Posen position vacant
Adam Posen is stepping up to become president of the Peterson Institute in Washington instead of seeking a second term as an external member of the Bank of Engalnd’s Monetary Policy Committee.
One of the most vocal and the most transparent members of the MPC since its inception, he is quite an act to follow. He is seen as an arch-dove, but that is more due to circumstances than inclination in my view.
MPC record not so pretty five years on
Five years ago today, Mervyn King, governor of the Bank of England, gave a lecture to mark the 10th anniversary of BoE independence. He also granted the Financial Times a rare interview on the same theme.
I will go into the details in a bit, but the bottom line of both was that the first decade of the monetary policy committee was a huge change that had brought economic stability to Britain. Moreover, the improved economic performance could not be luck because the UK’s performance had improved materially compared with the rest of the Group of Seven leading economies.
This post updates the evidence given by the BoE governor. Everyone knows Britain’s economic performance has deteriorated since 2007. It has also slipped badly relative to the rest of the G7. On the basis of Sir Mervyn’s 2007 logic, the deterioration must be a sign BoE independence has performed poorly and it cannot just be misfortune. Alternatively, I would argue that the 2007 lecture can represent a tutorial in hubris, the measures used were far from ideal and pride, did indeed come before a fall.
It will be interesting to see whether Sir Mervyn agrees in his BBC lecture tonight.
UK’s double-dip recession
Britain is back in recession – gross domestic product fell by 0.2 per cent in the first quarter of this year – following a 0.3 per cent fall at the end of 2011. What should we make of the figures?
1. Is this a deep recession?
No. It is nothing like 2008-09 when output dropped 7 per cent over five quarters. In truth, as Joe Grice, chief economist of the Office for National Statistics said, the economy has been broadly flat since the third quarter of 2010. Some quarters up a bit, the others down. The level of output is now measured at an index number of 98.1 (2008=100) and it was 98.3 in the autumn of 2010.
BoE governor race is on
Mervyn King, Governor of the Bank of England
There is still more than 14 months to go before Sir Mervyn King leaves the Bank of England, but he is already in danger of appearing a lame duck as the race to succeed begins in earnest.
Today the FT reported that Mark Carney, the governor of the Bank of Canada, has been approached in relation to the job by a member of the Bank’s court, its governing body, having spoken to three people involved in the process. Mr Carney declined to comment. The Bank of Canada said the report was not accurate.
The FT also reported that the Treasury wants Charlie Bean, deputy governor for monetary policy, to remain in post after his term expires in June 2013 to provide some continuity as the top echelons of the Bank are rearranged. No one has denied this part of the story and Mr Bean has told colleagues he is willing to accept any offer to stay on for an interim period. So where do these events put the runners, the riders and those subtly touting themselves for the job.
All that money growing on trees
No, this isn’t a post about quantitative easing – which genuinely is a case of creating money (banking reserves) and using it to buy assets in a bid to boost economic output and inflation.
This is a post about the lack of understanding in the UK government that the private sector – whether it is a pension fund, a sovereign wealth fund or wealthy individuals – do not simply give the nation assets.
It is not often that David Cameron, prime minister, is mentioned in the same sentence as John Prescott, former deputy prime minister, but today the PM has made exactly the same error in calling for “getting large-scale private investment into the national roads network – from sovereign wealth funds, pension funds, and other investors”. The PM says:
“The massive programme announced during last year’s Growth Review made a good start. But how do we do more, when , frankly, there isn’t enough money?”
Then he asks:
Why is it that other infrastructure – for example water – is funded by private sector capital through privately owned, independently regulated, utilities……but roads in Britain call on the public finances for funding?
Er….because the UK government has allowed regulated water charges to rise much faster than inflation, so encouraging private investment. Privatisation is really a red herring. The RPI index for water stands at 439 (1987=100) while the general RPI stands at 238.
If we want to build more roads, that is pretty easy. We can pay for them by higher taxes or by tolls, just like more water investment has been funded by higher bills. There is no mystery and no third revenue source. Similarly, we can finance better roads publicly or privately. And we can build and maintain them publicly or privately. All these choices can be made after considering the relative efficiency and equity of each. We do both public and private finance already. The building is almost always private.
Some shadow toll roads Private Finance Initiative deals have been successful. There, private finance is backed by taxpayer funding. Some PFI transport manintenance deals have failed – such as the upgrading of the Tube.
What does not happen is that the private sector invests and neither taxpayers nor users pay. If, as the PM says, “frankly, there isn’t enough money,” then we have to go without.
Jinxed generation: the data
A few people have asked me for more data and information on the jinxed generation article in Saturday’s paper, which shows the youngest cohort of people entering the labour market were the first in over 50 years not to have higher living standards then their immediate forebears.
Paul Fisher finds his voice
I always enjoy reading speeches by Paul Fisher, executive director for markets at the Bank of England. They clearly set out his views and appear to come straight from the central propaganda unit of the BoE. If you want to know the official line on the new Financial Policy Committee or macroprudential policy, read Paul’s speech from last night, for example.
The speech blames the lack of powers available to the BoE for officials’ inability to control the crisis, but reassures us that the new FPC is now seeing its recommendations implemented.
The logic of the speech is that the BoE’s voice could not work before the crisis so the BoE cannot be blamed. Yet voice is succeeding now, so the BoE must get the credit.
What is remarkable is that Mr Fischer seems to forget that the powers available to the BoE now are precisely the same as those available to the BoE in the crisis. New powers will come only when legislation is passed and certainly not until 2013.
Read the speech to feel the full righteousness of the BoE official line. Or you can read the best quotes below.
Monetary policy and redistribution
For almost the entire time the Bank of England has enjoyed operational control of monetary policy, the redistributive effects of monetary policy have rarely hit the headlines.
The public appeared to accept that interest rate rises hit borrowers and benefited savers and vice versa. The vast majority of the commentary related to the analysis of whether any monetary policy change was warranted by the prospects for inflation. This, in Britain at least, was the way the Bank of England liked it.
Unelected officials feel very uncomfortable about being seen to favour one group of society over another. Redistribution, after all, is properly something for elected politicians, since it involves using the power of the state to take money from some to give it to others.
It is noteworthy, therefore, both that the distributional effects of quantitative easing are now being raised vocally by strong lobby groups and that the Bank is feeling peeved, rightly so.
BoE: great speech marred by Bank secrecy
Martin Weale, one of the external members of the Monetary Policy Committee, delivered an excellent speech last night on the determinants of UK consumption.
The value of his speech did not arise from his bolted-on views that he does not think “there is likely to be a further case [for more QE] once our current programme is complete”.
Rather it came from taking a really big issue — the likely path of consumption — and analysing it in a way that brought insights from different sorts of households to the aggregate.
But in such an interesting talk, what on earth was he doing referring repeatedly to economic forecasts from the Office for Budget Responsibility? He has no influence over the OBR forecasts, but is important (one of nine) in agreeing the Bank forecasts.
It was akin to Moody’s downgrading UK sovereign debt on the basis of reading a report from S&P.
Will the Bank follow the Fed?
Here is a prediction. Now the Federal Reserve has moved towards publishing explicit interest rate forecasts, the Bank of England will follow suit. Moreover, it will happen sometime after June 2013.
The reason for my prediction isn’t as simple as the fact that central banks are assiduous followers of fashion, even though they are. But that the more forward-thinking officials in the Bank believe in increasing transparency and have a rather less cynical view of the British public and media than the current governor, Sir Mervyn King.
As Robin pointed out in his post on Tuesday, the Bank of England’s current forecasts have some advantages. By forecasting growth and inflation on the basis of two assumptions for monetary policy (constant policy and market expectations of interest rates), the growth and inflation forecasts are consistent with the assumptions for monetary policy. If inflation is forecast to be lower than target at a two to three year policy horizon, the implication is clearly that monetary policy is likely to loosen and vice-versa.
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Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Ralph Atkins, Frankfurt bureau chief, has been writing about European economics and politics for the Financial Times for more than 20 years following an economics degree from Cambridge. He has been watching the European Central Bank and eurozone economies since 2004. He has previously worked in London, Bonn, Berlin, Jerusalem and Brussels. RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS
James Politi is US economics and trade correspondent for the Financial Times, based in Washington DC. He joined the Washington bureau in January 2008 following four and a half years as US deals correspondent covering M&A and private equity. James Politi joined the FT in London in 2000 with an MSc at the London School of Economics, and undergraduate degrees from Georgetown University and the University of Florence. RSS
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