The Bank of England is not independent and has presided over a major banking crash and recession

Spare us the false argument that the Bank has been independent for the last 20 years, and spare us the idea that it has done well over that period.

Gordon Brown’s Treasury clearly influenced the Bank’s approach to interest rates, and on one occasion set it a new inflation target to remind it who was boss. Brown also took powers away from the Bank over banking regulation, making its job of controlling the money supply  and credit more difficult. The background to the banking crash is a turf war between the Bank and the financial regulator.

George Osborne chose the Governor he wanted, who turned out to share Mr Osborne’s view of what would happen were the UK to vote for Leave. The Bank joined the Treasury in making wildly inaccurate forecasts of the short term economic impact of a Leave  vote.

The Bank made two major policy errors. In 2005-7 it failed to limit an excessive build up of credit and money despite warnings from Opposition parties and many commentators. Worse still in 2007-8 it decided to remove too much liquidity and keep rates too high, triggering runs on banks and the collapse of several financial institutions.

It has shown a very unsure touch pre and post the Referendum vote, and is today tightening credit prematurely.

The mistakes the Bank made were significant and were criticised by some commentators at the time.

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41 Comments

  1. Ian Wragg
    Posted September 29, 2017 at 7:18 am | Permalink

    So 10 years later we’re repeating the same scenario
    Huge private debt.
    Out of control government borrowing and a Chancellor who is more interested in derailing Brexit than balancing the economy.
    We never learn.

    • Lifelogic
      Posted September 29, 2017 at 9:11 am | Permalink

      Indeed. Hammond is interested in derailing Brexit and hugely damaging the UK economy with absurdly high (and hugely over complex) taxes, large tax increases, absurd greencrap and vanity projects and attacks on the Gig Economy.

      It can perhaps be summed up by:- Corbyn wants an economy that is about 25% of the current size with the state sector wasting about 80% of GDP like Venezuela. Theresa May wants one that is about 80% of the current size with the state spending (largely wasting) about 60% of GDP (but with women earning exactly the same as men regardless of the job they do and the gig economy killed dead).

      Real Tories on the other hand want to see an economy that is about twice the current size and with the state sector at more like 20% of GDP. With real democracy and independence fully restored to the UK.

      • Lifelogic
        Posted September 29, 2017 at 10:11 am | Permalink

        Wood fires face bon in pollution crackdown by the son of a bus driver.

        So the green loons in governmemt encourage you to buy a wood stove and a diesel car and then they ban them both. Hopefully they will ban burning imported bio fuels in power station as it is economic and environmental lunacy.

    • Hope
      Posted September 29, 2017 at 9:24 am | Permalink

      Hammond borrowing £10 million every hour when the elicit was to be cleared by 2015, Treasury and BoE got every forecast and prediction wrong. BoE very political under Carney, he should be sacked. Melvyn King is spot on the money.

      Today we read May’s speech in Estonia claiming security cooperation will continue whatever happens to Brexit. So she is giving this away free when The EU makes more and more demands. She has already conceded ECJ over EU citizens, free movement to continue and giving away billions for no reason.

      Is this really a negotiation JR? It strikes me the U.K. is in the exact same position as staying in. May needs to walk there is no other choice.

      Guido reports the chumocracsy May was going to stop but continues with Heywoods appointment of the BBC and arch remainer to international trade minister!

  2. Bob
    Posted September 29, 2017 at 7:18 am | Permalink

    “The Bank of England is not independent and has presided over a major banking crash and recession”

    Hammond and Carney should not be allowed to meet in secret to hatch their plans to sabotage Brexit.

  3. Prigger
    Posted September 29, 2017 at 7:19 am | Permalink

    Great minds think alike so do snipperty ones. Therefore, in theory, the Treasury and the Bank of England could be a marriage of hearts. As we say in Yorkshire of such dual mental dizziness “They must be in love!”

  4. Prigger
    Posted September 29, 2017 at 7:26 am | Permalink

    Sorry: snippety. I was kind of writing double-dutch with snipperty

  5. Bert Young
    Posted September 29, 2017 at 7:58 am | Permalink

    I fully agree with Johns’ criticisms of the BoE today ; like him I have always felt that its relationship with the Treasury was a seamless one . As for Carney – well , his record speaks for itself ; he has not shown the independence and capability expected of him . Carney had a respected record before he came to London , since then he has never shown the integrity and leadership that was needed from a leading institution in the world .

    We face a challenge in the coming few years to establish once again a leading and respected place in the world’s economic affairs . The role of the Governor of the BoE is a significant one both as spokesman and regulator of an international banking centre ; if he simply is a lacky to a political figure we will be ridiculed .

  6. too read
    Posted September 29, 2017 at 8:03 am | Permalink

    Ex-Chancellor Osborne made me both laugh and cry when he stated matter-of-factly in Parliament and in Committee that he was preparing for the inevitable cyclical downturn. You can read too many economics books and this was given counter-intuitive resultant manifestation when Brown did his famous ” I’ve saved the world” party trick of throwing more money away from an already empty UK piggy-bank. He was an early pioneer for Corbynomics, a man before his time and made us pay in advance like a carpet company.

  7. formula57
    Posted September 29, 2017 at 8:10 am | Permalink

    “…and is today tightening credit prematurely” – thereby acting in concert with Janet and other central bankers in what may be their conspiracy to deflate the asset bubbles they have caused. We are all likely in for tough times ahead: they will be used by the quislings to block Brexit.

  8. Beecee
    Posted September 29, 2017 at 8:11 am | Permalink

    Mr Carney, desperate to fulfil his prophesy of Brexit doom, is at it again, talking up the horrors we have yet to face when we leave the EU. And this time whilst introducing Mrs May to the audience!

    Meanwhile Mrs May and her Brexit team continue to offer more and more goodies to Mr Barnier who stands there saying – I want more, much more, before we shall agree to talk about trade. Who on our side is going to say, publicly, to Mr Barnier – time to get real mon ami, you have much more to lose when it comes to trading with each other than we do!

    I read today that the latest concession is to let EU migrants be outside the UK law and conditions.

    The mind boggles at the way we allow ourselves to be hoodwinked for the cause of entente cordiale!

  9. Tad Davison
    Posted September 29, 2017 at 8:16 am | Permalink

    Thank Christ!

    You should have witnessed some of the arguments I’ve had trying to convince others of your point of view!

    It makes me wonder just how much other politicians know about the UK’s banking and finance industries, trotting out the same old party line en masse, just as they use words and phrases like ‘crash out’ and ‘cliff edge’. They have clearly been duped, and wish to do the same to the rest of us.

    Tad Davison

    Cambridge

    • Derek Henry
      Posted September 29, 2017 at 11:11 am | Permalink

      Yes Tad,

      Well said… John is on a roll this week.

      Like taxes fund government spending even though we left the gold standard decades ago.

      And

      The monopoly issuer of £’s can run out of £’s even though the massive clue is in the word monopoly.

      These lies caused by decades of framing and propaganda have to be put to bed after Brexit. Otherwise there is no point having Brexit at all.

  10. Anonymous
    Posted September 29, 2017 at 8:37 am | Permalink

    Quite.

    When I saw the “20 year’s of independence” banner behind Mark Carney I though, “And that went well, didn’t it !”.

    This disaster isn’t over yet and Brexit will get the blame.

    Austerity: caused trying to correct overborrowing by Brown

    Wage depression/rising housing costs: caused by Blair and mass immigration

    ‘Non political’ *coughs* low interest to keep the whole charade going.

  11. Right banker
    Posted September 29, 2017 at 8:55 am | Permalink

    BBC Online headline “Carney sees interest rate rise in ‘relatively near term’ ” Doesn’t he, hasn’t he, said this last year and every year? There’s certainty for you. DeBunk of England

  12. jack Snell
    Posted September 29, 2017 at 8:56 am | Permalink

    Am not too sure about this, 2005 – 2007 was a long time ago, and long before Carney’s time- just in case anyone is thinking of laying it on him- governors are mostly all the same
    and apart from the reality of the economic outlook have to take into account the will of their political masters.

    The problem is that governments are there for too short time periods only before having to face the public again at the next election and so want to make whatever policy changes in that short time frame and so then we end up invariably with short term gain winning out against longer term good and better planning. And just as we heard from John McDonnell over the past few days- if he were allowed into power for even one term of 4 – 5 years, he would try to turn the whole world on it’s head and for what? to prove some ideological point.

    So it’s all self serving and that’s whats got us into this terrible mess as well over brexit. But make no mistake, Boris and Gove IDS etc on the other side are just the very same- all self serving. The consequence of all of this is that our economic well being see-saws all over the place and we never get off the starting blocks.

    Likewise the BoE takes it’s cue from government as it goes along, and depending on the circumstances at the time usually ends up by blowing with the political wind- it’s the never ending circle of taking two steps forward and one step back.

  13. margaret
    Posted September 29, 2017 at 8:57 am | Permalink

    I cannot remember when Mark Carney came into office. But what strikes me is that Brexit was on the cards long before it was made public

  14. Original Richard
    Posted September 29, 2017 at 9:10 am | Permalink

    Never mind the history why do we continue today to have a governor of the BOE who is openly not supporting the country’s decision to leave the EU and would prefer the country’s economy to fail rather than his reputation for economic predictions ?

  15. ale bro
    Posted September 29, 2017 at 9:10 am | Permalink

    I’ve never been convinced that the BoE has a genuine inflation target.

    If it misses the current ‘target’ by a large amount, there is no sanction other than writing a letter. The BoE is under no obligation to correct for inflation in previous months or years, and this approach allows inflationary pressures to build up even though inflation is ‘on target’.

    For sure, the BoE may believe it has a moral obligation to focus on the target range of 1% – 3%, but there is no mechanism for forcing it out of inaction into action. Even replacing the governor would do nothing as interest rates are set by committee.

    The target at 2.0% is in current market conditions a target of 2.95%, as the bank has been given a generous amount of leeway.

    • Caterpillar
      Posted September 29, 2017 at 7:39 pm | Permalink

      Ale Bro,

      You are correct. The lack of forcing mechanism can be accounted for by (a) an admission monetary policy does not work or (b)a lack of democratic oversight.

  16. Lifelogic
    Posted September 29, 2017 at 9:17 am | Permalink

    Any organisation that feels the need to claim it is “independent” never is.

    Above all we need to get more real competition in banking and stop tying them all up in red tape. Regulation to a degree yes but not the current idiotic regulation we are getting from the Government, BoE and SCA.

    0.2% when you lend to the banks (unsecured) and yet 3-30%+ when you borrow well (often secured) what a complete rip off joke they are.

  17. John E
    Posted September 29, 2017 at 9:46 am | Permalink

    You’ll not have any concerns then when the next Chancellor (John McDonnell) ends the charade of independence and starts dictating Bank policy?

  18. Bryan Harris
    Posted September 29, 2017 at 9:49 am | Permalink

    It always strikes me as odd, that the government doesn’t do more about the people in the Treasury – Most are no doubt union employees who came in during the blair/brown wasted years, with a socialist bent – If people are unsuitable to do a job then they should be removed – as happens in the real world.

  19. Leslie Singleton
    Posted September 29, 2017 at 9:53 am | Permalink

    Dear John–I now read that Carney is saying that rates will or could (unclear which) rise as soon as November–Am I alone in thinking this merry go round is absurd?–If rates should go up then put them up and stop faffing around. If not shut up. Still amazes me that a foreigner was appointed. How can we be sure of his undivided loyalty to us?

    • Mitchel
      Posted September 29, 2017 at 3:15 pm | Permalink

      He was appointed precisely because of where his loyalties lie.See also why Osborne was such an enthusiast for Mme Lagarde at the IMF.See also why Osborne himself was appointed Chancellor despite having no academic or practical experience to qualify him.

  20. Andy
    Posted September 29, 2017 at 10:26 am | Permalink

    Looking across the globe the Central Banks have created a huge mess which at some point will have to be cleared up, but God alone knows how.

    • Mitchel
      Posted September 29, 2017 at 3:26 pm | Permalink

      They bought into the end of history fantasy that with the end of the Soviet Union we would get one world government under western control and therefore a global monopoly on money issuance.The revival of Russia and the resistance it has organised amongst other states (particularly a move with China to de-dollarize)has destroyed that and left a major problem for the west.

      Ever wondered why Hilary(with the UK dutifully following of course) was so keen on provoking a war with Russia?

  21. Epikouros
    Posted September 29, 2017 at 10:33 am | Permalink

    The machinations of government, vested interests and the agencies they set up to manipulate society and the economy to ensure the people and country bend to their will and march to their tune is the burden we have to bear we believe for our betterment. Nothing is further from the truth it is the will of us the people and the tune we play that government, vested interests and their agencies should be marching to and obeying. It was the people who devised the means to make us prosper and to put in place laws that all society happily abide by and it is us who left to their own devices would eschew conflict and seek peaceful solutions. Governments et al work tirelessly to undo all that good work imposing irrational laws with legislation and solutions that are incompetent and better handled by the free choice of every one through interaction and exchange. And who cannot keep their nose out of other peoples business and threaten with force if necessary to impose their fiat at home and abroad.

  22. Derek Henry
    Posted September 29, 2017 at 11:02 am | Permalink

    On the money again John.

    Carney increased bank reserves thinking it would mean more commercial bank lending which was just another smoke and mirror con trick. Banks will lend to any customer that is worthy regardless of reserves because they just back fill later.

    The central bank is NOT independent. Yet another ruse of propaganda and framing and owning the language and the message.

    The accepted accounting practice, is a technique known as group accounting – which produces consolidated financial statements (income, balance and cash) amongst a related group of entities. The international accounting standard for that is IFRS 10 ‘Consolidated Financial Statements’ which requires that entities under common control present a consolidated set of accounts so that external users can obtain a ‘true and fair view’ of the actual underlying economic transactions.

    The Central Bank in all sovereign jurisdictions falls under the definition of control by the Treasury – often de facto by the operation of law (Bernanke: “Our job is to do what Treasury tells us to do”), but also de jure, e.g in the Sterling area HM Treasury actually owns the entire shareholding of the Bank of England. The control model in IFRS 10 is elaborate to try and catch all those little tricks that entities use to avoid having to consolidate accounts and is worth studying to see the various ‘Wizard of Oz’ methods that control can be imparted even though the public face is supposedly independent.

    Given the control relationship, consolidated financial statements are entirely appropriate and correct accounting which reveals the essence of the underlying transactions. Therefore if you create a model you should be able to swap out the detailed entities and replace them with the consolidated entity and nothing about the response should change. If it does then it is likely your model is wrong.

    That’s why you should always look at it as a consolidated government sector with HM Treasury being at the top of that Pyramid.

    Importantly what this arrangement of accounts tells you, along with the description of the way Reserve accounts work at the Bank of England, is that spending is disconnected from the debt management operation. All entities operating at the Bank of England have an interest free overdraft available during the day to absorb flow differentials, and this effectively means that they spend on their accounts and then back fill (or under fill) to the target account balance using standard asset and liability optimisation mechanisms.

    Very likely some of the government spending flow out to the private sector stock accounts earlier in the day will flow back later in the day to the National Loans Fund in exchange for Treasury bills or Gilts as a completely separate transaction. Spending therefore demonstrably comes first. Moreover it is in the Debt Management Office’s interest for that to be the case since it ensures there will be healthy demand at the funding auctions.

    All the government sector does is allocate tokens to the non-government sector (often in return for some real provision to the government) and then swaps those tokens around for different tokens which attract different income flows and have different liquidity characteristics and holding criteria. The elements this simplification reveals are quite interesting.

    For example, if I have a young child and qualify, then that child attracts Child Benefit. If I then (give ed)that child to (soneone else ed) then the (new chikd carer ed)start getting the Child Benefit instead. There is remarkably little difference between a Gilt and a child from the financial systems point of view – a difference in the income stream attached and a difference in liquidity, holding cost, collateral value and issuing criteria.

    With this model you can see that QE is a token exchange – Gilts for Bank Reserves. The income flow goes down – because entities holding Bank Reserves receive less government spending than entities holding Gilts. So you will get a portfolio reconfiguration – since there is less income to go around and the mix of tokens has changed. Bank Reserves have a narrow holding criteria than Gilts and therefore are likely to create offsetting commercial bank deposits that have a wider holding criteria.

    The detail is important to understand how the government sector works internally and to understand the actual operations. But it is very easy to end up in a situation where you struggle to see the wood for the trees. Hence why the consolidated government sector is an important modelling tool.

  23. miami.mode
    Posted September 29, 2017 at 11:07 am | Permalink

    It always helps to know where an individual’s or committee’s funding or wages come from, because that’s where their loyalties will lie.

  24. Fed Up and Angry
    Posted September 29, 2017 at 11:40 am | Permalink

    So why is Mr Carney still in a job if the PM is really committed to leaving the EU?

  25. mickc
    Posted September 29, 2017 at 11:45 am | Permalink

    Yes, a very good piece. The BoE is not independent. Moreover, interest rates should be under the control of the Chancellor of the Exchequer; if an elected government cannot control them it loses a lever of power to enact its voter approved manifesto. In effect, it detracts from the democratic process.
    Brown’s triad was disastrous….as with much of Brown’s policy.

  26. Mark B
    Posted September 29, 2017 at 1:10 pm | Permalink

    Good afternoon

    Very strong words from our kind host today.

    Even before the BoE was made ‘independent’ there have been ups and downs. The BoE was not responsible for regulation during the financial crash, the FSA was. The FSA was a creation of the Labour government under GB and allowed the EU to regulate through its FS Regulator.

    We should either have a truly independent BoE, free from the government (ie appointments made by parliamentary committee) or not.

  27. ian
    Posted September 29, 2017 at 1:22 pm | Permalink

    The whole system is a con on the people and has been since the last depression in the 1930s.
    They the gov count most debt as income for a bigger GDP number, in other words they borrow money and put it down as income, but the big con on people is inflation where they pick the basket of goods and alter them to suit their case that inflation is low, when in fact it is always double what they say, if you take away the debt from income in gdp it show you real story of a deep depression mask by debt, and if you take inflation from GDP of 3 to 5 percent instead of under 2% which they use, the story just get worst. How does the gov pay off it debts, by inflation, because they never pay anything back, it called neo-liberalism with globalism. How does it work, they offshore your good jobs and send back cheap goods, then borrow money out of thin air to make up the tax which would come in from good jobs and production while you also borrow money to buy the goods, the so called elite collect all the excess money and pay no tax and just pay the interest on their debt, which they were allowed to borrow in big amounts at cheap rates, because they are the elite.

  28. Tabulazero
    Posted September 29, 2017 at 1:25 pm | Permalink

    From the FT:

    Broad revisions to Britain’s main statistics on Friday showed the economy has performed worse than previously thought since the Brexit vote, although household finances are significantly stronger. 

    Year-on-year growth in the second quarter was revised down from 1.7 per cent to 1.5 per cent, the Office for National Statistics said, with slower growth than previously recorded in the last three quarters of 2016.

    Alongside new figures showing that output in the all-important services sector dropped 0.2 per cent in July, the figures point towards a weaker-than-expected outlook in the remainder of 2017.

    … and the BoE which has managed to box itself to hike rates or lose face in November. It is going to be painful.

    Brexit is definitely the gift that keeps giving.

    • John
      Posted September 29, 2017 at 7:29 pm | Permalink

      Yes, no recession nor depression as predicted by the remainers, no crash etc.

      However, there is strong growth, record low unemployment, record employment and record exports.

  29. a-tracy
    Posted September 29, 2017 at 4:16 pm | Permalink

    How many times has the Bank of England told us we’re going to have an interest rate rise in the past three years?

    How many times has he told us we will have negative interest and pay to hold a bank account?

    I honestly don’t feel they know from one month to another and people will begin to ignore his regular like Chicken Licken until the house roof falls in.

  30. hans christian ivers
    Posted September 29, 2017 at 4:45 pm | Permalink

    John

    You are absolutely right there short term predictions on Brexit for the economy were wrong.

    However, there short term predictions now seem to come home to roost on the economy over the next few years.

    Or do you have a different view< and if so why and how?

    Reply Brexit will not harm the economy. The Banks policy is now harming

    • John
      Posted September 29, 2017 at 9:21 pm | Permalink

      ‘However, there short term predictions now seem to come home to roost on the economy over the next few years.’

      Hans, the predictions were for an immediate recession leading to a depression. As Gordon Brown put it, a depression that would make the Great Depression look like a drop in the ocean.

      Do you still think we are headed for the biggest economic collapse in history?

  31. acorn
    Posted September 29, 2017 at 6:22 pm | Permalink

    There is no requirement for a central bank in a sovereign fiat currency “issuing” economy, it is an unnecessary legacy from the Gold Standard. BUT; it does have the advantage that politicians can pretend that the government’s accounts, are the same as a currency “using” Household. This allows them to impose artificial restraints like austerity and balanced budgets.

    In a sovereign fiat currency economy, the currency issuing Treasury and its Central Bank, are one and the same. Neither can go broke in their own currency. They never have to borrow their own currency from anybody; in fact, there is nowhere else they can get their own monopoly currency from.

    Set the base interest rate at zero and shutdown “monetary” policy. Put the regulatory, currency clearing and last resort lending functions of the central bank, back into the Treasury under a cash management office, replacing the debt management office (DMO).

    Start making the politicians responsible for regulating the economy with fiscal policy (taxing and spending), to get the maximum out of each sector and sub-sector of the economy, while holding inflation at an agreed limit in each sector, with maximum employment.

  32. anon
    Posted September 30, 2017 at 3:03 pm | Permalink

    We need the ” remainiacs” to concede that any deal with the EU is clearly unacceptable & nothing less than anti democratic subversion.

    We need to clear the decks for a ” no deal” and the remainers need to stand-aside and stop undermining the national will and interest as expressed.

    All of the government executive and heads of department need to sign up to the “no deal” scenario or be replaced.

    This mockery of democracy of democracy is more than institutional inertia.

    Just get on with it and leave. Sign agreements now on the basis of ” no deal” with 3rd countries. The effective date being the earlier of March 2019 or any date approved by parliament.

    What is the point of democracy if it is ignored? It appears it is all an elaborate hoax.
    Perhaps we should try Corbyn & the SNP?

  • 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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