The Bank of England Financial Policy Committee said that leaving the EU was a financial risk yesterday. You would think that a statement of the obvious but in a highly charged environment it was contentious.
The Bank of England, and the economists who lovingly crafted its so called independence, wish it to be thought above politics, and certainly independent of it. But that is absurd, and impossible. Politics is not quite all about money at the end of the day, but it is very definitely important. And the Bank of England is a government agency tasked with managing monetary policy. Not only should it be integral to the state it is also integral to the implementation of any government's policy. If it likes to pretend otherwise its decisions can be over-ruled.
As a matter of fact then the Bank of England is inherently political but it is surrounded by a pretence that it is not that is viable only if there is a singular political consensus that supports the facade. We had that from 1998 to 2010, and it has been convenient for the last and present governments to continue with it, not least because it gives them room to deny their responsibility for delivering a fiscal stimulus. But, Brexit is shattering that consensus. There is no one view on this issue. The reality of the political role of the Bank of England is revealed as a result.
No one should be surprised: central bank independence has always been a neoliberal sham that suggests that life can be compartmentalised into what is political and what is not; what is rational economics and what is subjective opinion. There are no such divides, whether in the NGO or academic worlds, or in Threadneedle Street. To pretend there are is to lie in support of a world view that is both intensely political and deeply oppressive of alternative views.
At the end of the day, the Brexit campaign is not, I suspect, going to upset that world view. The pretence that the Bank of England is independent will be restored soon as a result.
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Yes, the Bank and the Treasury march to the same beat. Interest rates will move when it is politically acceptable, not when it is economically desirable and to think otherwise would be naive.
Yes they do march to the same beat especially George who uses the Colombiam Marching Powder to keep in step with Carney.
The Bank was founded to sort out the finances of a bankrupt monarch. Since then it has always been as political as it has been financial. Unluckily for us all it won the debate on gold in the 1840’s and then prevailed against bi-metallism and flexible monetary systems at the end of the 19th Century. We have been paying for its politics ever since.
As a nationalised institution since 1946, its owner is the UK state and therefore any notion of independence is just that – notional (and can be modified or abused at will).
Which does raise the question of why, having accepted that a nationalised bank is a more effective way to manage the central banking functions, there is the slightest concern over increasing the nationalisation of the commercial banks which have clearly failed to develop and/or protect the national or public interest?
Keith
I do not think that the private sector accepts the existence of the BoE. Why just print money when you can issue it as debt and get a nice little earner from the interest from the great under paid unwashed?
I agree with the post: BoE so called ‘independence’ is signalling to the private banks that they can basically do what they want.
Well they did – and they messed it up real bad and then needed the central banks to bail them out.
Really, this should be ‘game over’. We just need some courageous politicians now who will make that clear.
I’m still waiting…………….
“The Bank of England Financial Policy Committee said that leaving the EU was a financial risk yesterday.”
But their reasoning was that “borrowing costs” rise? At least I saw that in the Guardian. There is no transmission mechanism. Just a scare story.
The entire conclusion put forward follows from the premise that the bond markets can decide things.
However if it is clear to the markets that the government believes it ultimately controls the Bank of England and the understanding is that the Bank of England will prevent yields from rising, then they will not rise.
Any bond that drops below par can be purchased by the Bank of England and cancelled. That means that the private sector gets less back than it paid out for the bond.
And that is a tax. Show me a financial person that will voluntarily queue up to pay a tax and I’ll show you a unicorn.
So it matters not what the bond market thinks. It matters whether the government decides to *voluntarily tie its hands*.
Outside of the EU the government can run an overdraft at the Ways and Means Account and there is no need to issue Gilts at all.
At the moment:
Government spending from cash buffer/intraday overdraft => taxation plus private savings => purchase newly created government bonds => QE by the Bank of England of government bonds.
And we *only* have to do the double shuffle because the EU treaty prevents us from simply running an overdraft at the BoE.
I’ve seen that piece of propaganda from the BoE in the Guardian. It is bullshit.
The BoE offers *unlimited intra-day overdrafts* and nobody operating those accounts needs to co-ordinate the balances until the end of the day. That’s how it works.
The money to ‘pay for’ the interest on Gilts comes from HM Treasury’s Cash Buffer and on a heavy spending day the intraday overdraft – aka created – to pay the interest. It is either spent or saved in precisely the same way as any other government spending – generating taxation and net-increases in saving to the penny.
Government spending is always paid for by spending the money.
The injections that the government make into the economy from their spending buffer increases the demand for Gilts at the DMO. It’s like the economy breaths in before it breaths out.
The key thing to remember is where the control point is. There is *nobody* in this system that can bounce a government cheque and there is nowhere else for anything HM Treasury spend to go other than to other accounts at the Bank of England. So it all just bounces back and forward intra-day and settles up nicely at the end of the day (with DMO borrowing back from the banks like any other bank does if they are short of reserves to hit the arbitrary end of day ‘clearing’ figure).
Everything is always ‘fully funded’ because the money can’t go anywhere else. It’s like sitting on a water bed. And that’s the key point.
When you look at France, the money there can leak out to Germany – because they are in a fixed exchange system called the Euro. That can’t happen here.
I am sorry, but this is fantasy stuff
It uses MMT and distorts it out of reality and ignores legality
I engage with the real world
But you agree, as I know, that the power of ‘bond vigilantes’ is mythical in the case of a sovereign currency.
To adapt a quote of Bill Mitchell:
‘The Central Bank can maintain yields on treasuries at whatever level it chooses, at whatever maturity range it targets, and for as long as it likes. The bond market investors are incidental to that capacity and are supplicants rather than drivers.’
No, I don’t agree
Certainly in the short term that is not true
Richard, you seem to have missed my point that ‘borrowing costs’ are controlled by the Bank of England. So if ‘borrowing costs’ go up, it is because the BoE lets them, not because of anything else.
“Certainly in the short term that is not true”
Usually they don’t intervene, but there is absolutely no reason why they can’t. And “the markets” know that.
I think you over simplify and are ignoring lags