The BoE’s decision to raise the Bank Rate to 0.75% is a mistake. It is a mistake comparable to those made by Alan Greenspan’s Federal Reserve in the years between 2003 and 2006.
It is a mistake that must be understood in a wider context. Not just the political context – which promotes ‘monetary radicalism and fiscal conservatism’ – to quote David Cameron and George Osborne. But also in a wider monetary policy context.
As the governor of the Bank pointed out recently: ‘the Bank is the only game in town’. Policy for the British economy is now largely driven by technocrats appointed by government to the Bank of England’s Monetary Policy Committee (MPC). The elected government in the form of the Chancellor and HM Treasury are happy with this arrangement and prefer to sit on the sidelines of economic policy-making. Since the crisis, the government has pursued the policy of monetary radicalism and fiscal conservatism vigorously. The consequences of such austerity and economic passivity became evident in the Brexit referendum result, and in popular anger and unease at the ongoing stagnation of the economy and of real incomes.
The problem with leaving all policy-making to technocrats at the central bank is that the MPC has very few tools with which to address Britain’s economic malaise. It has only the rate of interest rate as a tool with which to influence rates across the spectrum, and the exchange rate.
This incapacitation is partly a self-inflicted weakness; partly a result of monetarist/neoclassical theory, but largely political. Conservatives do not want action on the economy. They believe that the ‘market’ can be trusted to manage the economy. Above all they believe that the now globalised market in money and labour can be trusted to crowd out government spending and to lower wages to levels comparable to, or, as they would see it, ‘competitive’ with, wages in emerging markets.
Falling wages have driven consumers to borrow more, to supplement their incomes to maintain living standards. This is of course unsustainable, and if the Bank was a proper regulator it would be issuing guidance to commercial bankers on credit creation, and demanding that, to benefit from the largesse of taxpayer deposit guarantees, QE and low cost borrowing, commercial bankers should limit speculative lending; particularly credit card loans to struggling consumers at very high, real credit card rates of interest.
The Bank however, has not chosen to manage the supply side of money-lending. Despite the recent u-turn on public sector pay, the Treasury chooses to do very little to help raise Britain’s low levels of investment, its poor productivity and falling incomes. Instead the choice is to allow ‘the only game in town’ to punish struggling borrowers – the victims of austerity – by imposing a higher Bank Rate, which will in turn lead to higher rates on credit cards and other loans.
Britain’s private debt level is at about 217% of GDP, lower than before the GFC, but rising. Public debt, which we were told would peak at 70% in 2016, is now approaching 90% of GDP. The policy of allowing borrowing at government, corporate, household and individual levels to balloon, while resorting to only one instrument – the ‘dagger’ of high interest rates – to puncture that balloon is very likely to be catastrophic. We know that, because it was a policy pursued by Alan Greenspan’s Fed from 2003-2006.
And we all know how that ended.
Photo credit from previous page: Flickr / Liz
