Saturday, March 20, 2010
Bizarre ideas from a former governor of the Bank of England.
For some strange reason two UK newspapers have chosen to report comments made by a former governor of the BoE to the Treasury Select Committee in 2007, yes 2007. I’ve heard of newspapers dressing up old news as “news”, but this is stretching it a bit. Anyway, the “old news” is actually very interesting, so well done the Independent and the Daily Mail.
There a few mysteries surrounding this story. For example, why are these newspapers reporting this storey NOW? What is their source? I’ve looked at old Treasury Select Committee hearings on the Internet and cannot find anything.
My comments below are based just on these press reports. Hopefully the source of these stories will become generally known quite soon. Anyway, according to the Independent and the mail the governor said:
"In the environment of global economic weakness at the beginning of this decade ... external demand was declining and related to that business investment was declining. We only had two alternative ways of sustaining demand and keeping the economy moving forward: One was public spending and the other was consumption. Now of course it's true that taxation and public spending may influence the economic climate, may influence consumer spending. But we knew that we were having to stimulate consumer spending; we knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term.
But for the time being, if we had not done that the UK economy would have gone into recession just as has the United States. That pushed up house prices, it increased household debt ... my legacy to the MPC if you like has been 'sort that out'."
There is a huge amount of nonsense here.
First, take the phrase “We only had two alternative ways of sustaining demand and keeping the economy moving forward: One was public spending and the other was consumption.”
Well what other elements ARE there to aggregate demand? The only other one is exports, over which government has little control. The fact that the above two are the only ways that government has of influencing demand has been true of every country worldwide for the last hundred years. The governor might as well have announced that water is wet.
Second, take the statement “But we knew that we were having to stimulate consumer spending; we knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term.” Now why is this a problem?
Given inadequate demand, governments and/or central banks can boost spending: as Keynes and others pointed out long ago, this is what governments NEED to do. It is what the OUGHT to do. To complain about the need to do this is a bit like complaining that growing children consume a lot of food.
Third, take the phrase “That pushed up house prices, it increased household debt ...”. Why do stimulatory measures push up house prices? If demand drops, house prices drop. If government then takes measures to return demand to its previous level, that should not result in an excessive house price boom: prices should simply revert to their previous level.
Low interest rates should not of themselves result in excessive debt because banks ought to lend on the basis that mortgagees can still afford the mortgage if interest rates rise. The REAL problem was that banks started playing silly buggers and offering ninja mortgages. And a ninja mortgage is a disaster waiting to happen whether it is offered during a period of high OR low interest rates.