Monthly Archives: April 2008

The United Kingdom has been blessed since 1997 with an exemplary division of labour between the government of the day and the central bank. The government makes fiscal policy, sets the inflation target and appoints all but two members of the nine-member Monetary Policy Committee of the Bank of England. The remaining two members of the MPC are appointed by the Governor of the Bank of England after consultation with the Chancellor of the Exchequer. The Bank of England sets Bank Rate to pursue its legal mandate, as stated in the Bank of England Act 1998.

Operational independence for monetary policy was granted to the Bank of England in 1997 by the then Chancellor of the Exchequer, one Gordon Brown. This good Gordon no longer holds the job of Chancellor, and I have no idea what became of him.

For the benefit of his successor, and of the current prime minister – a man who strangely enough carries the same name as the 1997 Chancellor of the Exchequer but is in no way related to that far-sighted institutional innovator – let me restate the legal mandate of the Bank of England:

Mr Greenspan’s apologia pro vita sua in the Financial Times of Monday, April 7 2008 fails to convince.

  1. The Greenspan Fed (August 1987 – January 2006) did indeed contribute, through excessively lax monetary policy, to the US housing boom that has now turned to bust.
  2. The Greenspan-Bernanke put is real. It is an example of an inappropriate monetary policy response to a stock market decline.
  3. The Greenspan Fed focused erroneously on core inflation, rather than using all available brain cells to predict underlying headline inflation in the medium term.
  4. The Greenspan Fed failed to appreciate the downside of the rapid securitisation during the first half of this decade and acted exclusively as a cheerleader for its undoubted virtues.
  5. The Greenspan Fed displayed a naive faith in the self-regulating and self-policing properties of financial markets and private financial institutions.
  6. The Greenspan Fed, by enabling the rescue of Long Term Capital Management in 1998, acted as a moral hazard incubator.
  7. The failure of the Greenspan Fed to press, before or after LTCM, for a special insolvency resolution regime with prompt corrective action features for all highly leveraged private financial institutions that were likely to be deemed too big and too systemically important to fail, demonstrates either bad judgement or regulatory capture.
  8. During his years as Chairman of the Federal Reserve Board, Mr. Greenspan’s statements reflected a partial (in every sense of the world) understanding of how free competitive markets based on private ownership work. This partial understanding guided his actions as monetary policy maker and financial regulator. Mr Greenspan’s theories have been comprehensively refuted by the financial crises of 1997/98 and 2007/08.

This blog is a comment on Martin Wolf’s Column in the Financial Times of Friday April 4, 2008, “Four falsehoods on immigration”.

Martin and I have crossed swords before on the issue of immigration. Our disagreement is fundamental and based on different ethical premises. Martin believes that existing residents of a country have a right to control who enters their country. The House of Lords select Committee shares this view, as is clear from their Report, The Economic Impact of Immigration, which asserts that the criterion to be used to assess the costs and benefits of immigration for the UK is the impact on the existing resident population.

I reject that view. The wellbeing of the existing resident population is no more, and no less, relevant than the wellbeing of any potential immigrant to the UK, wherever in the world he or she may be. I recognise private property rights. My home is my castle and I can deny entry into it to anybody at any time. I don’t recognise national property rights. A country is not like a private home. A country is an open club.

At last a local outbreak of common sense. The Advisory Council on the Misuse of Drugs, an independent expert body established under the Misuse of Drugs Act 1971 that advises government on drug related issues in the UK, has come out against UK government proposals to reverse the 2004 downgrading of cannabis from a class B substance to a class C substance.

I don’t know what irks me more about this government – the puritanical, kill-joy zeal with which it tries to hunt down and eradicate every vice, even those that do not impose material harm on third parties, or its inability/unwillingness to get its brain in gear once its emotions are engaged/the smell of elections is in the air.

This blog is a response to Martin Wolf’s FT Economists’ Forum column “The prudent will have to pay for the profligate” – as indeed they will, because that it what God made them for.

Much of what Martin says is right. He does, however, in his discussion of government purchases of impaired assets, call a child of mine ugly, and as a co-parent (with Anne Sibert) of the Market Maker of Last Resort, I feel obliged to protest.

Martin writes: “The solution they all desire is for the government to act as lender of last resort against illiquid instruments and buyer of last resort of impaired ones. While the former activity has been known since the days of Walter Bagehot’s Lombard Street, the latter is an overt bail-out.”

Not so, or at the very least, not necessarily so. When markets are disorderly and illiquid, it is not just the prices of good or prime assets that fall below their fundamental values. The same holds for the prices of bad, impaired and sub-prime assets. Impaired assets too will have a fair or fundamental value. That fundamental value may well be far below the face value of the security, but it may also be well above the price the impaired asset would fetch in a fire-sale in an illiquid market.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website

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