One cheer for the decision to get rid of the FSA. Another cheer for putting all regulation of the banks together at the Bank of England. These are both things I have argued for ever since Gordon Brown foolishly split banking regulation in 1997. We warned that Brown’s bodged regulatory structure was likely to be bad in a crisis, and warned of the excess credit and monetary looseness in the Economic Policy Review in 2006-7.
I am not awarding the third cheer that is conventional on good news for one very simple reason. The Monetary Policy Committee remains unchanged, yet the MPC as readers of this site will know has had a dreadful five years of misjudgements. The Governor last night said it was the job of the MPC to take the punch bowl away when the party gets into a swing. That is exactly what they failed to do in 2005-7, when they stubbornly against external advice kept interest rates too low for too long and allowed excessive credit.
It should also be the job of the MPC to avoid excessive collapses of credit. In 2008-9 the MPC helped engineer the most dangerous and precipitate decline of credit. Again some of us were going hoarse warning them of the dangers. Even one of their own members saw the problem, but the MPC ignored commonsense. It had lurched from money being too easy to money being too tight. How can we trust this group of people going forward? Inflation remains way over target whilst activity is weak. They have helped get us into a nightmare situation.Their money printing flooded the public sector with cheap money and inflationary tendencies whilst banking regulation starved the private sector of funds.
Which brings me to the new Financial Policy Committee. Their job we are told by the Governor is to turn down the music when the dancing gets too wild. By the same token I hope it is also their job to turn up the music when the dance floor is empty. In case the Governor hasn’t noticed, the dance floor has not been too popular with the private sector for the last couple of years, largely because they cannot afford the entry tickets whilst the regulatory bouncer on the door is keeping many of them out. The first task of the FPC should be to restore some balance to the UK economy, and take the action that needs taking to allow sensible levels of lending to enterprise and growing business so we can have a decent private sector led recovery.
The Governor’s language is appropriate to the conditions of 2005-6 which he misread at the time. It is not what is needed in 2010.