This contains two short paragraphs on Gordon Brown's much-hyped (by
Brown!) regulatory system which he set up. He took Bank supervision
away from the Bank of England and gave it to a new body, the
Financial Services Authority.
The BoE was restricted to considering inflation in its task (via its
own Monetary Policy Committee) of deciding on bank rate. The health
of the wider economy was outside their terms of reference.
Meanwhile the FSA just didn't work at all. The second (half-jokey)
story says it all . They were not supervising banks as we found out
at the start of the crisis when Northern Rock crashed.
This all round failure was not primarily the fault of the banks who
assumed they WERE being supervised and since nobody queried their
actions they also assumed they had been approved. THAT is a measure
of how utterly casual and careless Gordon Brown was as Chancellor,
proudly claiming he had abolished "boom and bust"
But then we turn to special pleading for savage cuts in interest
rates here as deep as the American rate of 1%. There is no unanimity
here!
I repeat here my comments inserted into the last article. Damian
Reece and David Blanchflower may not have the last word.
[BUT - another report on the American rate cut down to 1% warns "Such
low interest rates discourage saving and encourage borrowing,
precisely the reverse of the appropriate prescription for the US
economy. Much higher rates, giving savers a real return and bringing
supply and demand for funds into equilibrium, are needed in the long
term"
Indeed two other reports talk of "Building societies suffer from
customer deposit withdrawals" and of record borrowings on credit
cards in Britain to cope with current expenditure. That way lies
even worse. -cs]
Not an easy decision
xxxxxxxxxxx cs
=======================
TELEGRAPH 30.10.08
The MPC was driving the economy but didn't know the highway code
By Damian Reece
We were consistent in criticising the Monetary Policy Committee (MPC)
for allowing interest rates to fall too low during the credit boom.
We warned inflation would be the result. It was. We were then quick
earlier this year to change our tack and argue for urgent rate cuts
as it became apparent that the inflation threat would fade rapidly
and the economic brakes slam on. Everyone's aware of the car crash
we're now witnessing.
We can't help but back David Blanchflower's criticism of his fellow
MPC members, which Edmund Conway reports on the front page .[below] .
As we suspected, the MPC was driving the economy while looking
through the rear view mirror. It's all very well being wise after the
event, but the MPC was warned it was getting it wrong at the time but
chose to ignore its critics.
But Blanchflower's comments are more than just "I told you so"
grandstanding. It reveals a worrying trait in the MPC to focus too
mechanically on Consumer Price Inflation when setting one of the
wider economy's most important policy tools. The money supply
figures, which were again grim yesterday, had been flashing a warning
all year but were never given credence. If the MPC counters with the
objection that inflation control is its one and only objective then
that needs changing.
CPI is a poor statistic in itself, as we've been showing for two
years through our work with Capital Economics, so trying to influence
it delivers equally poor results for the wider economy. It's like
trying to drive a car but using first gear all the way. Stable prices
are crucial to a sound economy but can be affected by global events
beyond our control - another reason why using just CPI as a signal
for regulating the domestic economy is flawed. At a time when the
Government's fiscal controls are in tatters, as confirmed by Alistair
Darling's Mais lecture last night, it's even more important we have
an independent MPC that works. But the MPC now needs an urgent review
- something the Treasury Select Committee should revisit at the
earliest possible opportunity.
===============AND ---->
CITY DIARY
Lawson discovers what FSA (Financial Services Authority) doesn't do
Banks going to the wall, economy heading for recession etc etc. Where
did it all go wrong?
Lord Lawson speaking at a seminar at the House of Lords yesterday
on the economic crisis had an idea.
"At the time of Northern Rock I went on to the Financial Services
Authority website and clicked on 'What we do'," he told delegates.
"And in no place did it mention banking supervision.
"Which was very honest indeed, since that's precisely what they
hadn't been doing."
Quite.
==================
Bank of England member David Blanchflower admits bank was slow to act
on rates [see reference in first article above]
The Bank of England did not act fast enough to cut interest rates and
may now have consigned the country to a long and painful recession,
one of its own leading policymakers has admitted.
By Edmund Conway, Economics Editor
The Bank was not "forward-looking" enough and ought to have realised
the scale of the recession sooner, according to Monetary Policy
Committee member David Blanchflower.
The acknowledgement comes amid growing evidence that the economy is
facing a downturn as sharp and severe as in the early 1990s, and as
one City consultancy forecast that the Bank would now have to reduce
borrowing costs all the way down to 1pc.
Prof. Blanchflower, who has been arguing in favour of lower borrowing
costs for most of the past year, said the nine-member MPC committee
had made a mistake by leaving rates at 5pc until this month.
In a speech at the University of Kent, Prof Blanchflower said: "With
hindsight, monetary policy has not been sufficiently forward looking.
Changes in monetary policy only affect the real economy with a
substantial lag... It is not sufficient to consider the data month by
month until it emerges that the UK is in recession. I believe the
trend has been apparent for some time. The synchronized downturn in
so many business surveys should have led us to realise sooner that
the UK economy was entering a recession."
He dismissed the MPC's August inflation report, which forecast flat
growth for the next year and a recovery shortly afterwards, as "an
optimistic view."
In comments which will underline expectations that the Bank will cut
borrowing costs at its meeting next week - if not before - he added:
"My view remains that interest rates do need to come down
significantly - and quickly. If rates are not cut aggressively we do
face the prospect of a relatively deep and long-lasting recession."
The Bank reduced rates by half a percentage point at an emergency
meeting earlier this month, although only three months earlier Tim
Besley had voted for higher rates.
Capital Economics predicted that the Bank will have to reduce
borrowing costs all the way down to 1pc.
Chief economist Jonathan Loynes said: "Extraordinary circumstances
require extraordinary actions. With the current recession likely to
be deeper than that in the early 1990s and the credit crunch
impairing the effectiveness of monetary policy, we now expect UK
interest rates to fall to an all-time low of just 1pc."
[BUT - another report on the American rate cut down to 1% warns "Such
low interest rates discourage saving and encourage borrowing,
precisely the reverse of the appropriate prescription for the US
economy. Much higher rates, giving savers a real return and bringing
supply and demand for funds into equilibrium, are needed in the long
term" Indeed two other reports talk of "Building societies suffer
from customer deposit withdrawals" and of record borrowings on credit
cards in Britain to cope with current expenditure. That way lies
even worse. -cs]
Meanwhile, in the latest sign that the financial crisis has spread to
become a major economic issue, the Bank's figures showed that the
amount of money passing through the hands of UK non-financial
businesses slumped sharply in the wake of the Lehmans crisis.
The broadest measure of the amount of cash available to companies
excluding banks - M4 - is shrinking at the fastest rate since 1980.
Meanwhile, the amount of cash in peoples' hands and in instant access
bank accounts rose by only 0.1pc in the year to September - the
weakest annual increase since 1969.
Posts
