The Deputy Governor apologises for one of their many errors

I suppose it is progress of sorts that the Bank of England now admits it got it wrong in 2003-6, when it allowed excess to build up in the banking system by keeping interest rates too low.

When will they also admit they got it wrong in 2006-7, when they kept interest rates too high, bringing the pack of cards tumbling down?

And when will they admit they are still getting it wrong, pushing huge quantities of money at ever lower interest rates into a system which is still broken, but which one day may ignite inflation again?

I would be far happier if they confessed to current sins than long gone ones. It is difficult to fathom how bad they can be and can remain, when they seem to get every important call about banks and markets wrong. If this were a private sector business the management would have been changed a long time ago. When are they planning to hit any of their targets and forecasts for the economy?

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9 Comments

  1. mikestallard
    Posted December 22, 2008 at 5:32 pm | Permalink

    Bringing the Police into “the people’s Party” has proved a disaster.
    Bringing the banking system into “the People’s Bank” run by apparatchiks is proving even more disastrous because everything has to be done to promote the political image of the People’s Party.
    Truth went out of the window a long time ago, as did common sense.
    And how typical of Gordon Brown and his toadies to repeat ad nauseam the downright lie that their most important act was ‘to free up the Bank of England”.

  2. Brian Tomkinson
    Posted December 22, 2008 at 6:24 pm | Permalink

    Wasn’t Sir John Gieve the Permanent Secretary of the Home Office from 2001 to 2005 and after he had left, didn’t the UK National Audit Office publish a report, Home Office: 2004-05 Resource Account, which was highly critical of the Home Office’s accounts during the period of Gieve’s tenure?
    Also, didn’t the head of the National Audit Office report to Parliament that the Home Office had not maintained proper financial books and records for the financial year ending 31 March 2005 and conclude that, because the Home Office failed to deliver its accounts for audit by the statutory timetable, and because of the fundamental nature of the problems encountered, he could not reach an opinion on the truth and fairness of the Home Office’s accounts? Wasn’t the same Sir John Gieve heavily criticised by the Treasury Select Committee over his role in the events that led to the collapse of Northern Rock?
    Given this background it is not surprising that he admits that he did not foresee the financial problems the country faces.
    Just why was Sir John Gieve ever appointed Deputy Governor of the Bank of England?

  3. Alan Wheatley
    Posted December 22, 2008 at 8:02 pm | Permalink

    If you accept that it is sensible that inflation should be kept within bounds, then it follows that a method should be used to keep it there. What I have never understood is why interest rates should be the sole control. For that to be an effective method it surely follows that the sole diver for inflation is interest rates, and that seems highly implausible.

    Further, interest rates have effects beyond inflation, so even if the interest rate is correct for controlling inflation there is the danger that it is wrong for other aspects of the economy. When this very point became a hot political topic a few years ago Gordon Brown, rather than advocating the justification for his policy, hid in the shadows and sent Eddy George to the North to answer the restless natives.

    So how do you determine what is the correct interest rate?

    And who should have the responsibility for setting it?

    • Stuart Fairney
      Posted December 23, 2008 at 7:11 am | Permalink

      Why do you assume someone should “set it” It is absurd to imagine the government regulate the price of bread, why do you expect them to be able to “set” the “correct” price of money.

      Why bother with a central bank interest rate committee at all? Why not simply let thousands of transactions set the price of money as we do with more or less everything else?

      This is not as revolutionary as it sounds, think about it. Everywhere the government regulates a price, there is lobbying, rent-seeking, complaint and political pressure of all kinds. If the price is set too low, the good disappears, if too high, it is denied to those who would otherwise purchase it and ultimately less is produced, again denying the supply. We are seeing this now with interest rates. The MPC makes up a figure which crushes the pound internationally, yet has little impact because of the gap between it and LIBOR.

      Really, Mr Brown is not smarter than you, not does he know the price you would pay for money in your unique circumstances. Don’t let him.

      • Alan Wheatley
        Posted December 23, 2008 at 11:40 am | Permalink

        My points were to question the merits of the Bank of England interest rate as the sole means of controlling inflation and the impact of the rate beyond inflation.

        Are not banks and building societies able to set as they see fit their interest rates for borrowers and lenders?

        If the bank of England is to have an interest rate, then there has to be a method for setting it. A method that is driven solely by the requirement to control inflation seems to me suspect as it is based on a dubious premise.

  4. Man in a Shed
    Posted December 22, 2008 at 9:24 pm | Permalink

    I assume this isn’t just the Bank of England’s fault.

    The Treasury must have people monitoring the economy and identifying risk factors and possible scenarios. If so they are at least as guilty, if not more so.

    I am old enough to remember the days when if a department lead us to a national calamity the relevant minister resigned.

    Surely the responsible minister has been Gordon Brown and he must in honour resign ?

  5. Patrick
    Posted December 23, 2008 at 1:55 am | Permalink

    John,

    Off topic – but I would like to say I have enjoyed your postings very much this year. A breath of fresh air and common sense in a political world that seems incapable of facing facts and acting for the public good rather than party political advantage.

    Have a Happy Christmas and a Merry New Year.

    Reply: Thanks – positive feed back is especially welcome!

  6. Graeme Stewart
    Posted December 23, 2008 at 11:14 am | Permalink

    Isn’t the fundemental problem with BOE and intrest rates that they ahave been instructed, by law, to control only inflation? They could not use them to control bank lending unless they could somehow tie thieminto inflation. The root cause is the tri-partite system set up Brown, the architect of the whole mess.

    I would like to add my thanks for your postings this year. Clear headed and logical, they cut through the infantile rubbish we get from most of the MSM.
    Redwood for Chancellor or at least Chief Secretary to the Treasury.

  7. Sava Zxivanovich
    Posted December 30, 2008 at 9:27 pm | Permalink

    Reason for the bubble starting in 2003rd was a change from RPIX to CPI (doesn’t include housing costs) with deliberate underestimation of inflation caused by house price bubbles.

    Underestimation was huge. RPIX target was 2.5%, but was then 3.3% measured by RPIX. CPI’s target was nicely put at 2% as it was. Housing price effect on inflation was 1.3%, but was estimated that it contributes only 0.5% in a long term.

    They were right, they helped building pyramidal structure in which state took easy money for nothing (stamp duty) and banks’ employees took huge bonuses, but the bill is picked up by tax-payer and people on SVR’s as they can’t move to another bank unless day pay a ransom (new huge deposit) to a bank that was involved in pyramidal scheme to start with!

  • 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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