Who will protect us from this central bank?

The Governor of the Bank of England today becomes a politician. We are told in advance of his audience hearing that he will offer to protect the public from the banks. That is not what I want to hear.

The Governor is the senior unelected official in economic policy. He and his institution are responsible for interest rates and the rate of inflation. He should read the cycle well, and report and defend his actions on monetary policy as required. He should also act in private as an honest and fearless adviser to the Chancellor, the senior elected official, who has overall responsibility for economic policy, and who has the power to change the Bank and its functions.

I want to hear today from the Governor answers to the following questions:

1. Why did the Bank so misread the cycle 2005-9? Why did it encourage or allow dramatic overheating, when the smell of scorching was powerful enough for outsiders to notice it? Why did the Bank then lurch to freeze the monetary and banking system, so we had many banks in trouble? Why couldn’t the bank feel the icy blast in 2007-8 which brought down Northern Rock and undermined others? Why did they ignore the strong advice some of us gave to ease money markets earlier to avoid the worst of the crash?

2. Why is inflation still at 4.7% (RPI) and 3.1% CPI when the target rate is 2% on the CPI? Why has it been persistently above target for so many months? Why have Bank of England forecasts of inflation been too optimistic?

3. How can we have confidence that the Bank is now reading the cycle better? Does the Governor think now is a good time to demand more cash, capital and caution from the banks? Could it be that the economy still needs a more generous approach to money and bank credit to help it out of the deep hole recent policy forced it into?

4. Why does the Governor think sovereign debt is a risk free asset class for banks to hold, and why do the authorities now demand that banks hold so much more sovereign debt? Could this store up trouble for the future, especially where banks buy sovereign debt in Euroland countries with poor balance sheets?

The Bank of England wrongly advised a previous Conservative government to go into the Exchange Rate Mechanism, which did damage to jobs, prosperity and enterprise. The Bank of England set wrong interest rates in the boom and in the early bust 2005-9, making the task of the last Labour government that much more difficult.

The new government trusts the Bank and is giving it large new powers. The Bank and the Bank alone now can lead and regulate the banks and the monetary system. We need a full statement from the Governor on how he and his colleagues will carry out these new responsibilities. We need to know they have learned from past errors. Grandstanding at the expense of the banks he is regulating is not a good idea.

We need to believe the Bank will this time listen to their criticis, instead of drawing on a narow group of economists who all agree they are right and end up with a slump and 5% inflation at the same time.

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28 Comments

  1. Nick
    Posted September 15, 2010 at 9:57 am | Permalink

    And nothing about systemic risk

  2. Richard1
    Posted September 15, 2010 at 10:19 am | Permalink

    You should send an email to Bob Crow and suggest that a more intelligent reaction to Mr King's speech than a walk out would be for him to remain for it and ask to these questions.

    People should be forgiven the follies of youth but let's rememeber than Mr King was one of the infamous 364 economists who so misjudged the likely effects of Conservative policy in the 1980s.

  3. Martin C
    Posted September 15, 2010 at 10:54 am | Permalink

    Wholly agree. And it's worth pointing out (H/T Guido Fawkes, see http://order-order.com/2009/03/31/bank-of-england… ) that the 2bn BoE pension fund is invested in a manner that assumes high inflation is on the way, i.e. index-linked gilts.
    Therefore, the inescapable conclusion is that all this talk about deflation is simply lies in order to create the excuse for more QE, i.e. printing money to stoke inflation and so reduce the debt. Anyone dependent on savings or a fixed annuity pension is going to get shafted. The public sector will be Ok, their pay and pensions are index linked.

  4. Brian Tomkinson
    Posted September 15, 2010 at 11:06 am | Permalink

    Given the BoE's record, particularly under Mervyn King's stewardship, I never understood why the Conservative Party wanted to entrust it, without reform, with even more powers. As for your very pertinent questions, you don't really expect him to answer them in a speech to the TUC where he thinks the banks can be safely used as whipping-boys. You will have to use your position as a Member of Parliament to ascertain the answers.

  5. waramess
    Posted September 15, 2010 at 11:38 am | Permalink

    The main question must perhaps be addressed to this government: why is this man, who has presided over an institution that gave such bad advice to the previous government, who has presided over so many dismal and incorrect forcasts and who made such a complete hash over the '07 banking crisis still advising this government and still in his job?

  6. Ian Jones
    Posted September 15, 2010 at 11:40 am | Permalink

    It amazes me how the Bank of England has escaped blame for the crisis when its policies (along with the fed) were to blame for losing control of the money supply. Their sole job is to keep inflation at 2% but have failed miserably simply for the fact they have taken it upon themselves to include other measures in their target and they follow failed Keynesian policies.

    The output gap is no different from the theory of the Phillips curve, it does not exist. Inflation will rise from here as global inflation rises alongside domestic, the imported deflation from 2000 to 2007 has gone.

    We need a new Bank of England governor.

    • StevenL
      Posted September 15, 2010 at 3:25 pm | Permalink

      I think you'll still see deflation on consumer goods due to increasing productivity, new technology etc.

      Maybe 2000 – 2007 was when we had all the inflation? Oil prices rose from $10-20 / barrel to $70-90 / barrel. Gold prices rose from $200 / oz to $800 / oz. House prices doubled, trebled or even quadrupled in some places.

      Maybe we've just had all the inflation and we didn't notice as we were too busy eyeing up bargain Chinese goods in Tesco and selling our houses to each other?

    • Lola
      Posted September 16, 2010 at 11:39 am | Permalink

      This stems from a confusion as to what exactly inflation is. Inflation is the destruction of the value of money, for example by its overproduction. Changes in the prices level are a result of inflation, not its cause. Deflation is the opposite. Furthermore capitalism delivers more for less every day and so prices will always fall under capitalism. Or you will get better products for the same price. Cars and computers are two supreme examples of this perennial success.

      The B o E is stuck in the past self serving Keynesianistic folly in league with deceitful and theiving politicians.

  7. Mark
    Posted September 15, 2010 at 12:34 pm | Permalink

    I'm going to agree with most of this. I would add:

    1) Although the low interest rates of the earlier parts of the decade were under a previous Governor, they surely set the scene for the credit explosion that only saw a brief pause in 2005: that makes the later folly even worse, ignoring Eddie George's warning that it would need to be compensated by tighter policy.

    2) Inflation has been ignored, but we need to be careful that we don't see another switch to a measure that flatters the underlying realities.

    3/4) I note that the central banks of the UK, along with the US wanted 10%+ tier 1 capital ratios at the Basle III meeting, along with the idea that government debt should count as reserve assets. Was this motivated by seeking to crowd out private lending by statutory lending to governments, as has already happened with pension schemes? Does he not recognise that UK banks' balance sheets are flattered by lack of provisions against likely mortgage losses, but that the large excess of tier 1 capital that most of them have over the future 7% Basle criterion allows plenty of scope for that to be recognised in ways that would allow their businesses to be strengthened by reducing the uncertainty about their true viability that hiding the truth achieves? Does he not recognise that risk weightings that greatly understate the risks in property lending and lending to governments act to discourage deleveraging in those sectors, while maximising deleverage on lending to business and industry?

    Some other questions worth asking include:

    When will he recommend that the true and complete balance sheet of the BoE will be published weekly as it was for 140 years, so that we can have confidence that the financial crisis is truly over?

    How does he see the process of winding down the SLS and CGS – will that be done without needing to replace those schemes with other BoE lending that should appear as part of the National Debt, threatening the Chancellor's fiscal forecasts?

    I read "protecting the public from the banks" as continuation of ZIRP: a policy that actually leaves the public at the mercy of the banks who fail to offer competitive savings rates, and encourages unwise borrowing that will backfire. I fear he seeks to hide the truth of the spreading financial cancer, rather than offering treatment for it.

  8. NickM
    Posted September 15, 2010 at 1:04 pm | Permalink

    The inflation target is 0 – 2%, not 2%. So the BoE's management of inflation is even worse than you say.

  9. Toby Baxendale
    Posted September 15, 2010 at 1:22 pm | Permalink

    John, Steve Baker has just sent this to me, I would add,

    Why do your want the banking system to hold more sovereign debt in the sure knowledge that this will suck out capital from the private sector when it needs most to go and feed an already over bloated state sector?

  10. John Broughton
    Posted September 15, 2010 at 2:45 pm | Permalink

    As Richard1 says Mervyn King has form and bad form at that. Is he a fit person to run the BoE? Not in my opinion.

    • Simon
      Posted September 16, 2010 at 1:06 am | Permalink

      Not only does he look unfit but his latest performance infront of the TUC makes his position look untenable .

      He said sustainable growth was within reach and that they dropped the ball .

      The only conclusion is that he still believes everything was fundamentally sound up until the financial crisis . This is classic spreadsheet syndrome . All he had to do at any time was open his eyes and look at the real world rather than his models but he's still in denial .

      Then he spouts off that the BANKING crisis is the fault of the bankers , politicians etc and not the man in the street . BBC immediately seize on this and mis-report it as Mervyn King says "bankers are responsible for the FINANCIAL crisis" .
      He should have preempted this by making it quite clear that the banking crisis was one of the causes of the current financial crisis but not the only one .

      • Black Raven
        Posted September 16, 2010 at 2:27 pm | Permalink

        He did make quite clear that the "first cause" of the crisis was the glut of Asian savings, the BBC reporting of his words is deliberately misleading! no change there then, its not as if the BBC even pretends to be neutral these days.

  11. Mark
    Posted September 15, 2010 at 3:32 pm | Permalink

    At least Mervyn King has now issued a mea culpa on behalf of himself and Gordon Brown (who could never admit anything) in his speech to the TUC. Now let us have the cold analysis he called for in that speech.

  12. GJWyatt
    Posted September 15, 2010 at 3:42 pm | Permalink

    re NickM: The inflation target is a point, 2%, not a range (0 – 2%). The BoE says "inflation below the target of 2% is judged to be just as bad as inflation above the target".

  13. Steve
    Posted September 15, 2010 at 3:49 pm | Permalink

    Right on the mark, John. I've been saying for many months that Mervyn King is unfit for the Governor's job and should be removed. He and the MPC are making a mockery of George Osborne, the government, and its declared inflation target. His excuses are weak vacillations and have as much reliability as his forecasting tools. How can any sane person expect to know what inflation will do when the BoE has tripled the money supply in just over a year? Nobody in the world has such tools, but King remains in denial about its effects in stoking inflation and depressing Sterling.

    How about a new incentive policy for the BoE and MPC, along the lines of California's once-famous 'three strikes and you're out' crime policy? If the Governor has to write three letters to the Chancellor explaining why he has failed at his job, he should be fired with no compensation and loss of all pension rights. You know, we really need to give public sector workers – which is what King is – an incentive to get it right. Look at what happened to the hapless Tony Hayward at BP – King has wrought financial disaster upon us ten or a hundred times worse than anything BP did. King must go and the whole MPC must be reformed. Get rid of Gordon Brown's doveish placemen for a start and replace them with more people like Mr Sentance who can clearly see the inflationary danger – not a danger that is ahead of us, we are in it right now, and as things stand it will only get worse. Is George Osborne asleep at the helm?

  14. THE ESSEX GIRLS
    Posted September 15, 2010 at 4:05 pm | Permalink

    Does EVERY official aspire to be a matey PR man?
    It was as if this was a new Governor who’d taken up the job sometime in the past few months and had no idea why the banks were allowed to take liberties by lending so much money to each other and the government able to ignore all the signs.
    Part of the difficulty is that the then Shadow Chancellor and Leader made such a fuss in forcing Brown to re-appoint him that it’s now hard for THEM to be hard!

    PUT MR KING'S FEET TO THE FIRE AND MAKE HIM ANSWER JR's QUESTIONS!

  15. Mike Fowle
    Posted September 15, 2010 at 5:40 pm | Permalink

    These are pertinent and penetrating questions. As far as the Bank's record during the last government is concerned I suspect that they were effectively sidelined by you know who. As regards the last sentence, I sometimes think that all economists are good at is explaining why things didn't pan out the way they predicted.

  16. @FelixLiberty
    Posted September 15, 2010 at 10:18 pm | Permalink

    The answer to this is all very simple. Central bankers cannot plan the economy. Having them control interest rates and credit is a disaster. They fail for the same reasons socialism fails. Britain will not succeed with a socialist money supply manipulated by the MPC. We joke about Stalinist planning boards, but the truth is one of the most vital aspects of the entire economy is run by a Stalinist planning board. The recession has shown that independent central banking is an abject failure, like all central planning.

    The solution is the free market.

  17. P Haynes
    Posted September 15, 2010 at 10:46 pm | Permalink

    He should explain:

    1. Why the BoE totally failed to regulate or control the banks – who were after all taking deposits for which the BoE was at risk.

    2. Why under John Major they failed to foresee the obvious economic disaster that was the ERM.

    3. He could perhaps then go on to suggest how he is going to get the banks lending rather than sucking money back from sound businesses as they still actively are.

    If he cannot provide good answers he should go now.

    • nonny mouse
      Posted September 16, 2010 at 8:57 am | Permalink

      >>1. Why the BoE totally failed to regulate or control the banks – who were after all taking deposits for which the BoE was at risk.

      Because Gordon Brown took regulation away from the BOE and created the FSA.

      >>2. Why under John Major they failed to foresee the obvious economic disaster that was the ERM.

      Politicians were responsible for monetary policy up until the BOE was made independant by Gordon Brown. Any advice should have been given privately to the then Chancellor.

      >>3. He could perhaps then go on to suggest how he is going to get the banks lending rather than sucking money back from sound businesses as they still actively are.

      Someone correct me if I'm wrong, but the BOE is now responsible for the stability and health of the banking system, not making them lend. Nobody sets bank lending targets except for the banks under the current regime. The BOE only steps in if it thinks they are at risk of failing by lending too much.

    • waramess
      Posted September 16, 2010 at 10:53 am | Permalink

      I don't think that anyone should want Mr Kings explanation for anything: he has already got it wrong on far too many occasions.

  18. Lindsay McDougall
    Posted September 15, 2010 at 11:07 pm | Permalink

    Searching questions and a lot of good sense. However, I am curious. Does David Cameron read your Blogs? Does Nick Clegg? Does George Osborne? I am also curious about this parliament now that we are in office, what works and what doesn't. You have enough strong arguements here to mount a major attack on the Governor and the MPC in the Commons, and to demand their removal.

  19. simon_555
    Posted September 15, 2010 at 11:14 pm | Permalink

    I think it's clear the plan is to pretend inflation is temporary and keep interest rates at 0.5% for several years to come whilst inflating away debt. Only a matter of time now before they print even more money.

    I honestly thought this nonsense would end with the demise of New Labour, but sadly not. It's time to start educating kids about the perils of saving and being sensible with money instead of encouraging it.

  20. FrankC
    Posted September 16, 2010 at 1:04 am | Permalink

    I figure the Governor of the BoE should be a grumpy pessimist, tickling the base interest rate now up a quarter, now down a quarter. When chancy Chancellors say "sell gold" should havereplied "P.off. Not at these prices."

  21. FaustiesBlog
    Posted September 17, 2010 at 5:31 am | Permalink

    Why did the BoE not see the crash coming?

    Because:

    1) it makes money from crashes (it is, after all, a private bank);
    2) it does not adhere to Austrian Economics.

    I hope you will be supporting Douglas Carswell's bill in November, which seeks to control the banking system.

  22. Sabine McNeill
    Posted September 17, 2010 at 8:19 pm | Permalink

    Very good questions, dear Mr Redwood MP!!!

    However, it seems that everybody believes by now that "money" can ONLY be created as "credit", i.e. by banks and central banks. Central banks do it with more largesse, in grander style, as sovereign debts.

    But the Treasury does it much better: "money" as "cash", free of interest! Why has it sold its soul to Westminster and the Royal Mint to shareholders?

    Printing notes and minting coins has only acquired a bad image because the banks painted it. For they want control: over "money" as Credit, created from thin air and "sold" at interest.

    The writers of the Bank of England Act 1694 knew that "serious oppression" could result, if the Bank were to trade. See http://edm1297.info

    Maybe it's time to address this serious oppression by looking at the ratio between Cash and Credit in the money supply? See http://bit.ly/3U6jCc

    More on http://publicdebts.org.uk

    With best wishes for your questioning elbows,
    Sabine
    Organiser, Forum for Stable Currencies http://forumforstablecurrencies.info

  • 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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