The Bank has agreed to review its approach to the Boom and Bust of 2005-12

 

              Reluctantly and later than the other main participants the Bank of England has agreed to a review of its conduct during the recent banking crisis, Credit Crunch and recession. There is plenty of material for it to sift through, and plenty of issues for it to handle.

                I will be setting out some of the questions, and looking at some of the answers over the next few days. I see the Boom-bust cycle of the last few years as primarily a crisis in Central Banking. It was a crisis brought on by regulators who allowed excess credit and money in the system up to 2007. It was a crisis made far worse by the sudden lurch to very restrictive money and credit policies in 2007-8. It is a recession that has taken a long time to reverse thanks to tough pro cyclical banking policies after the  crash.

                The official enquiry will want to know why the Bank’s Monetary Policy Committee proved so bad at forecasting inflation, let alone at controlling it. It will want to know to what extent the Bank thinks it has some wider role in maintaining output and activity, and why it was unable to do this in 2008.  I hope it will examine the popular view that the whole crash was the fault of the commercial banks, aided by “light touch” regulation.  It should go on to ask why the economy is not now performing well given that presumably we now have “heavy touch” regulation. It will need to review the impact of taking away powers to regulate banks from the Bank of England in 1997, and how the tripartite system of Chancellor, FSA and Bank tried to work together during the crisis.

                The UK was not alone in putting its economy through a boom/bust cycle of unusual  violence. The US and the Euro areas authorities also did something similar, though there were important differences in how they responded to the worst of the crisis, and how they handled the problem of banking weakness in their jurisidictions.

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31 Comments

  1. Kevin Ronald Lohse
    Posted May 25, 2012 at 5:26 am | Permalink

    I thought that the problem with the tripartite system was that it was deliberately set up by a Chancellor to allow him to oversee the functions of Treasury, BoE and FSA by controlling information access so that only he knew the full picture. Could it be that some of the questions worth asking would be about information flows between the 3 institutions?

  2. norman
    Posted May 25, 2012 at 5:53 am | Permalink

    I realise we’ve long since waved goodbye to the boom but hadn’t realised we’d entered the bust phase yet. I’ve been under the impression all the nonsense we’ve been through the last few years was designed to hold reality at bay and the real bust is yet to happen.

    Good to know. Probably should print some money to celebrate, a hundred billion seems a not unreasonable sum.

    • Gary
      Posted May 25, 2012 at 8:49 am | Permalink

      Right Norman. We have not had the bust. They will not allow the banking system to be restructured. Creditors are in the elite. So, instead we are on the road to Japan style slow motion decay for decades. Except , Japan had surpluses, savings and industry when they started their decay. Now 222 years later they have debt of around 500% of GDP and still no recovery in sight. We don’t have surplus, savings or much productive industry. We are STARTING with the largest total debt in the developed world. And yet the ratings agencies give us AAA, just like they gave Enron and the banks earlier last decade….

      • Gary
        Posted May 25, 2012 at 8:50 am | Permalink

        make that “22 years”. Not even japan had 222 years of bust !

    • Sally C.
      Posted May 25, 2012 at 12:33 pm | Permalink

      Absolutely right. We, the sensible people, know that we are currently living in a wonderland created by the B of E to stop all those indebted householders and companies from falling off a cliff.
      People who comment here, are thinking not just about their own welfare, but the welfare of the nation. That is probably not true of most people. They just want a government that will make life easy for them. We only have to look across the channel to see how that plays out.
      So, the choice we are left with is a) the party that at least knows they are complicit in letting us continue to live in this wonderland of record low interest rates – where we party on the edge of a rather large abyss (while they make small efforts to fill in the hole) or b) the party that thinks that the wonderland we are currently living in is in fact normality and wants to persuade us that we can continue making the hole a lot bigger – à la Francois Hollande, Ed’s new best mate.
      JR – People will up with quite a lot as long as we don’t see Conservative politicians splashing the cash along the lines of Sarkozy. I am dreading seeing a headline exposing some Conservative MP’s excessive consumption.

  3. Mick Anderson
    Posted May 25, 2012 at 6:06 am | Permalink

    Some of the blame must also lie with the profligate politicians. They were both setting the tone of buy now pay later, and sucking vast sums of tax from the private sector to fund their largess.

    If Mr Brown had not been “investing” so enthusiastically, people and businesses would have had more of their own hard-earned money left, and would not have taken on so much debt. Nor should he have been allowed to believe that he had “ended boom and bust”.

    You would have thought that Mr Osborne would at least try to learn from recent history, and reduce spending….

  4. Gary
    Posted May 25, 2012 at 6:07 am | Permalink

    You cannot centrally plan an economy. It is impossible. The best speculators in the world, staking their own money , cannot be correct more than about 60% of the time. A general bank is far less nimble and their policies are a sitting duck for arbitrage. Eg. Front running QE is child’s play to the banks.

    The central banks are even now making a far bigger mistake than they made previously. They have caused massive govt bond price inflation. This is not measured in their basket. When that bubble bursts there will almost certainly be an instant hyperinflation. The central bank socializes risk. It mis prices money. It is a central planning cartel. Free markets cannot operate with this quango.

    Get rid of the central bank. You cannot reform it.

    • Mike Stallard
      Posted May 25, 2012 at 6:51 am | Permalink

      Do you mean the ECB or the Bank of England?

  5. lifelogic
    Posted May 25, 2012 at 6:17 am | Permalink

    Exactly, hugely incompetent regulation and incompetent bank rescues. Moving from too loose to far too tight now. It was hugely destructive. Why can the government, at least, not fix the banks they own so they are functional again.

    Did anyone ever take any blame in the state sector – or loose their bonus as private industry collapsed all around.

    • Bazman
      Posted May 25, 2012 at 8:56 pm | Permalink

      Regulation? How is this going to help banking or growth? Smells like socialism. Absurd and pointless. Everyone will just find a way around. What has the government got to do with banking? JUST GET OUT OF THE WAY!

  6. Mike Stallard
    Posted May 25, 2012 at 6:47 am | Permalink

    Perception is so important in politics – as Mr Blair, one of the most successful managers of elections, proved.

    The general perception is now that the crash, which Mr Brown so cleverly managed, was all the fault of the Greedy Bankers and they ought to be given a BankerSpanking like on Deal or No Deal. Sir Fred is the worst offender, of course.

    Wasn’t the crash really all about a rapid excess of government borrowing to pay for the burgeoning state coupled with personal borrowing to max on the credit cards? Sooner or later, of course, the bills had to be paid. Now we are still borrowing money in the form of rapidly expanding QE. The banks have drawn in their horns and nobody knows exactly how much they are in debt themselves.

    Gryff Rhys Jones, that hilarious comedian, had an angry rant about this on Question time last night.

    Meanwhile, as you prove above, the government is pretending to deal with the crisis while allowing the debt and deficit to creep up.

    I just cannot understand why the people in power do not just lift the regulations, reduce taxes and stand back to let the machine roar back into life. It is all there ready to go and they are standing on the brakes.

    • Electro-Kevin
      Posted May 25, 2012 at 7:53 am | Permalink

      “Mr Blair, one of the most successful managers of elections…”

      Thank you Mike. For that’s all Mr Blair was – an election manager and self promoter. He always offered jam today and here we are, faced with the consequences. Michael Howard really didn’t stand a chance against such a media-savvy force but there are much worse consequences than this. A mandate has been given for all of the unpopular policies in this country.

      Mr Redwood wonders why voters elected Europhile MPs. It’s because all of them offer jam today.

      The one solace is that the majority of the people of this country – because of their shallowness, greed and stupidity – thoroughly deserve what’s coming.

      • Electro-Kevin
        Posted May 25, 2012 at 7:54 am | Permalink

        I should add that those mandates were given unwittingly.

    • Bob
      Posted May 25, 2012 at 1:37 pm | Permalink

      @Mike Stallard

      “I just cannot understand why the people in power do not just lift the regulations…”

      The question is who is really in power?

      I think U-Turn Dave is taking his orders from a higher power, a power that doesn’t necessarily have the UK’s best interests at heart.

    • uanime5
      Posted May 25, 2012 at 3:58 pm | Permalink

      The crash occurred because American banks convinced people to invest in bad mortgages by making them look like good mortgages. When people couldn’t pay their mortgages and defaulted the whole system crashed.

      Given how many billions of pounds companies are currently hoarding reducing their taxes will just lead to them hoarding more money, not investing more. Lower taxes are also unlikely to increase customer spending because people may spend their money on reducing their debts or save it in case the Government reduces their job security.

      Also less money from tax revenues results in higher short term borrowing, and higher medium and long term borrowing if the economy doesn’t grow enough. So lower taxes make make the situation worse, not better.

      • Bob
        Posted May 26, 2012 at 9:57 am | Permalink

        @uanime5

        “It was Clinton who in pursuit of votes from the poorest (often black) voters in the southern USA arm twisted the banks into lending money on near valueless property to those with neither income, jobs, nor assets. The banks were given in exchange the repeal of the Glass Steagall Act which had enforced the separation of conventional high street banking and the investment banking. The latter rapidly became gambling operations, and the mis-selling on of the valueless trailer park mortgages. That had nothing to do with Reagan, Bush, Thatcher or, to be fair, Blair or Brown.

        It was Blair and Brown who were on watch here as the banking problems began to emerge as a threat and they failed to prevent the contagion spreading here.”

        http://blogs.telegraph.co.uk/news/normantebbit/100159513/david-cameron-is-facing-make-or-break-time/

      • Lindsay McDougall
        Posted May 27, 2012 at 4:54 am | Permalink

        No one is arguing for lower total tax in the short term. That has to follow getting public expendiure down precisely because of the need to reduce government borrowing. Some people are arguing that in certain circumstances reduced tax rates can result in a higher total tax take. Clearly, this argument depends on behaviour modification.

    • libertarian
      Posted May 25, 2012 at 5:56 pm | Permalink

      Agree with most of that Mike, for me though the biggest travesty over this whole political disaster was the setting of interest rates at a suicidely low level thereby encouraging profligate lending and borrowing which in turn caused another property bubble.

      The markets and the markets alone should determine interest rates not politicians

  7. Richard1
    Posted May 25, 2012 at 7:52 am | Permalink

    I find it extraordinary that after a disaster such as we have been through – and are not yet out of – there has not been a root & branch public enquiry into all aspects of the financial crash. Such an enquiry would look at monetary policy, tax & spending policy, as well as the structure and regulation of the banking sector. I hope it might also take into its scope such calamitous errors of policy as Gordon Brown’s sale of 1/2 the nation’s gold at approx 1/6th of the current market price.

  8. Leslie Singleton
    Posted May 25, 2012 at 8:40 am | Permalink

    Taking away the powers of the Bank was an act of typical megalomaniac insanity by Brown . I was in banking in a small way (branches of foreign banks) and well remember the respect and influence the Bank had. I remember in particular that it was true that the Bank just had to raise its eyebrow or invite you round (literally) for a cup of tea (cups and saucers no less) to get across what it wanted and in an effective and non-confrontational way. Even when the Bank wasn’t right (eg on best way to report forward-forward interest on swaps) one still felt that one had to do one’s best to comply, almost as it were for the good of the country. By comparison the FSA was and I suspect still is regarded as a joke.

  9. lojolondon
    Posted May 25, 2012 at 8:54 am | Permalink

    John, this question has to be tackled head-on, it is fundamental to the whole Gordon Brown ‘light touch regulation’ etc., and I am delighted to say I think you are the right man for the job!

    My point is : All commonwealth countries are run on the ‘old’ British system, including their banking regulations and central bank management.

    NOT ONE of the commonwealth countries, except Britain had to bail out their banking sectors – including many countries who have far weaker economies than ours, Australia, New Zealand, India, Pakistan, Sri Lanka, South Africa, Canada are the obvious ones.

    So every country that had (the old British system of) firm financial regulation of their banks was ok after the credit crunch, and the USA and UK were in a dreadful state. By Clinton and Brown respectively. King was totally a part of that and for his Keynesian beliefs and for his support of the ‘364 economists letter to Thatcher’ and for his management of the economy over the last years he should have to answer!

  10. Lindsay McDougall
    Posted May 25, 2012 at 9:33 am | Permalink

    The Governor of the Bank of England is in denial. He is on record as saying that there was no boom, just a bust.

    Wrong! There was a boom and it fed into asset prices, which were not measured by CPI. If you are going control monetary policy by targeting inflation, you have to pick the right measure of inflation, otherwise it doesn’t work. If, between roughly 2001 and 2007, an inflation measure that included house prices had been used, monetary policy would have been tighter and the boom would not have built up to the same extent.

    It simply beggars belief that Gordon Brown and Mervyn King didn’t cotton on to this at the time. To be fair, Merveyn King did issue the odd warning, but he didn’t resign – and that was the only thing that would have shaken Gordon Brown out of his complacency.

    • A Different Simon
      Posted May 26, 2012 at 9:13 am | Permalink

      Look at the misallocation of money that the property bubble has caused and is still causing .

      All it does is ensure householders pay a larger part of their lifetime earnings to the bank as interest . They don’t have enough left over to save or invest .

      People are putting too much money into private pensions . Even 1 penny is too much .

      In October , a large number of people are supposed to be automatically enrolled into the ill conceived NEST pension scheme .

      To illustrate how badly the pensions industry performs , the amount of money paid out of private pension annuities is almost exactly the same as the amount of tax relief claimed on the contributions each year .

      All they are doing is funnelling the tax relief to the pensioners . We might well ask what the heck has happened to the non-tax relief part of the contributions which have been paid in .

      The obvious solution would be to channel the money which would be going into NEST into a national pension fund which would build high quality social housing to eliminate the housing shortage .

      It could also pay for infrastructure like nuclear powerstations and a tidal barrage in the Bristol Channel . Gotta be better than funding nuclear power stations with an elabourate form of PFI . So long as politicians and the city of london don’t have anything to do with it should work .

  11. Mark
    Posted May 25, 2012 at 9:37 am | Permalink

    The first period of poor control was in 2001 when rates were slashed aggressively and kept low thereafter, igniting the property boom. Of course, a large part of the lack of control was also in regulation and monitoring that failed to pick up the extent of home equity withdrawal to finance big ticket spending, and the dubious practices that inflated house prices that became rife at the time. Charts of the stock of lending are perhaps the most revealing.

  12. Paul Danon
    Posted May 25, 2012 at 10:06 am | Permalink

    Could there be evidence that forecasters are told to be optimistic in order to talk-up the markets? They’ve recently been proved wrong about the depth of this second dip. Forecasts shouldn’t be revised but judged for reliability and, as appropriate, folks who make wrong forecasts should be replaced which people who can do it. Forecasts are predictions rather than measurements (which is the way that government and media seem to treat them). It is bizarre that Mervyn King got a knighthood after failing to keep inflation below 2% which (we need to be reminded) is a maximum, not some sort of sales-target.

  13. Lindsay McDougall
    Posted May 25, 2012 at 10:48 am | Permalink

    If you want to get the banking sector healthy again:
    (1) Force full disclosure of all toxic assets held by all UK banks (this would also be useful in Europe but it probably won’t happen).
    (2) Allow failed banks to go out of business or be taken over . No taxpayer money. No regulation.

  14. forthurst
    Posted May 25, 2012 at 11:37 am | Permalink

    “I hope it will examine the popular view that the whole crash was the fault of the commercial banks, aided by “light touch” regulation.”

    A synthetic CDO where the underlying asset class is knowingly missold mortgages is not part of an ‘asset bubble’, it is a fraudulent instrument. Asset bubbles are created by mistaken central banking policies (agreed) which can deflate but not entirly collapse as was the case with much of the ‘asset base’ of the defrauded banks.

    We should not act as host to foreign banks and others unless our regulators accept their responsibility to prosecute all frauds committed on our territory. There has been a stunning silence over a recent case.

  15. Steven Whitfield
    Posted May 25, 2012 at 12:48 pm | Permalink

    I don’t think Mr Redwood is so naive as to believe the BOE is bad at predicting inflation – they know exactly what they are doing – stealing money from every saver (by experimental money printing) to pay for their mad and unaffordable job creation schemes. As they are doing something quite wrong, they wish to try and cover it up so they publish fantasy inflation forecasts.

    Another government minister was on BBC Question time last night peddling the lie that we enjoy low interest rates because the markets are so enamoured by the coalition’s ‘tough spending decisions’. The central plank of the coalitions economic policy is based a grand act of slippery deception.

    The difference between us and Spain is we can print money and hack away at living standards as the Spanish cannot. It’s a shame the minister wasn’t challeneged on this.

  16. Local Tory
    Posted May 25, 2012 at 9:38 pm | Permalink

    Good Evening John, Central Banks did indeed help to boost debt levels. But so did oil money and money from the Far East. I also agree that the Central Banks did not properly monitor debt levels or asset inflation. But the Thatcherites amongst us should note that in reality many aspiring people and companies were all too happy to live beyond their means (egged on by the prudent Chancellor and a socialist government itself looking to spend, and then spend some more even at the top of the cycle) and individuals were happy to make large short term gains at the long term expense of society. In fact the brakes on the credit cycle had begun to be dismantled by politicians in the 1980s on both sides of the Atlantic. This allowed for the possibility in the first place that debt levels could begin to build.

    Market innovation meant that finance had become increasingly specialised and short term. This allowed risky and irresponsible long term debt practices to still give individuals large profits and big bonuses/commissions in the short term. Everybody also thought that the whole system was backed by gold plated assets, but when the credit bubble burst the asset prices fell. Some of the lightly regulated banks were then not sufficiently capitalised or liquid to absorb the shock. So the taxpayer and the BoE had to step in order to support the system of credit provision.

    I agree transparency and accountability at a re-invigorated BoE is to be welcomed and the restoration of the necessary credit cycle safeguards and regulations should be phased in over time. But the real problem is the levels of debt. The necessary de-leveraging, even without new shocks, will take years. The economy may have spare capacity, but the existing system of credit (both the supply and the demand) is arguably close to saturation. The problem was not just with the Central Banks, it was as Alan Greenspan has reflected – human nature.

  17. Derek Emery
    Posted May 29, 2012 at 9:30 am | Permalink

    The boom was not acknowledged as a problem as it was slow long boom. All the political impetus was towards deregulation as the downside risks were seen as negligible. Brown said there would be no return to Tory boom and bust.
    The debt graph looks innocuous up to around 2008 http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/
    Brown’s creation of the tripartite system of regulation guaranteed lack of accountability and response as it fell between three stools.

    What seemed obvious to me as an ordinary member of the public was that we had high growth year in year out but based on nothing real. There was no massive increase in industrial production or anything else that backed the growth.
    It was also completely obvious to me and others that there had to be a massive crash at some stage as the combination of low interest rates and ever easier access to home loans produced a never ending boom in house prices.

    I guess you could have a country that produced nothing and just had a public sector. As long as it had access to infinite debt it could have a massive GDP growth figure year in year out which sounds brilliant as long as you totally ignore the ever rising debt mountain.

    There needs to be measurements used that take account of borrowings as well as GDP growth to be meaningful as measures of performance.

  18. David Langley
    Posted June 1, 2012 at 11:23 am | Permalink

    Why is it that we are so poor when we are not in the Euro, why are we so bust when we have full control over our monetary policies?
    Is it that we do not have full control and that in fact we are either incompetent or subject to EU dictats that preclude us from taking sensible monetary precautions with our Macro financial policies.
    I am very worried about the exposure to EU banking and requirements outlined by recent papers published by the Bruges group. £149B total commitment would break us if called upon, bang goes Britain.

  • 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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