial period of excess inflation.
There is to be a review of Bank of England policy
This was announced on the Bank of England website yesterday:
The Court of the Bank of England has today commissioned a set of three reviews into areas of the Bank’s performance and current capabilities in order to learn lessons and to ensure the Bank is best equipped to carry out its responsibilities in the future. All three reviews will be led by independent, internationally respected, experts.
The reviews will cover:
- The provision of Emergency Liquidity Assistance in 2008/9.
- The Bank’s framework for providing liquidity to the banking system as a whole.
- The Monetary Policy Committee’s forecasting capability.They will be led by Ian Plenderleith, Bill Winters and David Stockton respectively. They will begin immediately, and their conclusions will be presented to Court in October 2012
Independent Internationally Respected Experts?
If we start with Ian Plenderleith we see a man who worked at the Bank of England for 36 years and was on the Monetary Policy Committee from 1997 to 2003 so he looks more like a “lifer” than someone independent! Next up is the ex-Chief Executive Officer of JP Morgan in London Bill Winters and his old employer (have they been up to anything?) may be sending a little chill down your spine. He was also on the Vickers Report which kicked any reform of UK banking as far forwards as 2019 i.e hoping it will have been forgotten by then! And finally we have Bill Stockton who was at the US Federal Reserve for 30 years and from 2000 to 2011 was its Chief Economist so another central banking insider and indeed “lifer”. Indeed the site which advertises his speeches tells us that he "participated in the policymaking process in the United States."
Over that period which if you think about it………
So we already see a Committee which looks set to come to the “right” conclusion on the three issues named. Indeed I am reminded of Sir Humphrey Appleby’s view on people suited in his opinion to being on such reviews/enquiries:
You appoint one who doesn’t need to be influenced
Seems like the job has already been done to me.
What about the matters to be investigated?
The three matters themselves are sound but there are serious matters which are missing and in my view right at the top of the list should be the Bank of England’s consistent failure to get anywhere near hitting its inflation target. It has had better news this morning on annual CPI inflation but a 3% it is still 1% over its target when we are officially in recession and output is still around 4% below pre-credit crunch levels. If you had punched our current economic data into a model it would have predicted much lower inflation so something (or of course more than one thing…) changed and one of the biggest criticisms that I have of the Monetary Policy Committee is that it did not adapt to this.
Another matter for review should be the policy of Quantitaive Easing. As it is currently in hiatus some may forget that some £325 billion was spent on buying UK government bonds and there should be a review into what good it has done. And it is rarely reported that this is a very long-term policy as we purchased over £4 billion of our longest-dated conventional bond which matures in 2060. So there is plenty of time to debate and rue this decision. Of course as supporters of QE have recently reverted to using the word counter-factual as their argument (everything would be worse otherwise…) they may be afraid of the abuse they would get for what the £325 billion they have spent has achieved. Particularly when I point out that there is no evidence anywhere in the world from the increasing number of places it has been tried in of it working!
Also missing is the pre-credit crunch period where some proponents, like me for example, were arguing that we needed to lean against the wind and deal with our house price boom and bubble. If we had reduced the scale of the boom we would now be suffering from less of a bust. There are two sides to this the rate cut in 2005 to 4.5% in what was a building boom and on the other side of the coin in 2007/08 when tight post Lehman Bros crisis forced actual interest-rates up to 7% whilst the Bank of England twiddled its fingers and sat on its hands. Its main policy response did not begin until the 8th of October 2008 when it cut base rates by 0.5% to 4.5% and spent the next few months in a panic cutting the base rate to 0.5%. My argument is that when you move interest-rates is often as important as by how much.
In addition we see that there is to be no review into the situation at Northern Rock in the run-up to its failure and collapse. A fundamental role of a cemtral bank is to provide liquidity in such a situation and if we recall the queues at Northern Rock branches at the time the Bank of England was again off the pace.
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