7th November 2008

Yesterday’s dramatic Bank of England 1.5% rate cut was an extraordinary admission of analytical failure. The Monetary Policy Committee of orthodox economists (with Danny Blanchflower the honourable exception) is well behind the curve. While it is tiresome to beat one’s own drum, I am obliged to point out that on the 12th July I wrote a short piece for the Guardian beseeching the Bank of England not to “sacrifice the economy on the cross of inflation targeting”. Today’s numbers from the Insolvency Service reveal that more than 4,000 companies have been sacrificed.  Company insolvencies have risen by 26.3% over a year ago, and by 10% over the last quarter. This represents the loss of a great deal of productive activity, and of thousands of jobs.

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Both the British Chancellor, Alastair Darling and the shadow Chancellor, George Osborne, have been on the radio this morning, resisting the idea that interest rates are political. Instead they have argued, vehemently, that the Bank of England is independent, and that the Bank must decide whether or not to lower interest rates.

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I am up ready to listen to the Presidential debate, so thought I would share my letter to the Guardian today.  But first, may I beg readers’ tolerance for mixing too many metaphors…

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The Prime Minister, Gordon Brown, speaking on Radio 4’s flagship current affairs programme this morning, repeated something he says regularly: that ‘interest rates are low’ and that his government, through the Bank of England, kept them low. The question the BBC should have asked is this: if interest rates are low, and have been so, why on earth are people/companies/banks having such a hard time paying debts? Surely the Credit Crunch crunched, because debts - of banks in particular - became both too large, too expensive, and unpayable? Do small businessmen/women pay low rates on  investments? Mortgages? Credit Cards? Car loans? Does the PM live/work on another planet?

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The US-centred financial crisis will damage the lives and futures of savers, employees, businesses and consumers across the world. All the more reason to address the systemic failures that led to it, is what I have argued in this piece published on Open Democracy today.

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19th September, 2008: My comment for the Guardian’s site, part of a debate on the Credit Crunch organised by the new economics foundation, of which I am a fellow…

Bankers have gone to great lengths to damage our confidence in the banking sector. And loss of confidence and trust on this scale can’t be fixed by banning a few short-selling speculators or by nationalising a bank here, an insurance company there. Nor is confidence restored when ministers meet up with bankers on the quiet, and grant them monopoly powers (as with Lloyds).

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In this big bad world of the Credit Crunch, powerful central bankers - civil servants all - have bent over backwards to help powerful and rich private bankers.

On one day, ‘debtonation day’, central bankers in Europe and the US pumped an eye-watering $150 billion into the financial system, to keep big banks afloat. According to Bloomberg, the US’s Federal reserve has ‘cycled $2.58 trillion through U.S. money markets since December’. (Bloomberg 8th August, 2008).

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The Commentariat are spooking themselves themselves with ‘frightmares’ about the “spectre of inflation”. The charge is led by the BBC’s economics team with Hugh Pym warning in his News At 10 report (17th June) that inflation was “haunting the economy….” . Tonight Michael Crick of Newsnight piled on the horror by flashing images of the strikes and inflation that brought down Callaghan’s government……

The Governor of the Bank of England, dismayed by the shock-horror his earlier inflation-hype has caused, has belatedly tried to calm nerves and contradict these irrational fears in his now famous ‘Letter to the Chancellor’ of 16th June. Recanting of his earlier assertions he wrote: “there are good reasons to expect the period of above-target inflation we are experiencing now to be temporary” (my italics). (More about this inflationary squeeze being temporary in my next blog.)
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We trust Central Bank governors. They are after all, civil servants - not masters of the universe - there to serve the citizenry, not just the finance sector. And they are charged to act as ‘guardians of the nation’s finances’.

So when the deputy governor of the Bank of England says in a report on the nation’s financial stability on the 1st May, 2008 that: “the most likely path ahead is that confidence and risk appetite will return gradually in the coming months” we are inclined to believe him. His comforting words were echoed by that American civil servant and central bank governor of the Federal Reserve, Ben Bernanke, who said in a speech on 9th June, 2008 that “although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

But then a cautious citizen turns to Page 27 of the Financial Times of 14th June, and reads that European banks have a $400 bn hole on their balance sheets, in spite of raising a great deal of money from the capital markets this last week. Furthermore there are fears of another American bank failure - Lehman brothers - ‘a dead bank walking’ according to critics quoted in the FT on 14th June.

A cautious citizen would extrapolate from this first, that confidence is unlikely to return; second, that risks have not diminished over the past month or so. Third, that therefore our public servants are either a) deluded or b) unaware of the state of banks’ balance sheets.

This could cause a cautious citizen to lose confidence in the pronouncements of central bankers.