"Bank of England - Wrong and Powerless"

Count_Dante

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/12/hl_what_the_bank_of.html

From Robert Peston. One worrying revelation:

For me, what stood out when interviewing this quartet was the revelation about how Royal Bank of Scotland and HBOS were - in October - only hours away from being unable to open for business.

I know some people think Peston caused this crisis, but this is the most naive thing imaginable. What caused the crunch was that that banks were fools to lend too much money and people were fools to borrow too much money.

gozomark

I think Peston's heading "Bank of England - Wrong and Powerless" - powerless yes, but wrong, no. They have generally done what they were mandated to do (keep inflation between 1 and 3%). The problem is they weren't given the right mandate - as well as inflation as defined by CPI, there should have been a broader inflation mandate, that included asset prices, in particular house prices

gozomark

BoE needs the powers to regulate lending - eg multiples of income on mortgages, and the ability to adjust these during the economic cycle.

BoE needs to be given back supervisory role over finance sector.

earlgrey_3

gozomark wrote: »

The problem is they weren't given the right mandate - as well as inflation as defined by CPI, there should have been a broader inflation mandate, that included asset prices, in particular house prices

I think "should have" is about right. The difficulty is in a democracy whether the majority of house-owners would have voted for a policy of limiting the value of their assets. Somehow I think not.

Our system of democracy quite rightly limits what governments can do without our support and sometimes we the voters get it wrong. But always far better to blame it on someone other than ourselves.

gozomark

earlgrey wrote: »

The difficulty is in a democracy whether the majority of house-owners would have voted for a policy of limiting the value of their assets. Somehow I think not..

did the Labour Party have an independent central bank in their manifesto ?
was inflation targetting via CPI rather than RPI in their manifesto ?

I don't remember them being so, but happy to be proven wrong.

earlgrey_3

Like you, most voters can't remember what is in manifestos but that isn't the point. The point is that voters in the privacy of the voting booth don't continue to support parties which act against what they perceive, rightly or wrongly, to be their interests.

gozomark

from Labour's 1997 manifesto

"We will reform the Bank of England to ensure that decision-making on monetary policy is more effective, open, accountable and free from short-term political manipulation"

so independence was almost there - however, I remember when it was announced it wasn't expected

earlgrey_3

Well you may have interpretted that to mean "We will take steps to limit the value of your house" but most would not.

To deliberately limit house prices may have helpful but that does not mean it would have been widely electorally popular.

gozomark

I didn't mean that, but whether they had in their manifesto about an independent BoE, but I guess it could be translated as part of being "more effective". Actually, how many would have interpreted the manifesto statement as meaning an independent BoE ?

earlgrey_3

Yes, sorry, rereading your post I now understand what you meant. But I think the difficulty remains that no matter what is in our best interests, governments can only survive with our continuing consent. Sometimes that is a problem that limits beneficial actions.

gozomark

it also says in the 1997 manifesto


Strict rules for government borrowing
We will enforce the 'golden rule' of public spending - over the economic cycle, we will only borrow to invest and not to fund current expenditure. We will ensure that - over the economic cycle - public debt as a proportion of national income is at a stable and prudent level.

so its all a bad dream after all....