It is possible something important happened last week at the Bank of England. Parliament, of course, has not been told of any change of policy and has held no debate. The media have largely ignored it. The Sunday press did pick some of it up. Some of the change was in the Mansion House speeches of the Chancellor and the Governor, which attracted some brief attention the next day.
I have long supported the government’s stated aim of tight fiscal policy and loose monetary policy to generate a private sector recovery and to bring public and private into better balance. I have also long argued that for the first two years of the Coalition money policy was too tight, and public spending kept on going up, in real terms as well as in cash terms.
Last week the government and the Bank at last acknowledged that money policy had been much tighter than planned. The use of Quantitative easing has meant artifically low interest rates for the public sector, but not for the private sector. It has meant plenty of credit for the government, but not enough for the rest of the economy. Banks have been prevented from lending it on to the private sector by tough banking regulations. I have argued against QE, and in favour of allowing banks to lend more against their current stronger balance sheets, whilst we generate some growth to restart the cycle. I have also argued for more banks, to introduce competition and to have some banks willing and able to lend to individuals and smaller busiensses.
We heard at the Mansion House the Governor and Chancelllor announce two schemes to put some more mmoney into the banks. One was just to lend them more cash as they need it to make sure they are liquid in illiquid times. That is the minimum a Central Bank should do against good security, and is welcome. The second was a scheme to help banks finance new lending for good projects.We still need to see the details of how this will work.
In a way the more important potential change is the one that was not mentioned that night, but which appeared over the week-end. The Bank now thinks commercial banks are being made to hold too much cash and to keep too much in government bonds, and will allow them to use more of this cash. We need to see the details of how they intend this to happen. They will need to change the regulatory requirements. They will need to reassure the banks that the permissions will not be suddenly removed. They also need to reassure taxpayers that proper checks and balances for all these schemes will not leave taxpayers losing money.
It is good news there is some new thinking. We will need to study the detail before being able to decide if the balance is right. It needs to be cooked for Goldilocks. There needs to be enough real relaxation to allow sensible levels of lending to good projects, without overdoing it and leaving bad debts or inflation in the system. I have always thought it is more a question of how the banks are regulated, than a need to inject loads of newly printed money into the banks. There’s plenty of high powered money, but there has been a broken transmission mechanism domestically limiting its impact on activity.