Is the Bank of England monetary committee INCOMPETENT ?

free4440273

I actually quite admire them for holding their nerve yesterday (I was expecting a possible .25 reduction): hopefully Mervyn has learned his mistake from August 2005 when he cut rates to prop up an existing housing bubble (perplexing). Yes, I do have a mortgage (massive) and I have no job also after being made redundant a year ago. The Fed should take a leaf out of Mervyn's book...

Dylanwing

HugoSP - I thought that I was the only person who thought like that! Absolute common sense, would avoid a lot of repos and sort the mess relatively painlessly. Unfortunately, it is a medium to long term solution and would not sit comfortably with the short-sighted greed that currently drives Bank policy.

poppy10_2

cells wrote: »

In my opinion they are trying to crash the housing market and with it uk stocks ect via increasing the base rate.


Why would they want to do that? Simple, they along with their rich pals have sold all their properties and stocks, and are heavily in cash. So now increase the base rate, getting you more interest on your cash and also crashing house prices and stock prices in time.


Then when house prices, stock prices are cheap again they will buy up.


Repeat the process every 20years and “legally” steal the nations wealth into the hands of a few hundred rich dominant men.

Your reasoning is wrong, but ultimately yes, this is what is happening.

sarkin

HugoSP wrote: »

I think that the way out of this mess is to reduce interest rates to make borrowing cheaper but put in controls to stop consumers borrowing irresponsibly.

It seems that the general public have created their own downfall through greed, encourage by advertising.

Remortgages for similar amounts would be easier to get than mortgages to buy, so people could maintain their homes at an affordable rate by remortgaging/switching to cheaper deals but buyers would be discouraged/prevented from overstreaching themselves.

In the same way, loans would have a specific purpose. A car loan would be provided partly on a needs analysis basis. So if you needed a car to get to work, fine, there would be a ceiling you could borrow depending on what your need is, rather than what repayments you could afford. If you want something better you have to bridge the difference, or convince the bank that you can safely service this loan and others besides it.

Credit cards would have limits set upon salaries and likely spend. When applying for a CC you would stipulate what you would use it for and how big your family is. They would then propose a credit limit and then you could discuss it with them. I have an £8000 limit on my cc. Quite frankly I don't need it. Occasionally it helps to put a deposit on a large purchase, like a car (as I get cashback) but I simply use it to buy time to drag money from accounts etc, so I don't spend money I don't have.

Applying the above would help the economy out without encouraging inflation etc.

You would find that people IMO would generally be happier as they won't have to work 25 hours a day to pay interest etc, fewer families would break up and in the long term a real sense of community would come back into the UK.

If you believe in a free world this will not work, you need to take responsibility for yourself. I dont want someone telling me what I can and cant do. I make my own decisions in life, your ideal sounds like communism

IF the house market crashes the irresponsible will be found out.

HugoSP

sarkin wrote: »

If you believe in a free world this will not work, you need to take responsibility for yourself. I dont want someone telling me what I can and cant do. I make my own decisions in life, your ideal sounds like communism

IF the house market crashes the irresponsible will be found out.

There is no such thing as a free market. ALL markets are regulated to a certain extent by consumer legislation and financial leglislation that exist at the moment. As a mortgage advisor you will no doubt be much more aware of the guidlines and criteria for borrowing than I am.

I'm not discussing ideology, in principle I agree that people should be free to make their own decision, however experience tells us time and time again that large sections of the population do this very badly - you know this as well as I do.

You only need to read some of the posts on here to learn about the abject misery that can be caused. Not only are the spendahilics caught out but they leave behind them a trail of unpaid bills and other debts so creating more victims of their own irresponsible or misguided borrowing. Many of the people who get their fingers burnt by the debtor are har working individuals who manage their money well and simply do not deserve this to happen to them.

Also, their immediate families are made to suffer as a result. I have seen this with a work colleague and how he managed not to have a complete breakdown was beyond me. However he still walked into work complete with the latest gadget and put down deposits on new cars etc. He worked 7 days a week, 6 days at our place then Sundays at a nursing home. He still slid further into debt. He desparately needed someone to forcibly remove his chequebook and credit cards and give him a strict budget for him and his family to live on.

Whilst I knew him he twice went to renegotiate his debts with his creditors.

This guy had some fairly major issues that didn't help. Among them he had two teenage children who were both going off the rails and no relationship to speak of with his wife, although they still lived under the same roof. He and his whole family basically needed debt councelling and other councelling as well.

Basically he was spending money to fill a void in his life, as do most of the subjects for that tv programme that deals with personal debts.

The controls I propose are to catch these people, whilst most other people probably would not notice them operating. For example, I know what our means are. I would love to buy a new Land Rover, but at the moment that would be beyond what I could sensibly afford, so I don't even apply for the credit that would allow it. If I did apply for a loan I would most likely get it but meeting the payments would be a struggle. Strictly speaking that should prevent me from getting the loan but we both know that it won't. Where is the sense in that?

As for introducing these proposals - to my mind they would have to be introduced in a systematic way. People who are already heavily committed would be allowed to refinance without increasing their debts as they see fit to reduce costs of maintaining them. However they would be introduced first with the higher interest finance areas, such as CCs hire purchase etc in a way that would gradually reduce the nations personal debt over time.

So, as the population managed and paid off debts we would be more restricted.

Dylanwing

If you believe in a free world this will not work, you need to take responsibility for yourself. I dont want someone telling me what I can and cant do. I make my own decisions in life, your ideal sounds like communism

IF the house market crashes the irresponsible will be found out.

By irresponsible, do you mean the mug punters or Banks? Many of past scandals have been caused by Bank irresponsibility and this is no different. As for the free market alternative, basically it is personal misery, even more social problems and a huge bill for the taxpayer. Also, please explain where the repossessed will live? Since the mad-woman sold all the social housing, options are a bit limited. There is a massive difference between basic controls to benefit society and communism.

shaunrc

Hi

I usually add the disclaimer on here that I am an IFA which is true but my intial qualification is as a monetary economist which is why I am posting on this thread.

Lets us first examine what the MPC are supposed to do.They are supposed to keep inflation as measured by the CPI under control and around 2%.So in a sense the job is easy if CPI ( Consumer Price Index) is above 2% you raise rates and if it is below 2% you cut them.Sadly its not that simple but let us just stay with interest rates for the moment.

If you change interest rates today then there is a small initial impact but only a small one. This is because some people will not be affected for example those with fixed rate mortgages or savings will not be affected until the fixed rate ends. Even for those with variable rate mortgages some have arrangements whereby any adjustments are annual so there will be a lag before they are affected. There are other examples of this and it is not easy to measure.Those that have ever tried to measure this ( econometrics is the science) estimate that the main effects are in the range of 12/18 months later and the full effect takes 2 years.

So now we are in a harder position.If you sit in Threadneedle Street deciding rates you have to realise that for a year any individual rate change will have little impact. You could of course do several but then you run the risk of overdoing it when the full effects hit in 2 years time. So the sensible position is in fact to set rates for the situation some 18 months or so ahead.This is why the Bank of England forecasts inflation two years ahead so it can target it.You can find out what they plan to do by examining their quarterly forecasts because comparing forecast inflation with their target gives away their thoughts.

So you are in effect estimating future inflation and responding to it.In that time a lot can change. For example 18 months ago can anyone tell me that you would have been sure that oil would have been nearly $100 a barrel and the £/$ rate would be 2:10? In fact it is worse that that because oil is priced in dollars so the 2 effects offset each other to an extent if you spend your money in £.

As you can see it is more complicated than you think.The economics of such a situation is that you can only have one target ( inflation) if you only have one policy lever ( interest rates). Adding things such as aggregate demand or growth unfortunately have led to problems as in the end you have to choose.

So are they incompetent? No, in fact they have done a decent job. Not perfect because inflation has usually been above target implying rates have been too high.However when central banks have acted in a knee jerk manner such as after 9/11 the evidence is that they cut them too much! So if you are harsh rates have been slightly too high on average but when they cut they have tended to overdo it.

The real problems in my opinion with the system are

1. The target as CPI is a poor indicator of inflation in my view in theoretical terms.Also in practical terms who believes the current level?

2. Gordon Brown has interfered in who gets onto the MPC when there should be an all-party committee to make sure that the best qualified people get the jobs.

So to improve things those are the 2 changes I would make.

If you want a real debate about incompetence in my view you would be looking at how we have ended up with a nationalised bank ( Northern Rock) with the taxpayer underwriting it with the directors and the underlying strategy mostly unchanged.If anything it has even less deposits and is more reliant on wholesale money than before it hit trouble which via the Chancellor we are bankrolling..........

GooeyBlob

CPI is a very poor indicator of inflation, which is probably why Gordon Brown likes it. Even the Retail Prices index, consistently around 4% or so for the past year, seems to underestimate the rate, given the prices of fuel and basic foodstuffs.

free4440273

It does not help that the BofE consistently do not tell the truth about inflation. To suggest that CPI is 1.8% is preposterous. Anyhow, as i said in my above post, they did the correct thing by not reducing rates on Thursday. I think one humiliation (August 2005) was more than enough.

shaunrc

As you can see above I have expressed my views on CPI.However it was Gordon Brown who foisted this measure on us.

His introduction of the MPC was probably his finest hour.But making them target CPI was a poor one and such a poor one it risks affecting the economy. Even the old RPI which has faults is a better measure in my view. So if you are in my camp and believe CPI has been a failure dont blame the MPC as Gordon Brown introduced it for in my view no better reason than it shows a lower number than RPI.

I presume he hoped he could do things like index benefits and pensions to it.