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.
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I forget where I first saw it , but I recall someone – a politician or a civil servant, perhaps – discussing the myth of “pulling policy levers” and expecting an immediate and predictable reaction, like some sort of engineer operating a machine or a captain steering a ship.
Whereas, most of the time, no one knows which so-called levers are connected to anything, what the effect might be, and even if pulling the same lever twice will necessarily produce the same effect, the second time around. Or possibly the opposite. Or nothing. Or something entirely unexpected.
The Bank of England has essentially one lever – a hammer, if you like – so every problem has to become a nail to be struck, even if it is a screw. Or an egg.
How exactly does increasing the cost of money reduce inflation?
Supposedly be reducing demand – but only amongst those already in debt
It is also supposed to reduce investment – which assumes investment decisions are rational
They gave clearly never been near business in that case
The theory is as removed from reality as is most micro-based economic theory
You are right. Some levers are not connected to anything, save some defunct economist’s simultaneous equations, or a Government’s PR machine and the tabloid editors’ mobiles.
The Wizard of Oz springs to mind.
So much to agree with.
In particular the second point of your reasoning, that in a few words sums up of one of the key reasons for widespread poverty and inequality in Western societies and given how little understood it is, surely is worth a blog all of its own
As our foreign owned car industry has demonstrated throughout the last 30 years it is quite possible in Britain to operate very efficient, profitable manufacturing industry with well paid workers enjoying humane terms and conditions.
However, manufacturing is complicated and requires excellent planning, creativity, efficient working and competent management.
If you lack all of those skills how much easier is it in the rigged game that is the British economy to sit in the City of London and make a fortune by acting as a middleman for the import of manufactured goods from ghastly authoritarian countries in the Far East.
Your very reasonable list of alternatives only leaves me with an unsettled feeling deep in my stomach wondering what the results of this interrogation will be.
Someone will have to lose won’t they?
And it won’t be the rich.
Sadly, about as much chance as a squadron of pigs appearing over Westminster!
The BBC’s economics correspondent was on this morning appearing in the gold vault of the Bank of England to promote their new book “Can’t we just print Money?” which will be published tomorrow. An employee of the Bank was interviewed and trotted out the same old nonsense based on the Quantity of Money theory. I’ve already preordered this book from Amazon and expect to receive it on the 25th. I am sure it will be horrific.
Also, you say, Richard, that the supposed idea of raising interest rates is to suppress demand, so manufacturers reduce prices in an attempt to clear inventories. There was an interesting article in the Telegraph on Saturday by Matthew Lynn, who I quite like, suggesting that raising interest rates improves the exchange rate. If it does – and the rise in the US dollar in response to the Fed’s rise in their base rate suggest that is true – it could have a marginal effect on inflation because imported goods become cheaper.
I have ordered a Kindle version to enable screen shotting
Regarding your sixth point, have you seen TNL’s (Australia) and Steve Keen’s proposal for retethering house and rental prices to the real world in a fair manner, which also goes about rebalancing the public/private debt skew?
https://www.keenforthesenate.com/affordable-housing/
Very interesting. And could work here just the same.
I have not read this in detail
I will take a look
“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.”
Then it wouldn’t have been quantitative easing, it would have been direct monetisation of fiscal policy.. the two are quite distinct.
I know
As I have said for about 12 years now when writing about green QE
QE was never going to direct resources to where it was needed most. It was passed by the central bank, through privileged dealers to commercial banks and large investment institutions, effectively with the distinctive outcome of increasing asset prices.It was never going to do anything else. It was trapped within a privileged central banking and related high-level financial interest network.
This was economics, but without a general population of consumers (still less the inconvenience of a world with people in desperate need). Each day of this crisis we are presented with reminders that the central bankers, commercial bankers, economists and politicians do not really understand the consequences of the monetary system we have, how it works, or what they are doing.
Reading this
https://www.telegraph.co.uk/politics/2022/05/14/cabinet-ministers-launch-unprecedented-attack-bank-england-inflation/
I have to say much of the vitriol strikes me as scapegoating rather than genuine criticism. I note too none of the critics even attempt to explain exactly (or even broadly) how the BofE ought to be tackling inflation. All the ministerial huff and puff can be dismissed as misdirection then, simply an attempt to shift any incoming blame from themselves to whoever can be thrown under the nearest bus.
I agree: this is scapegoating. That is all neoliberal economics is good for now
OMG!!
Scapegoating to what? – privatise it I wonder!!!
God know what is going though their tiny little minds.
“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.”
The actual argument for independent central banks is that interest rates will be lower for any given worry about future inflation if the central bank is independent. Because we know that politicians will try to time things for the electoral cycle – in favour of their being re-elected. Taking the decisions out of their hands reduces risk – therefore interest rates are lower for any particular stage of the inflation/boom/bust cycle..do you not agree?
Tell me, are you a democract?
If so, why do you want to put the control of the economy in the hands of a banking elite?
Carl
Are you saying that private wealth does not manipulate markets for some sort of gain and to the detriment of others? Have you noticed what has ben happening to energy prices recently?
Try to be balanced eh, there’s a good chap. You sound like James Buchanan.
“Seventh, deflate capital markets using seriously progressive taxation on wealth, including by reintroducing withholding on overseas holdings.”
So one minute you want to increase investment in the British economy now you want to reduce investment in the British economy?…or why not come clean and just saw you want to replace private wealth / investment / enterprise with that of the State. At least have the decency to say what you really mean.
I want to eliminate profiteering by monopolists, which is what most so-called investment creates now
Now tell me why, if you believe in free markets, you disagree with me?
Do you not think that you’ve misunderstood neo-liberalism there by an amount which is not small?
My understanding of that philosophy is that you want markets to compete away the profits so you want conditions which make it easy for new investors to enter the market and undercut, and the benefits are shared between consumers and the new market entrants.
However if we’re to set up government committees to establish the following:
1. Are you making excess profits when your costs haven’t changed much but customers are currently willing to pay much higher prices for what you produce?
2. Are you monopolistic, so not actually a monopoly supplier, but we can intuit that you’d like to be?
3. Are you wealthy?
Then we will confiscate some or all of that wealth. That’s communistic surely?
There must be a centre ground position on this.
I suggest you go and look at the anti-trust laws in the USA dating from the early twentieth century and tell me how communist they are
Come back and tell me how and why they are
I think those proposing them might find your claim hard to believe
Adam Smith said the ‘invisible hand’ of the market ONLY worked when no participant in the market was large enough to have the power to control or manipulate prices. Almost none of our markets satisfy that condition, thus none will achieve an optimum outcome. Indeed most markets have a very small number of large and powerful operators, e.g. supermarkets, oil companies, and tend to be very one sided, e.g. supermarkets vs farmers.
Absolutely correct.
I’m all for a mixture of markets and State intervention but I trust markets less I’m afraid and that is their fault – not mine. What I’ve seen and discovered in my life time about the ‘unseen hand’ is that Neo-liberals and corporations have used this concept to hide their rampant and grasping manipulation of society in plain sight.
Here’s an example.
From what I understand, the State of California in the U.S. – one of the most pro-car of modern states today – used to have one of the largest public transportation systems in the world including bike lanes. Bike usage was widespread and it had trolleys and trams crisscrossing Los Angeles for example etc.
What changed all this was the automobile industry who promoted freeway building because they wanted to sell cars. They even set up shell companies to buy the public transportation companies to close them down, deny people real choice and head towards using the motor car, buying cars.
This idea that the car was a natural choice of society is just plain wrong. It wasn’t. It was out and out manipulation under the guise of ‘modernity’ and ‘individualisation’.
The automobile industry has a lot to answer for given the state of the environment but the way in which they have essentially helped to close down other choices is a story that the public have a right to know. This manipulation is just as bad as any Right wing accusations made on the state or ‘socialism’.
Need any more proof that economics is not a science and not social?