That’s no independent Bank

First, Gordon Brown smashed the Bank of England’s ability to understand the money markets by removing their duty to regulate the day to day activities of the commercial banks, and by removing their task of raising the public debt.

Second, he set up a so called independent Monetary Policy Committee. Every member of it was either appointed by the Chancellor, or by someone appointed by him. We have not been told how they were selected, and why some were renewed and some were not. The Committee was given an easier target to hit in December 2003 at a time when they should have been putting interest rates up. They were effectively told to cut rates recently as part of a concerted international move, one day before they had undertaken their normal review of the economy to make a decision. Yesterday the Chancellor effectively instructed them to cut rates again, whilst intoning that they were still independent!

What he should do instead is write a new letter to the Governor. It should say:

Dear Governor,

I realise the conduct of money and banking policy has gone badly wrong in recent years. On reflection, I think the Bank does need to regulate the commercial banks and to handle government debt issue, so it is hands on in the money markets as it used to be. I therefore intend to restore these powers as soon as possible. I believe Parliament will welcome this move. It was clear that in the good days the Bank did not see enough of the business to realise that the commercial banks were too liquid, and from August 2007 the Bank did not appreciate how starved of money markets had become. We need a strong Bank which is close to the needs and misdeeds of commercial banks, so that it can correct and adjust more rapidly.

I would like to continue with a more independent Monetary Policy Committee. This will require a more independent approach to appointments and renewals. I am considering giving the Treasury Select Committee of the Commons a role in this process. However, recent events have also shown that there is merit in the US system where the Fed has a clear duty to consider output levels as well as inflation, and where it is required to work in a way which is compatible with the Administration’s policy. Clearly it is not desirable if the government is using fiscal policy to expand the economy if the Bank is using interest rate policy to do the opposite. On the other hand if any government is seeking to pursue too reckless a fiscal policy then the Bank should be able to signal its concern. I will be consulting interested parties on how we can get this balance right. I have no wish to stifle the views of a genuinely independent MPC, but there may be occasions as when we agreed emergency rate cuts with other countries where the government does have to override. This should always be done in a transparent way, with reasons being given for the use of the reserve power.

It is perhaps too early to go into who is to blame for the sharp move from excess credit to credit crunch, as we need to manage the situation day by day at the moment. However, I do hope the MPC is asking itself how it came to set rates that were too low for too long, leading to inflation rising to 150% above the target rate. I also hope it will ask itself urgently whether rates are now too high for the deflationary situation we find ourselves in.

For my part I do accept the public sector cannot spend our way out of this recession given the state of the national finances. I fully understand that if we seek to borrow too much the strain will be taken on sterling and the longer term rate of interest. These market pressures will constrain me in my judgements about spending.

Yours etc

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5 Comments

  1. Pete Chown
    Posted October 30, 2008 at 12:12 pm | Permalink

    “However, recent events have also shown that there is merit in the US system where the Fed has a clear duty to consider output levels as well as inflation …”

    You can certainly “consider” output levels as well as inflation, but of course you can’t control both at once. There is no reason why the right interest rate for inflation should be the right interest rate for growth. If you were asked to consider both growth and inflation, a compromise is the best you could hope for.

    How do you think this compromise would work in actual numbers? Would you want to see inflation staying around 5%, for example, or should it be allowed to go even higher to keep the economy growing? Do you think you could do this without a sterling crisis and a large rise in government borrowing costs?

  2. adam
    Posted October 30, 2008 at 4:03 pm | Permalink

    I heard on the news yesterday in a very minor piece that the chancellor had or is thinking of, i forget which, telling the BofE it is no longer obliged to meet the inflation target.

    I feel this is big news. The policy to tackle inflation was always going to fail with non monetary driven inflation. Oil prices drove consumers goods and bills up, the banks only response was raising interest rates.

    So low income families were hit with higher bills and more expensive goods and then on top of that those on variable mortgages or renewing fixed rates faced higher payments

    The goverment has failed the very people they would claim to represent. Darling is admitting that.

  3. mikestallard
    Posted October 30, 2008 at 6:56 pm | Permalink

    Under Ken Clarke, I had the impression that the Bank of England was in charge of the money system. With a quiet word here and there in the right places, catastrophe could usually be averted by the all important Governor. Now there is the FSA, the MPC, even the Chancellor all sort of interfering and when there is a huge problem looming, it is always the other person's fault.
    Why this happened – EU advice? Bureaucratic thinking? Gordon Brown's obvious love of the complicated? – historians will, no doubt discuss.
    The other problem is trust – something which I do not think the Labour Party understands. Financial professionals in this country have a fine record. They have been at it for years, too. But by portraying them as bonus eaters and fat cats out for a swindle, this trust has been undermined.
    Hence – all power to the Government!
    What a shame that they are in no way worthy of it.

  4. matt
    Posted October 30, 2008 at 8:41 pm | Permalink

    The world's central banks are operating in concert. It is global centralized economic planning……aka communism.

    By fixing the cost of borrowing, independent from market conditions, they are micromanaging national economies, or rather they are resource allocators.

    The cost of borrowing was kept way too low in Britain and America for several years by basing inflation statistics on the CPI, a totally useless inflation yardstick as it takes no account of money supply.

    The Federal Reserve and the Bank of England, with the full connaivance of the Bush and Blair/Brown adminstrations have allowed the mother of all credit bubbles to develop.

    Now they have contracted the money supply and are British and American people are going to be asset stripped.

    It's a crime worthy of revolution but most people don't realize they've been totally conned.

  5. Adrian Peirson
    Posted October 30, 2008 at 10:53 pm | Permalink

    When they have forced us into reposession, we can then be Greatfull to our Govt that they will decide thiat we can keep our once Private houses and instead, we and our children can pay the state rent Forever.
    This is all deliberate. These events were predicted over two yrs ago.

    Welcome to Gulag Britain.
    http://www.order-order.com/2008/10/renegade-econo

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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