I am worried about the Bank of England and what it is up to. It's not the first time I have been so, of course, but I think the concern worth airing.
First, some facts. The economy is not looking good. Take the car sector, for example, where the FT has noted:
Investment in the UK car industry has fallen to just £322m in the first half of 2017, in a sign that companies are delaying or cancelling spending ahead of the UK leaving the EU. Last year £1.66bn was invested in the auto sector, more than 30 per cent down from £2.5bn in 2015, as carmakers and their suppliers delayed non-essential investment following the EU referendum in June 2016.
That's pretty worrying. And we now know car purchases are falling. So too are real wages. And the government is apparently refusing to do anything about that, although it could. As a result personal debt is rising. And we have Brexit uncertainty on top of that. There is also inflation, I admit, but that is obviously caused by the fall in the value of the pound because declining real wages prove it is not being stoked by domestic wage demands.
Second, there's the Bank of England's response to this pretty toxic mix. What is that? First to threaten interest rate rises. Second it is threatening to reduce the availability of credit.
Third, now ask why it might be doing this? I really cannot say. There are four reasons this time.
First, if the Bank is trying to beat inflation then reducing demand by reducing credit or household purchasing power as a result of mortgage rate increases then this is not going to work because a) excess demand is not the cause of the inflation and b) cutting demand won't solve the inflation in that case.
Second, if it is trying to restore market 'normality' why now, when things could not be more abnormal and the risk of doing so could not be greater?
Third, if it's trying to build a margin against a future shock then it's deluded: that would require a rate increase of maybe two or more per cent rate now, and that would blow many household budgets apart and risk massive mortgage default.
Fourth, if it is to beat a credit shock then this makes no sense: credit rationing can precipitate one.
In other words, the threatened measures can only make things worse, barring on short term exchange rates, which could have a small beneficial inflation impact. That one issue apart the proposed moves do not otherwise tackle the inflation we have but do harm household incomes and so demand; do precipitate debt crises in both the secured and unsecured sectors and do create default risk for many individuals and real risk of solvency issues in banks and more peripheral parts of the finance sector.
So why is Carney doing this? Does he want a crisis, or even the threat of one? If so, why? Is it he wants to tip the economy into recession to influence Brexit? I would sincerely disapprove if he did. Or is there some other motive?
I wish I knew, because I sure as heck am perplexed about the game he's playing right now.
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Carney works for the bankers, and look how well they did out of the last financial crisis, which they caused. It would make sense, then, if he were trying to engineer another one.
Perhaps lets phrase the question differently; “What could the banking sector gain from another financial crisis?”
I think that’s an interesting question
The answer is control of a lot more state capital which lets the senior management increase tie rewards out of all proportion to contribution
In other words, it increases the rent paid to senior bankers
And there you have it, Richard. It’ as straightforward as that and surprises me not at all. Indeed, we could see it as a timely, strategic, move given the possibility of a Corbyn led government in the not too distant future.
Now that is a big conspiracy: not just anti-Brexit crash but a Labour crash too? Wow….
According to Michael Hudson, Carney worked for Goldman Sachs for thirteen years from 1995.
If you think that is bad, look at Italy:
Mario Draghi, Romani Prodi, Mario Monti – all have worked for Goldman (look at the banking sector in poor old Italy).
Goldman’s ‘market making’ ethos strolls on it seems.
Labour, the Greens etc., should be talking about this and making sure that people know what is going on. This is one of the reasons why even though I am a Remain voter, I have had serious issues with the ECB/EU to the point where I would threaten to pull the UK out if the GS parasites are not kicked out of the state central banking sectors of all EU nations.
Either that or I would keep banging on about it that is for sure in order to build up a pan European movement to have GS bankers ousted.
It’s scandalous it really is – ex GS staffers in national central banking structures are nothing but cuckoos in the nest.
I think they are just covering their backs. If you look at the lead up to 2007-08 Mervyn King was completely complacent about potential dangers and did nothing. Carney is preparing to say I told you so.
But aside from regulation, the idea that the Bank can do much is misplaced. Monetary policy has failed and is still failing. The responsibility is completely in the hands of the Chancellor – we know what he needs to do: close the tax havens, capital taxes on unearned income and Green New Deal!
An interesting perspective – and one I had not considered
But it still does not explain why they are suggesting such obviously economically inappropriate actions
Engineering a crisis now is throwing fuel on a smouldering fire. Everyone risks getting burned, including those engineering it.
I can imagine bankers thinking they can force us to stay in the EU and personally profit from another crisis but surely they must also fear a Brexiter backlash or Corbyn as PM?
Those who start crises can’t predict consequences. I think that’s a pretty universal rule
I wonder if this is a sign of panic and/or incompetence and a failure of ideas.
Perhaps MC and his staff are at a total loss given their macroeconomic headset and EU/Ordoliberal based restrictions on freedom of action they cannot find a route which does not say “Go directly to Mount Doom”…
Their forecasting is not too hot….
See http://www.dartmouth.edu/~blnchflr/papers/db%20rc%20sm%20real%20wage%20update%20may%202017%20final.pdf
Warren Mosler deploys an amusing image to illustrate the limits of central bankers playing with monetary policy to ‘steer’ the economony, when only fiscal policy can really do it.
He created a cartoon of Ben Bernacke sat in the passenger seat of a car, holding onto a child’s play steering wheel, stuck onto the dashboard. Next to him is the President.
‘Great driving, Ben,’ says the the President, as the car heads over a cliff and Ben enthusiastically plays with the useless kiddie’s steering-wheel. ‘We’re getting there!’
Carney’s in essentially the same position.
The answer is obvious to me. The finance industry and all of its outriders and supporters are caught in a huge trap of groupthink. Their truths are stil locked into the 1980s and classical economic thinking and any deviation is viewed as apostasy and will only serve to have the deviant outcast. So all economic problems are simple ones to solve and if there is too much debt put up interest rates and market equilibrium will follow as night follows day. I’ve often thought that however good many modern economists were at economics they were crap at social history. It now seems that they can’t even think back less than 10 years.
Neo-Goldfish Economics? That would be to underestimate slightly the neurological capacities of Carassius Auratus.
When the only tool you have is a hammer, everything starts to look like a nail.
A lot starts to take shape when you read a book like Gary B. Gorton’s “Misunderstanding Financial Crises” in which he argues that central banks know they cannot let commercial banks, “shadow” banks and other important parts of the financial sector like insurance companies fail and because they and the government have a joint Magic Money Tree are able to bailout the financial sector. Most politicians are economically and monetary illiterate and will go along with their central bank’s bailout advice. This “too important and risky to fail” safety net means the financial sector knows it can engage in moral hazard and engineer a crash subsequently picking up assets at substantial discount.
I’m intrigued by Craig Murray who says that letting the banks fail and just reimbursing the companies and individuals who had money in them would have been cheaper and much better for society.
https://www.craigmurray.org.uk/?s=globalisation
For me it would, now but I certainly didn’t know that then. Did the politicians I wonder?
Craig Murray can be a member of the idiot tendency on occasion and this is one such time.
If the banks had failed it would have taken years for people to be paid out
In the meantime there would have been riots as the UK food chain collapsed. Maybe he has not noticed that hungry people tend to be unhappy about it
Perhaps he wanted that, but he would often benefit from thinking before he writes
Another statistic reported today: productivity is still below what it was before the crash.
Just about every stat is looking horrible now
Please excuse my naivity.
“Is it he wants to tip the economy into recession to influence Brexit?”
a) In what way?
b) Why?
Increasing rates will suck demand and investment out of the economy whilst tipping many households into insolvency
Why? To make it seem that we must not Brexit