I have been accused of many things in my time, many of them untrue. Of late it has been suggested that I have posed a threat to the Central Bank Independence (CBI) of the Bank of England. This is, apparently, a spin-off from People's Quantitative Easing.
Let me come to the core of my argument first, then explain why I think that core argument is right. What I have argued is that the UK needs a National Invetsment Bank (I once called it a Green Investment Bank in the days when PQE was Green Infrastrxuture QE, but the semantics do not matter). And I have argued that this NIB will be financed by bonds, some of which (and it is a proportion to be determined as appropriate at the time when these events happen in the future) might be bought by the Bank of England to represent, as Paul Krugman has out it, an investment by the Bank of England in 'stuff' and not 'financial assets'.
And for the record, I do not think this does in any way challenges the current structure of CBI. Ignore the myths when saying that: I am saying it does not challenge the reality.
So let's also be clear what I have not said. I have not said that the NIB would only be funded by PQE: others opposing the idea have assumed that, but I have not said it.
And then let's be clear about what I have said, such as explicitly saying (to the FT in early August) that PQE would not be needed if there was a ready market for NIB bonds and QE itself was not required. I have heard, for the record, Jeremy Corbyn say the same thing since then, although that is not material to what I am saying here.
I have also said, quite explicitly, that I do see an advantage to NIB bonds being explicitly marketed as a pension product in an ISA-style wrapper: I would envisage this as an NS&I product, and think it could be very attractive. That is explicitly a debt sale.
In that case let's summarise the unambiguous message I have given, which is that the Treasury could, and in my opinion should, include bonds issued by the NIB in any future QE mandate it issues to the BoE.
As I have shown by publishing on this blog letters issued by the Treasury to the BoE the Treasury does, with regard to QE specifically authorise the sums to be spent, the time scale for spending and the asset classes to be invested in and in the process explicitly underwrites the risk to the Treasury of the transactions in question. So let's be clear: under any normal contractual interpretation of the arrangement entered into this relationship is at best a nominee arrangement with the BoE acting as agent for the Treasury and in the broadest possible interpretation is a limited form of blind trust where only the precise timing of engagement is devolved to the BoE by the Treasury. Legally no other interpretation is possible in my view. And in neither case can the BoE be considered independent in any meaningful sense. I think such cold analysis useful, and appropriate. Economists might dream what they wish but in the real world facts matter,
And bar the inclusion of new asset classes, such as PQE or helicopter money (which many of my critics espouse) in QE authorisation from the Treasury nothing I have said change those facts in any way. All that the Treasury would be doing if either such class were authorised for use would be extending the options available to the BoE if the Treasury also decided QE was necessary.
Now the contentious point in what I have just said is that it is the Treasury decides QE is necessary. Please refer back to the letters I have published from the Treasury on this point. They are explicit: the decision on QE was the Treasury's. If they were taking the risk it could not have been anyone else's. I could rest my case there. But for those in doubt please read the Bank of England Act 1998, which sets out the terms for CBI in the UK (without ever mentioning QE, of course, as it had not been thought of then).
Section 10 makes clear the BoE has some responsibility for monetary policy.
Section 11 says its obligation with regard to monetary policy is to maintain price stability. But it also makes clear that the BoE has a duty to support the government's economic policies including those for employment and growth.
Section 12 makes clear that the Treasury specifies policy and the BoE does not.
Sections 13 to 18 set out how the MPC works when considering interest rates and what they must publish, and nothing changes here as a result of what I have suggested.
Section 19 makes clear if the MPC does something the Treasury does not like it can be over-ruled.
So, in summary, the MPC is given delegated power within strict limits to set interest rates, about which it will, in any event, talk frequently to the Treasury, and now within even tighter limits it makes decisions on the management of QE programmes. I stress, that is management and not the strategy or even policy: because the risk lies with the Treasury it is obvious that the strategy and policy decisions on QE lie with the Treasury. And PQE does not change that, at all.
One final point then: as has been widely agreed, PQE is fiscal policy, not monetary policy. That's important: the Bank has a legal duty to support government fiscal policy. Whether we are arguing about something over which the BoE or MPC really have any choice at all is a very good question. Legally I would suggest they have probably got none at all.
Now I am well aware that no one would want relations between the BoE and Treasury to be run on the basis of legal threats: that would be deeply undesirable. But in that case it is also wise to look at reality. I fear those who are claiming CBI is so important have not looked at the facts of what has actually happened on QE, what the real legal relationships are, how my suggestions really change them and have no, as a consequence realised they actually change nothing.
It would be good if they did because then we might have a more meaningful debate. Unless, of course, I have missed something. Please then point out what it is, but can we stick to the facts?
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It seems to me from the arguments that the Bank of England is anything but fully independent.
That does not stop EVERY SINGLE COMMENTATOR to state it is otherwise (Peston, Bootle, Wren-Lewis). Especially economists, who mistake the relatively limited scope of the BoE to set interest rates (by a “independent” MPC committee, whose members have been carefully appointed by the government or the BoE) as the whole role of the BoE.
Now, a further thing comes into it, though, the way monetary policy is now conducted means that the BoE has to support the official Bank Rate by paying money to the banks deposited at the BoE. That is clearly an unjustified subsidy by the taxpayer to private sector commercial banks, costing it about £1.5bn a year on the £315bn deposits.
Now the BoE becomes a spending department of the government, handing out welfare payments, just as the Department for Health and Social Security.
The difference, of course, that this £1.5bn is given to the banks! And there does not seem to be any political oversight to this.
As soon as interest rates double, from 0.5% to 1%, the Bank of England would simultaneously decide to double the welfare payments to banks.
So there clearly needs to be a discussion about the role of the BoE, also fully reviewing its role in the initial £375bn QE, and the “welfare” it generated then for the financial sector.
Matt, I’m not stalking you, but you really need to figure out first why the banks have drawable deposits of £315bn with the BoE ( compared to less than £50bn 7 years previously ) rather than have full frontal rage about it.
Are they constrained or stupid, because higher rates of return are available elsewhere, and if the banks are foregoing that higher return then the difference ( the opportunity cost ) is being pocketed by the people with their 1% ISAs ( inflation 0% ) to people with more fancy savings vehicles.
You can have your headline point about BoE independence. If the question is binary:
Is the BoE independent?
Then the answer is no. The Treasury appoints the Board, tells them their inflation target etc.
If the question is put differently though:
How independent is the BoE?
Then the answer is more nuanced. It’s more independent than in 1997. There are shades of grey to the answer. Did you know the ‘independent’ IFS is majority government funded, so really it’s not independent. The BBC Board is appointed by government, so you can reasonably say the BBC is a State broadcaster, just independent of advertising interests. ‘Independence’ has come to have a very loose meaning in almost all media.
I’m sorry if this sounds a stupid question, but is there really much of a debate here? Your view that QE, if it is needed, should include NIB bonds seems to me no different from the Fed’s inclusion of Freddie Mac and Fannie Mae bonds in its QE policy.
And I suspect most mainstream economists would agree that if we do fall into recession or deflation then a resumption of QE would be part of a suite of policies to reflate the economy (alongside fiscal expansion and maybe helicopter drops).
If I understand rightly, your position is a mainstream one. What have I got wrong?
Chris
I wish I knew
As far as I know I am making a mainstream argument
But others have sought to argue I am otherwise
I keep asking them to explain why
Richard
Richard,
How quickly we forget the white elephants built at the taxpayers expense and then given away. Would you with your National Investment Bank cash build the the likes of the Millennium Dome. Opened on 1 St January 2000 build at a cost of £789m and closed on 31 December 2000 and then sold to Meridium Delta for£1.
You may be a very good accountant but you certainty would not retain any clients if you proposed anything like the above to them. But I forget it’s just printed money.
Let’s get real the government cannot run business. These are the people who sold northern rock to Richard Banson and he paid for it using the reserves the government had just paid iin.
Regards
Nick
Do you recall that that the entire private banking system made errors vastly more catastrophic?
It’s what we humans do
Sometimes things go wrong
Saying this only happens in the public sector is absurd
Shall we discuss the real world instead please?
Of course, in law, the Bank of England has no independence. However, following considerable lobbying from commercial bankers, the Blair administration did grant it operational independence almost immediately following its election victory in 1997. In my opinion, the government missed a trick back in 1946 when it nationalised the bank. At that stage the bank served no purpose and it could so easily have been dissolved and its service as a monetary authority transferred to the Treasury.
Instead, the bank has been allowed to continue as a quango operated by bankers for the benefit of bankers as the kingpin in the banking cartel. Under Gordon Richardson (who became the bank’s governor following his move from Schroders), this cartel was granted an effective monopoly to create all money in Britain. This was done with no parliamentary or public debate. This shows just how much independence the bank really has.
Mark Carney (ex Goldman Sachs and it’s current governor) has today acknowledged that the bank “allowed” the Treasury to authorise QE. Of course, there was no option. By QE, the bank borrowed £375bn from the private banks to purchase financial securities and so make the banks extremely substantial creditors of the bank. If interest rates return to more normal levels, these securities will lose substantial value so that the Bank of England will likely prove insolvent. The bank required a guarantee from the government to cover these losses and so, of course, government authority was required, not “allowed”.
Agreed: especially re the last