The poverty of Tory thinking is going to be very clearly on display this afternoon. Andrew Bailey, Governor of the Bank of England, is going to be quizzed in parliament. If The Telegraph is to be believed, Tory MPs are livid with him.
Their claim is that the Bank has one job, and it has not got it right. All they have to do is control inflation, and they have not done so. As a result those MPs are angry.
Don’t get me wrong: I have to agree with them to some extent. But my reasoning is very different to that of the Tory MPs.
First, until now we have had no serious inflation since the early 1990s, which was well before Bank of England independence. The reality is that they have never done their job: other factors have weighed on inflation instead.
Second, the biggest other such factor was the opening up of China, which produced a massively increased labour market suppressing wages but allowing increases in return to capital largely beyond inflation measurement that distorted society and rewards within it, but kept regulators happy. Nothing a central banker did had any impact on this.
Third, in reality, bankers were given only one tool to deliver on the task given to them, which was the control of interest rates. This tool is, however, almost useless when inflation is rising because it is far too blunt a tool to use without creating considerable social friction. And when rates are low it is also useless, because as has been seen for much of the period of independent central banks, rates had to be near zero, leaving them without impact.
Fourth, changing taxes was always a better tool to tackle inflation, with a much greater degree of finesses in the targeting and so the likely result, but this was (thankfully) never within the Bank’s remit.
Fifth, quantitative easing was never used as it should have been. It should have been used to inject money into the economy very largely as direct investment. Instead from 2009 to 2016 it was used to support banks and from 2020 it was direct government funding, which the Bank thinks it must now, quite bizarrely, withdraw. That’s because it wants a recession.
All of this shows that the Bank has never understood its role, and what it can achieve. Nor has it understood how ridiculous its brief is, or complained about it. There has never been complaint that the supposed independence it enjoys is nothing more than a charade, because it can always be over-ridden by the Chancellor. And there has been not a squeak about the absurd split between fiscal (spend and tax) and monetary (money supply and interest) policies when they so obviously need to be managed simultaneously, being reconciled through tax. That the Bank clearly does not understand (or denies) its role in the government spending cycle does not help either.
Andrew Bailey will in that case defend the indefensible from an impossible position this afternoon, making claim to a past record that is no credit to any central banker and suggesting he has solutions now when all he can actually deliver is economic meltdown, recession and serious social harm by continuing to increase rates.
What is the solution? It’s simple.
First, end the separation of economic management and bring fiscal and monetary policy back into the Treasury.
Second, make the Bank the issuer of notes and coin,; the agent of the Treasury on QE; the regulator of other banks and the supplier of central banking services to them.
Third, understand money and the actual spend and tax cycle.
Fourth, realise the supremacy of fiscal policy.
Five, use fiscal policy and simultaneously keep interest rates low to restrict upwards flows of wealth in the economy.
Sixth, put in place capital controls to stop the upward direction in house prices.
Seventh, deflate capital markets using seriously progressive taxation on wealth, including by reintroducing withholding on overseas holdings.
Eighth, tackle the real causes of inflation I discussed very recently here.
But let’s stop pretending we need an independent central bank to run the economy with bias to those already well off. We don’t.
Will Tory MP’s get that? I doubt it. But I can hope.