I took some time off writing over the weekend. That did not stop me musing. One strand of thought was on central banks, or rather the failure of the model of central banking that we now have.
Since the 1990s in the UK, and at various times before and slightly afterwards elsewhere, pressure brought to bear on governments by neoliberal economists of a monetarist persuasion was used to secure the supposed ‘independence' of central banks from central government control.
Various arguments used to support this policy initiative. The worst (from my perspective) was that it took interest rate settings out of the political arena and gave control of it to central bankers instead. The idea that that were in any way apolitical is, of course, absurd. They very clearly all have pro-wealth agendas to run, but such policies are apolitical in the neoliberal lexicon, and so did not count in the opinion of those proposing this policy or defending it ever since. Bias towards the wealthy and against those who worked was hardwired into the system as a result.
Then there was the fact that this policy split control of economic policy as a whole. It was claimed that monetary and fiscal policy were different issues and that they could be managed independently of each other. Government could have fiscal policy and the central bank monetary policy and mysteriously, and without explanation as to how, co-ordinated policy initiatives were still meant to happen.
They did not, of course. Instead what happened was that, as neoliberal economists expected, government was put under pressure to never increase a tax rate meaning that fiscal policy was effectively neutered, and monetary policy become predominant. This was another remarkably useful outcome for those with wealth. No policy measure now impacted them: the economy was to be managed via unemployment and the imposition of misery on those who had to borrow.
Perhaps more importantly, central banks like the Bank of England here in the UK were given just one policy objective to fulfil. They were told to control inflation without having to take any other matters, such as full employment, into account. Nothing was better designed to deliver boom and bust.
And then there was the issue that the only policy tool given to central banks was control of the interest rate, which remains the case despite the introduction of QE because that takes place only with the permission of the Treasury in countries like the UK.
Using the interest rate to control inflation might have been a useful tool if there was any evidence that it worked. The slight problem with that is that there is no such evidence.
For a long time that did not matter. By the time the model of central banking we have now had for around 25 years was up and running the risk of inflation had largely disappeared from the economy. That was largely because of the impact of the emergence of China on the world economy that over two decades reduced inflationary pressure to close to zero. That had nothing to do with central banks or central bankers, but they felt omnipotent nonetheless.
Even two major crises in 2008 and 2020 did not rock that confidence. Instead they became masters of the universe, creating money out of thin air as if this was some new trick, when it was not. But it did just increase their sense of importance.
And then came inflation. It was not the sort of inflation they had been taught about and which they thought Paul Volcker had shown how to manage in the early 80s through his brutal imposition of recession on the US economy.
That type of inflation, for which they thought they were prepared, was the result of excess domestic demand chasing too little domestic production.
Instead the inflation we got was because of external shocks, supply chain disruption, commodity market profiteering and corporate profiteering, all taking place against a background where households already stressed by low earnings and debt servicing could take little more financial punishment, but were asked to do so nonetheless.
Nothing in the central banking textbooks allowed for this. And since central bankers have all been taught to think alike none had the ability to imagine what was really going on, let alone work out how to deal with it. Instead they assumed that we must have the only type of inflation that they had been told existed, and so responded as they had been taught to do, and raised interest rates.
Again.
And again.
And again.
The trouble is that this has not worked. Inflation is not falling as their theory said it must. There are three reasons.
First, inflation was not of the sort central bankers imagined. Inflation caused by external factors was never going to respond to domestic policy measures.
Second, the driver of inflation was not wages but interest rate policy was solely designed to impact on wages and net household incomes. The prescription missed the cause of the malaise as a result.
Third, the supposed art of managing interest rate expectations, which justified the continuously rising rates (using the logic “do as we say or the beatings will continue”) does not have any impact on the short term speculations of commodity traders and corporate entities that can use price confusion to increase their profit margins, potentially in the losing term.
Unsurprisingly, if you use the wrong tool and target it on the wrong people, and do both these things to target a type of inflation that you are not suffering from then the policy does not work. That is what is happening in the UK and elsewhere.
So what should be done?
First, rate increases should first stop and then fall.That should be obvious by now. If the policy is not working but is causing harm the policy is obviously wrong and should be reversed.
Second, central banks should be brought back under state control. That should be obvious by now. The democratic deficit implicit in the independent central bank model must be removed.
Third, there must be a clear out of central bankers. The wrong people, with the wrong training and the wrong mindset are doing the wrong job at considerable cost to society.
Central banking is necessary. It should also be very boring, and lack a significant policy component. Policy is a job for government.
Nothing less than a central banking revolution is required now. But at least this revolution has few likely victims and the chance of success is high. That, by itself, is unusual and makes this a good place to start when the required radical transformation of our economy is being considered.
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This makes EU membership problematic for a newcomer. The EU states among many of her criteria that
“In particular, national central banks must be independent”
And try getting a woman to change her mind.
So we make them independent but not in control of inflation policy
Silly me, from the central bank issue Scottish independence and EU accession is so easy. Problem solved
Oh dear: I spy trolling
I’m not claiming any expertise here , but as the Maastricht Treaty seems to place great emphasis on CBs being responsible for price stability, wouldn’t we have some difficulty with rejoining the EU if we took this away from the BoE?
Maybe….
But if they were given that responsibility and required to do-ordinate with fisca, policy? What then?
1st line, final paragraph, last word “it”, should perhaps be “at”?
Corrected
Thanks
This government isn’t likely to reform the BofE. I’m sure most of its members think the BofE is doing a grand job.
And the Labour Party wouldn’t dare even if they get the opportunity.
I cannot imagine what it will take to change the UK’s current drift, but one way or another I think it will be messy. (Messier than it is already)
But please keep on trying to inject some sensible ideas into the political arena. Some people are certainly listening even if the right people aren’t…….. maybe the people listening now will become the right people of the future ?
On the nail again. It can be added that the Neoliberal Death Cult has various planks in its ideology chief amongst them that really only the production of goods and services by the free market counts or put another way anything produced by the public sector has no value. As I’ve argued previously this is nonsense because the free market wants to free-load or free-ride. To maximise profit and to stay in business free market enterprises abuse the planet as an eco-system, want somebody else to pay to educate their workforce and keep them healthy, etc.!
Clearly a government that wants a moral balance in how things are valued can restrict free market activity in order to make way or more room for state delivered goods and services and to minimise any potential inflationary impact. It can do this in various ways. For example, it can put restrictions on private sector bank loans. It used to be the case in the UK you had to save a substantial deposit before you could get a house mortgage loan, an equity contribution if you like. Or it could be evidence of a minimum level of deposit savings before you are eligible for a credit card, after all with inter-bank loans banks require collateral! There is obviously also the mechanism of re-balancing taxation as you’ve often argued. To take but one example why should capital gains be charged at a lower rate than earned or waged income.
A detailed post.
Central bank independence is just a sneaky way of depoliticizing interest rate control away from politicians to so-called ‘experts’ who are ‘allegedly neutral’.
That way, MPs and ministers can hide behind them and their decisions and claim its all based on facts and the immutable laws of the market.
The fact that it was money creation by sovereign governments that created these markets and the licences it gives to private banks to create credit is all down played to create the artificiality that states do not have a role in markets except to enable them to be as free as possible to do as they wish.
This links quite well to one of last week’s themes: infrastructure failure (Thames Water – et al). The politicos may not like it – but the nettle of failing critical infrastructure will need to be grasped. I’m guessing that the vile-tories will do nothing, instead passing the poisoned chalice to vile-liebore, confident in the knowledge that that party is to stupid/timid/tory-lite to actually change things.
At the heart is money – where will the money come from? for infra re-build etc etc. There is only one institution that can deliver – the BoE – which as you show, is at best disfunctional, at worst contains the same types of people/mindsets that wrecked Thames Water etc. Thus there needs to be root & branch reform. Certainly all the top people at the BoE should be thrown out as a danger to the national interest.
This link is interesting (in the context of failed infra) – although the writer does not seem to be able to think beyond gov issuing bonds.
https://morningporridge.com/blog/blains-morning-porridge/thames-water-the-straw-that-broke-the-uks-back
I was taken by Bain’s Morning Porridge rework of Thatcher’s quote on socialists: “Conservative governments traditionally do make a mess. They always give away our money to their chums…”
During the euro crisis c.2011, when the EU minsters made a decision, we would hear ‘what will the markets make of this?’
Gove was on Kuenssberg a week or so ago saying something similar.
Direction of the economy by a small number of very rich people, whether by central bankers or bond markets, is not democracy. MMT liberates us in the sense that govt. spending does not depend on bond sales.
Hi Richard spot on here. Central bankers represent the interests of banks and the rich. The idea that a central bank could be independent was ok when low inflation was being imported from China. Then it wasn’t. The interests of the people suggest that now the independence has passed its sell-by date. Crashing the economy and especially the housing market, lowering wages and destroying public services shows the model is broken. Who represents the woman in the Mile End Road omnibus? Nobody currently. Then there is brexit
Not good
DGB
Agreed
Recently, the Australian Government announced that they planned to widen the membership of their equivalent to the Monetary Policy Committee to become more representative. The New Zealand Minister of Finance crowed (sic) in response that they had already done that. However, that change in New Zealand has has done nothing to change policy away from high interest rates and the rest of the neoliberal kitset. Plus ca change!
Hi danny why are you no longer on twitter?
They suspended me without explanation just said I broke their rules of engagement….
“Central bankers represent the interests of banks and the rich” [Danny Blanchflower: The?)]
Yes but so does a Tory government.
I was all for the move to an independent BoE when Gordon Brown made it, essentially due to the belief that the economy does need de-politicising to some degree, to avoid the Orange Juice politics (rip-it-up-and-start-again – one for my generation) of a change in government. The Tories are particularly notorious for this, seemingly spending the first year of any new government destroying everything in their path like a child having a twelve-month tantrum. If something has a name and that name was given by Labour, change the name (and everything else). Petty. It is ‘urban wisdom’ that companies like/demand stability. Changes in government are anything but.
So – and please excuse a challenge of sorts as I’ve never been a sycophant – I’m somewhat surprised by Richard’s antipathy towards an independent BoE, even after reading the justifications. I agree there is a clear democratic deficit, but then a Tory government getting elected with 35% of the vote is the biggest democratic deficit, so moving interest rate policy responsibility back to government would just be swapping one democratic deficit for another.
Question for you, Richard – Are we not in a situation these days whereby ‘the markets’ more or less decide what the interest rate should be? Such that even if interest rate policy responsibility is switched back to the government, if the markets don’t like where the rate is compared to their expectations, government will be under huge pressure to realign to market expectations? We saw what a mess Divine Wind Kwarteng got into last autumn. And of course this is much a democratic deficit as before, if not worse, as the markets will not take into account any ‘social benefit’ element of interest rate policy but will look at it purely from an economic pov. I’m reasonably sure the markets have no direct interest in the welfare of the woman on the Mile End Road omnibus. And if the markets effectively decide interest rate policy, does that effectively mean that BoE independence is pointless as the committee will likely tend to be attracted to market sentiment?
If there were a social element of interest rate policy, for instance, to maximise employment, would the markets reject it, or would they take it into account and mark gov/BoE out of 10 accordingly?
We will have to disagree on democratic deficits, and it is clear I argue for electoaal reform as well
Re interest rates – no amrkets do not set them – they are heavil guided by central banks
To answer your question isn’t actually easy in the current climate of human development of a global financial system. You need first of all to understand MMT which tells you that every state sovereign in its own currency is able to determine base rate not the market. However, given that the private sector finance market is unstable because of uncertainty and corruption (see Hyman Minsky’s Instability Hypothesis) this means a lender or dealer of last resort is necessary which has to be the sovereign state according to MMT theory.
However, there is still some debate whether the world ultimately needs this to be a single hegemonic state currently the United States (see Perrry Mehrling’s book “Money and Empire”). Throwing a spanner into the hegemonic idea is China which still currency rigs and clearly this does have an effect on the value of the US dollar as does the current move to depend less on Chinese manufacturing because of potential global supply chain problems. This is creating inflationary problems for countries previously dependent on China. In simple terms if China is buying less US treasury bonds to prop up the US dollar then will the US being less reliant on China and manufacturing more to meet its needs counteract any decline in the value of its currency? Does this mean the US will therefore be better placed to help out other countries it perceives as friendly and sharing its own values as a dealer or arbiter of last resort? These are some of the main issues bubbling along beneath the surface.
Thank you
Re. this:
“If there were a social element of interest rate policy, for instance, to maximise employment”
The Australian central bank has that. There might be some other such examples as well (?).
https://www.bis.org/review/r230620a.pdf
The US Fed is required to consider it
It seems to have little impact
[…] Cross-posted from Richard Murphy’s blog ‘Funding the Future’ […]
Here are two interesting papers which raise the question whether Andrew Bailey at the BoE still believes in the Loanable Funds idea despite the official position of the bank that it doesn’t:-
http://www.paecon.net/PAEReview/issue104/Keen104.pdf
http://www.paecon.net/PAEReview/issue104/Spano104.pdf
I have yet to read them….
Richard says:
“Unsurprisingly, if you use the wrong tool and target it on the wrong people, and do both these things to target a type of inflation that you are not suffering from then the policy does not work. That is what is happening in the UK and elsewhere.”
Spot on!
Replacing fiscal policy with monetary policy was always one of the main pillars of neo-liberalism. Now monetary policy, as the key macroeconomic tool, doesn’t work – at all – anymore. As a response to recession it hit Zero Lower Bound (and QE just made asset-price inflation worse). As a response to inflation its now getting nowhere whilst needlessly torturing mortgage holders.
This, needless to say, confirms that neo-liberalism is dead, done, kaput, game over.
That’s one reason why the govt’s, big business and media are so painfully slow to admit or even realise that the interest rate hikes aren’t working. The implications are too much for them to bear.
The two papers I reference above contain the idea that at the heart of the Neoliberal Death Cult is the debilitating effect of what’s called “creditocracy.” This is the belief the stability of liberal democracies is being undermined by a coalition of market fundamentalist thinking politicians and private banks who fail to understand the inherent instability of loading up economies with private sector debt.
It is one thing to build a bridge into an uncertain future by using money to finance the production of goods and services and hoping that at the end of that bridge there will be a surplus of money or profit to stay in business quite another to borrow that financing money and then discover banker greed via capture of a central bank or ill-thought out inflation policy has substantially increased the cost of using money and increased profit uncertainty. Certainly it true businesses can raise their prices but if demand is being undermined by the cost of debt amongst customers it’s a vicious circle.
The whole concept of an “undermining creditocracy” makes the idea of the world continuing to have a single quasi hegemonic monetary stability order like that of the United States dollar currently highly problematic!
https://en.wikipedia.org/wiki/Hegemonic_stability_theory
https://sites.bu.edu/perry/files/2019/04/The-Vision-of-Hyman-P.-Minsky.pdf
I love this – common sense, music to the ears! Exactly what I have been thinking but wouldn’t in a million years be able to articulate. How can anyone think that the current fiscal or monetary policies are working when by most measurements the UK economy is dying slowly and with it all the key state services that a healthy state and citizenry require. Political priorities should be about a resilient and healthy nation. If this was the case we’d be looking at the way in economy works in a very different and more beneficial (to the majority) way and not through the lens of theories 40 or more years old which patently are not working in today’s world – unless of course you are in the minority in which case it’s bonanza time.
Thanks
Thames Water, Funding the future etc……
Most of your readers will have been instinctively aware that the knockdown sale of North Sea oil & gas resources (5 years before peak production & subsequent peak income) + the sale/franchising i.e. privatisation, of essential utilities/services, public transport, the corporate erosion of the NHS et al, was & is a can of worms. You, however, have opened that can with the precision of figures, facts, & then drew reasonable conclusions that now renders the case against this privatisation nonsense utterly irrefutable. Well done!
Let’s move on: most of those same readers will also be instinctively aware that striking a productive balance between public & private sectors is essential to economic health. We can all make our own lists of what should be in which sector. There is no need to labour the point. The problem of course is that we have no such balance. We have been invaded by a neo-liberal armada with privatisation as its flagship.
Behind this sustained neo-liberal campaign is the cabal of megabanks/corporations that in effect “owns” its supportive media, (& the BBC by means of its passive acceptance of status quo) political parties, & politicians all over the world. As a result we have de facto governance, the unseen hands pulling the strings & playing the tune that our leaders all have to dance to. Note Starmer cosying up to Murdoch & Son recently just like Blair 20-25 years ago!
Your latest article on central banks (in particular ours i.e. BoE) coincides with my questions about private commercial banks (PCBs), & what, if anything, could or should be done about them. Currently (obviously) in the private sector, should they brought into the public sector either wholly or partly?
Deregulation in 1985, & the USA’s 1999 repeal of the 1936 Glass Steagall Act, represent two of multiple trigger-points that resulted in the 2008 debacle. I don’t have figures on how many USA Savings & Loans operations (in effect mutuals) were subsumed prior to & after 1999, but UK had in 1960 some 725 Mutual Building Societies – by 1985 only 2 were left. This process coincided with the gradual & unfortunate discrediting of Keynes’ philosophy & economics (I am not an Economist incidentally) & replaced by its Neo-liberal alternative. I am guessing that its original main proponent, Hayek, may well have been an idealist – that would not have mattered to the Bankster Corporations who co-opted & probably distorted matters for their own ends. And in Milton Friedman they had an advocate who had Thatcher’s ear, hence the conversion of Conservatism into full-blown Neoliberalism. I read somewhere that he later recanted – too bloody late!
Should the PCBs be charged with recreating the mutual scenario – over time of course & accepting that a damned sight more than 725 from 1960 would be needed to meet current mortgage demand?
We are also mutually aware (unintended pun) that there is lot of tax-incentivised investment floating around in PCBs that does little more than provide casino money for them. We had a brief exchange about ISAs for example (appended). As you pointed out it is NS&I not BoE (both of course wholly owned by government as is the DMO) who handles their less than 10% market share of ISA sales. In 2021 total ISA sales was £73 billion: NS&I contributed £4.4 billion to government based on a “target” contribution of “between 3 to 6 billions). I am hazarding a guess (haven’t been able to verify – you could?) that they must have actually sold circa 5 to 6 billions to meet that 4.4 actual to government. Whether this is part of or additional to the over-all sales of 73 billions, I know not.
Even with this somewhat limited level of sales, however, NS&I have apparently found it necessary to outsource some of their work to ATOS. Another snouts-in-the-trough syndrome or a necessity? I don’t know, but it does raise questions about the capacity of NS&I should exclusive rights to ISA sales be considered a good idea. Could there be some kind of compromise here?
Enough: you may perhaps see where I am going with this. Most of what goes on in all of these organisations is little short of electronic skulduggery based on centuries of historic precedent. None of it is fit for purpose & none of it addresses the fundamental need for world-wide change.
Is fundamental redesign even possible?
PREVIOUS BRIEF EXCHANGES:
Following your Robert Owen day video on “financing the future” + Thames Water + wider picture:
Our exchanges so far –
Alan Peyton says:
June 13 2023 at 6:40 pm
your video on funding the future: interesting figures, facts, & ideas on ISAs….why doesn’t BoE offer them directly instead of letting private banks do it?
Richard Murphy says:
June 13 2023 at 6:44 pm
Not the job of the BoE
But it could be that of NS&I
Alan Peyton says:
June 13 2023 at 6:55 pm
mistakenly thought that NS&I was part of BoE!! Maybe it should be?
Richard Murphy says:
June 13 2023 at 7:04 pm
No
Definitely needs to be separate
Alan Peyton says:
June 13 2023 at 7:33 pm
will investigate…..don’t want to abuse your time..you have enough on your plate given the almost complete absence of political traction for changing the way things are done.
Thanks