Yesterday I was asked to step in to speak to a lunch of Parliamentarians and business people in the House of Lords because the Governor of the Bank of England had cancelled. He was detained in the Bank, unable to get in and out easily owing to the protesters.
I decided to develop two of the Governor’s sensible remarks last week. I hope he privately approves of what I said. He himself is rather more constrained than I am by his need to work with the current administration.
I began by praising his comment that the UK cannot afford another “reflationary” package. I went on to agree with his comment that switching inflation targets in December 2003 made it much more difficult to conduct a sensible money policy during the build up of excess credit and lending.
We have three simultaneous crises that egg each other on.
There is the monetary crisis. We lurched from too much cash and credit in 2007, to too little in 2008. The authorities are now literally printing money to try to get cash and credit growing quickly again. If they succeed too well it will be inflationary.
There is a banking crisis. The banks lent and borrowed too much. The Regulators egged them on by approving their business plans, ticking their boxes and setting requirements that were too lax. Now we have a series of broken banks that need to get on with the job of managing their bad loans and worse investments.
There is a collapse in parts of the real economy, led by the property and housing crash and followed by the auto crunch. The real economy will not work well until money and banking are stabilised. The saving and exporting economies need to spend and borrow more. The importing and over borrowed countries need to save and export more. The G20 needs different solutions for different countries, not a new credit bubble based on government bonds.
The rest of what I said will be familiar to readers here. It can be summed up in four soundbites.
You cannot solve a crisis of over borrowing by borrowing more.
You do not make toxic debts friendly assets by nationalising them.
It does not help solve the crisis by undermining national credit worthiness. There must be prudent limits to how much a country can borrow.
The Governor might be pleased to be reminded I do want to see the Bank of England reunited with full Central Bank powers to handle government debt and regulate the banks. That way we might go back to avoiding monetary disasters and banking crises.