Policy Research in Macroeconomics

Tory MPs have a nerve to attack the Bank of England

When David Davies MP (not to be confused with cabinet member David Davis MP) tweeted

“Mr Carney you are an unelected bank official. Theresa May has got every right to tell you how to do your job!”

he was quite wrong. Bank of England officials are civil servants and are given a mandate by Britain’s elected government. However, Bank of England officials have primary operational responsibility for fulfilling that mandate. Theresa May could, if she so wished, provide a new mandate, but she cannot tell Mark Carney how to do his job. 

The current political mandate is for the Bank to use unconventional monetary tools to boost the economy. – the very thing that Mr. Davies and many of his pro-Brexit colleagues object to.  But these MPs have a nerve to complain about the mandate. It was after all issued by their Conservative colleague, George Osborne in March  2013, as the BBC reported here

“The Bank of England has been ordered to consider using unconventional monetary tools to boost the economy, as growth forecasts were cut again.”   

Furthermore the man who until recently was David Davies MP’s leader, the Prime Minister David Cameron, was even more explicit about the Bank of England’s democratic mandate:  

“…while we may be fiscal conservatives, we are monetary radicals injecting cash into the banking system and introducing credit easing measures to make it easier for small businesses to access finance.”  (Davos, 26 January, 2012)

The Bank of England is a nationalised central bank

This is an important debate, because the Bank of England is of course a nationalised bank. (It was nationalised in 1945 after the debacle of the 1930s when the then ‘independent’ Bank was responsible for catastrophic economic failure). And the Bank of England is distinct from the European Central Bank which is truly ‘independent’ – and has no democratic mandate at all. Instead the ECB is expected to abide by ‘rules’ – so-called ‘ordo-liberal’ rules – embedded like concrete in the EU Treaties, and based on deeply flawed economic theory defined by George Soros as ‘market fundamentalism’  The ‘rules’ are too inflexible to address the chronically weak condition of the Eurozone economy, and as a result unemployment remains high, and economic activity depressed. No wonder there are growing divergences in Europe fuelling a populist revolt against ‘elites’ of the Union itself, and bolstering right-wing and even fascist political parties.  

But is QE appropriate?

Of course elected politicians like David Davies MP have every right to question whether ‘unconventional monetary tools’ are appropriate at this point in the ongoing Great Financial Crisis. I happen to think that central banks around the world played a heroic role in rescuing the global economy from catastrophic failure in 2007-9 – and we should be grateful for that. We were on the brink of financial meltdown, and as individuals and firms would have lost access to our own funds deposited in banks had central bankers not intervened. 

However the economists that advised governments at that time – most prominent among them Kenneth Rogoff of Harvard University (Mr. 90%) – argued that it was unwise for governments to use their powers, including ‘accommodative’ monetary policy, to spend – to invest in jobs, higher public sector pay (which would raise private sector pay and help in paying down debts), new skills, or for example, the transformation of the economy away from fossil fuels. No, said the world’s most influential economists, governments had to ‘tighten their belts’ ‘balance the books’ and not ‘crowd out’ private sector investment, spending and borrowing.

And plenty of politicians echoed their mantra of ‘fiscal conservatism’.

However, these same deeply orthodox economists were on the whole relaxed about ‘unconventional monetary tools’ – as these could be used to bail out the banks and support the finance sector. And then, they unwisely argued, banks would be fixed, and would surely start lending into the real economy to finance the recovery. 

The result was inevitable. First, there was no expansion of lending into the real economy. Or if banks did lend to firms and SMEs – they charged very high, real rates of interest – in the hope of making quick returns. 

Instead bankers and financiers who were beneficiaries of central bank largesse went on a wild speculative spree gambling e.g. that assets like property prices in London, New York or Auckland would rise forever; that prices of soya beans or emerging market currencies or US Treasuries (you name it) would rise or fall. They reckoned they could make much more money from speculation than from investment in the real economy. And they were right. Obscene amounts of money were made.

The really tragic aspect of this all is that no central banker anywhere in the world applied conditionality – ‘terms and conditions’ – for the taxpayer-backed guarantees/bailouts/largesse.(As an aside, when any poor country gets a loan from the IMF or World Bank the conditionality is intense.)  While banks were required to build up capital buffers – a commonsensical requirement for a stake (or equity) in their own risk-taking –  there were no conditions applied to what the largesse of QE was to be used for. 

No central banker insisted that the banks concentrate on investing in the kind of projects that would create decent, well-paid jobs and activity to generate the income needed to keep the economy afloat, and to repay the debts that had burdened consumers and firms, and that bankers had lent so recklessly. 

Nor did central banks penalise speculative conduct. 

As a result private commercial banks suddenly found that far from being insolvent and made to pay a price for bringing down the global financial system, they were being rewarded! Their speculative activities were now backed by taxpayer guarantees, central bank largesse in the form of QE, and historically low interest rates. They could not believe their luck. No wonder they kept employing and rewarding orthodox economists. 

Of course the party could not last. The emergence of Donald Trump in the US, UKIP in the UK and of right-wing parties in Europe – and even of David Davies MP – are just symptoms of democratic revulsion at the imbalances and injustices caused by skewed, deeply flawed economic policies (including ‘monetary radicalism and fiscal conservatism’) that enrich the rich, and leave the rest much poorer and more unequal. These political uprisings are also a rejection of Social Democratic parties that went along with the economists’ advocacy of globalised market fundamentalism. 

But where, you ask, are all the orthodox economists who landed us in this mess? Hiding away in university departments, a long way from the site of battle. One is promoting a new book on whether we need cash, others are mulling over their next peer-reviewed article on micro-economic theory, while all the while effectively asserting that the mess the world currently finds itself in, is ‘nothing to do with me guv’.  

PS This blog has been amended to include reference to ‘capital buffers.’

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