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Tory MPs have a nerve to attack the Bank of England

ad_221423652_e1475423881572When David Davies MP (not to be confused with cabinet member David Davis MP) tweeted “Mr Carney you are an unelected bank official. Theresa May has got every right to tell you how to do your job!” he was quite wrong. Bank of England officials are civil servants and are given a mandate by Britain’s elected government. However, Bank of England officials have primary operational responsibility for fulfilling that mandate. Theresa May could, if she so wished, provide a new mandate, but she cannot tell Mark Carney how to do his job. 

The current political mandate is for the Bank to use unconventional monetary tools to boost the economy. – the very thing that Mr. Davies and many of his pro-Brexit colleagues object to. But these MPs have a nerve to complain about the mandate. It was after all issued by their Conservative colleague, George Osborne in March 2013, as the BBC reported here:

The Bank of England has been ordered to consider using unconventional monetary tools to boost the economy, as growth forecasts were cut again.

Furthermore the man who until recently was David Davies MP’s leader, the Prime Minister David Cameron, was even more explicit about the Bank of England’s democratic mandate:

“…while we may be fiscal conservatives, we are monetary radicals injecting cash into the banking system and introducing credit easing measures to make it easier for small businesses to access finance.”

The Bank of England is a nationalised central bank 

This is an important debate, because the Bank of England is of course a nationalised bank. (It was nationalised in 1945 after the debacle of the 1930s when the then ‘independent’ Bank was responsible for catastrophic economic failure). And the Bank of England is distinct from the European Central Bank which is truly ‘independent’ – and has no democratic mandate at all. Instead the ECB is expected to abide by ‘rules’ – so-called ‘ordo-liberal’ rules – embedded like concrete in the EU Treaties, and based on deeply flawed economic theory defined by George Soros as ‘market fundamentalism’.  The ‘rules’ are too inflexible to address the chronically weak condition of the Eurozone economy, and as a result unemployment remains high, and economic activity depressed. No wonder there are growing divergences in Europe fuelling a populist revolt against ‘elites’ of the Union itself, and bolstering right-wing and even fascist political parties.

But is QE appropriate?

Of course elected politicians like David Davies MP have every right to question whether ‘unconventional monetary tools’ are appropriate at this point in the ongoing Great Financial Crisis. I happen to think that central banks around the world played a heroic role in rescuing the global economy from catastrophic failure in 2007-9 – and we should be grateful for that. We were on the brink of financial meltdown, and as individuals and firms would have lost access to our own funds deposited in banks had central bankers not intervened.

However the economists that advised governments at that time – most prominent among them Kenneth Rogoff of Harvard University (Mr. 90%) – argued that it was unwise for governments to use their powers, including ‘accommodative’ monetary policy, to spend – to invest in jobs, higher public sector pay (which would raise private sector pay and help in paying down debts), new skills, or for example, the transformation of the economy away from fossil fuels. No, said the world’s most influential economists, governments had to ‘tighten their belts’ ‘balance the books’ and not ‘crowd out’ private sector investment, spending and borrowing.

And plenty of politicians echoed their mantra of ‘fiscal conservatism’.

However, these same deeply orthodox economists were on the whole relaxed about ‘unconventional monetary tools’ – as these could be used to bail out the banks and support the finance sector. And then, they unwisely argued, banks would be fixed, and would surely start lending into the real economy to finance the recovery.

The result was inevitable. First, there was no expansion of lending into the real economy. Or if banks did lend to firms and SMEs – they charged very high, real rates of interest – in the hope of making quick returns.

Instead bankers and financiers who were beneficiaries of central bank largesse went on a wild speculative spree gambling e.g. that assets like property prices in London, New York or Auckland would rise forever; that prices of soya beans or emerging market currencies or US Treasuries (you name it) would rise or fall. They reckoned they could make much more money from speculation than from investment in the real economy. And they were right. Obscene amounts of money were made.

The really tragic aspect of this all is that no central banker anywhere in the world applied conditionality – ‘terms and conditions’ – for the taxpayer-backed guarantees/bailouts/largesse.(As an aside, when any poor country gets a loan from the IMF or World Bank the conditionality is intense.)  While banks were required to build up capital buffers – a commonsensical requirement for a stake (or equity) in their own risk-taking –  there were no conditions applied to what the largesse of QE was to be used for. 

No central banker insisted that the banks concentrate on investing in the kind of projects that would create decent, well-paid jobs and activity to generate the income needed to keep the economy afloat, and to repay the debts that had burdened consumers and firms, and that bankers had lent so recklessly.

Nor did central banks penalise speculative conduct.

As a result private commercial banks suddenly found that far from being insolvent and made to pay a price for bringing down the global financial system, they were being rewarded! Their speculative activities were now backed by taxpayer guarantees, central bank largesse in the form of QE, and historically low interest rates. They could not believe their luck. No wonder they kept employing and rewarding orthodox economists.

Of course the party could not last. The emergence of Donald Trump in the US, UKIP in the UK and of right-wing parties in Europe – and even of David Davies MP – are just symptoms of democratic revulsion at the imbalances and injustices caused by skewed, deeply flawed economic policies (including ‘monetary radicalism and fiscal conservatism’) that enrich the rich, and leave the rest much poorer and more unequal. These political uprisings are also a rejection of Social Democratic parties that went along with the economists’ advocacy of globalised market fundamentalism.

But where, you ask, are all the orthodox economists who landed us in this mess? Hiding away in university departments, a long way from the site of battle. One is promoting a new book on whether we need cash, others are mulling over their next peer-reviewed article on micro-economic theory, while all the while effectively asserting that the mess the world currently finds itself in, is ‘nothing to do with me guv’.

14 Comments

  1. John Penney says:

    This article is, good, but missing, I think, an account of important pre 2008 Crash background history, to round out its explanation. This really needs to explain how the Blair/Brown Labour government, in line with its adoption of a fully neoliberal, financialised, economic agenda, whilst making the BoE nominally “independent”, also stripped it of its former regulatory powers over the financial sector. In its place it put a deliberately useless “light touch” regulatory body, staffed by “revolving door”, creatures of the very industry it was meant to regulate. This left the financial sector free to run amok, with the resulting speculative frenzy, as part of the global banking Crash, almost destroyed the global economy in 2008.

    That caveat apart, this is a good account of the various ways the BoE within its firmly neoliberal political remit, attempted to stabilise the financial system, post 2008. That it chose the then “unorthodox” technique of “Quantitative easing” (alongside constant interest rate reductions) as its chosen strategy is highly instructive. The response to the 2008 Crash and the resulting recession, under a Labour Government of a non-neoliberal bent, could have been a Left neo-Keynsian one, with the banks still recapitalised using public money , BUT brought under direct state control, and the state then implementing a wide range of 1930’s Roosevelt-New Deal–style major interventions in the economy via major infrastructure projects and employment schemes. Instead, with QE the, still uncontrolled, banking system was stuffed full of cheap, newly created money, which massively inflated asset values, and in particular property asset values – with very little of this new money actually finding its way into productive investment.

    This deliberately, highly political, pro-superrich strategy, not only massively enriched the asset rich capitalist superrich in the midst of Austerity for the rest of us, but has left the banking sector as out of control as ever. All this extra money, has in the main simply pumped up new speculative property bubbles, and reinflated the utterly speculative, globally out of control, bubbles of derivatives and other speculative and arcane financial instruments. This total failure by the BoE , the financial regulatory bodies (and the government) to bring the still buccaneering banking system under control absolutely guarantees that the UK banking sector, as in the lead up to the 2008 Crash, will be a key causal player in the next great global financial crash, which is quite possible within the next five years.

    And this time around the “steam” has run out of that globally vital, “locomotive of the world economy”, the Chinese Economy, and all the financial rescue techniques used to temporarily repair the 2008 Crash have already been deployed. Scary economic times ahead!

  2. David Pavett says:

    I have a problem in putting two of Ann Pettifor’s claims together.

    The first is

    … central banks around the world played a heroic role in rescuing the global economy from catastrophic failure in 2007-9 – and we should be grateful for that.

    And the second is

    Nor did central banks penalise speculative conduct. As a result private commercial banks suddenly found that far from being insolvent and made to pay a price for bringing down the global financial system, they were being rewarded! Their speculative activities were now backed by taxpayer guarantees, central bank largesse in the form of QE, and historically low interest rates. They could not believe their luck.

    Crises are a chance to shift the balance of power and wealth in society. In this case it seems that the crisis was resolved in the interests of the rich and powerful. That shift was already taking place before 2007, as John Penny points out. The crash made it possible to ramp up that process. What exactly is heroic about that? Or am I missing something?

  3. Bazza says:

    Good points David; I liked reading Wolgang Streekct in New Left Review a while back arguing that QE was only buying the rich and powerful capitalists time because they didn’t really have a clue what to do.
    But perhaps with state-led public investment, a massive windfall tax on big business, more democratic public ownership with staff and communities having a say, taxing the rich and closing offshore illicit banking etc. and all countries doing the same along along with a global living wage then perhaps we can rebuild the global economy by meeting human need.
    A left wing democratic socialist strategy to get us to the position where all countries in a bottom up approach consult working humanity on how together we may build a new and fairer, non-exploitative and greener non-capitalist economic system.

    1. Imran Khan says:

      All good stuff Bazza. All we need first is a Labour government and that’s not on the cards at the moment, or for some time.

  4. Mervyn Hyde says:

    I can’t believe the unanimity between us on this thread, perhaps we should thank Ann Pettifor for consolidating our varied opinions.

    Certainly the Financial sector as a whole is and unless we change it always will be the problem.

    whilst we are all very good at pointing out the things which are wrong, where we all tend to differ is what we will do to remedy the failings of the financial sector,

    The radical approach which I would agree with John Penny would be the nationalisation of the Banks, if you don’t control the money supply you can’t control the economy. The Banks can make or break governments and economies, the people of Iceland of course took decisive and locked their criminal bankers up. We still hand out large bonuses to reward them for ripping us off.

    What I do say also, is whilst Ann criticises Orthodox economists she still supports debt issued through the private banks as a means of money creation, anyone who believes you can tame the private banks through regulation is to forget how the crash came about in the first place.

    The other small point that is constantly peddled that we can’t trust government with the power over money, as we read the Tories will make their views known to any public servant and should they step out of place then they suffer their wrath with it. But of course a Labour government must at all costs be denied the same luxury when in office.

    We should of course democratise money creation and not be afraid of public oversight, unlike today with all the wheeling and dealing behind closed doors.

  5. Peter Rowlands says:

    Yes, a good article and some pertinent comment from John and David,but Labour policy here has not advanced beyond the National Investment Bank which was in the 2015 manifesto. Surely a key demand should be the break up of the big banks, certainly the top four ( HSBC, Barclays, Lloyds and RBS), which are ‘too big to fail’ and which in the increasingly likely event of another crash would have to be bailed out again.Banking regulation since 2008 has been quite inadequate, all of the banks in question have proved themselves completely unfit to manage anything, and measures such as this, alongside greater regulation of the volatile ‘shadow’ banking sector based on hedge funds, are now urgently needed. So come on, John McD, let’s have some policy in this area. It would certainly be popular – bankers are held in almost as great contempt as politicians!
    And incidentally what happened to People’s QE? It seems to have been replaced by straight borrowing.Why?

    1. C MacMackin says:

      Breaking up the banks is a liberal policy, not a socialist one. It ignores the fact that large banks are necessary in the economy (at least as it exists today) and that small banks tend to put their money into larger banks anyway (how would it work if there were no larger ones?). More importantly, it ignores the fundamental question of popular control. As socialists, we should be campaigning for the public ownership of and control over the banks, as outlined a few years ago in a superb pamphlet by the FBU: https://www.fbu.org.uk/circular/2012hoc0633mw/fbu-discussion-pamphlet-public-ownership-banks.

      1. Peter Rowlands says:

        No, of course the only socialist policy towards the banks is public ownership, but the policies in the main being promoted by JC and JMD are left social democratic rather than socialist, and seek to lay the basis, through greater regulation and intervention, for movement towards socialism.British banks do not have to be as big as they are. HSBC holdings is the biggest bank in the world after three giant Chinese banks. German banks are smaller and there is a network of regional banks, which is what JMD is proposing. Indeed thiswas contained in the 2015 manifesto, as by implication was breaking up the big banks by promoting new banks to stimulate competition.thus reducing monopoly power and the need for a further taxpayer bailout, although how that could be afforded, given that we still owe a lot for the last one, is an interesting
        question.

        1. C MacMackin says:

          I grant you that Corbyn is not offering a socialist platform, but that doesn’t mean we who are socialists should be content with what he is offering. We should still call for more left-wing policies if we think they are appropriate. Given the tremendous pressure which Corbyn faces from the PLP, there needs to be a left-wing counterweight coming from the membership. Also, given that much of the membership are not socialists in any well-thought-out way, we should be trying to convince them of a socialist position, rather than be content with liberal platitudes.

          1. David Pavett says:

            I agree with this and I don’t think that what you and Peter are saying is mutually exclusive. I am convinced that the “counterweight” you mention is absolutely necessary. And as you also say there is a need to convince a majority in the Labour Party of the case for socialism. For that we need to know what the case is that we want to convince them of. That is a task of immense proportions and the sooner we start working on it systematically the better. We need to proceed in the manner of Aristotle by first making a comprehensive survey of what has gone before – another immense task. My view is that if we do that thoroughly we will come to the view that the views of left Keynesians like Ann Pettifor are missing several layers of social and economic critique. This includes, as far as I can tell, all the illustrious members of John McDonnell’s advisory panel all of whom think that they know how to make capitalism work in the interests of everyone.

  6. Peter Rowlands says:

    I hardly think that breaking up the banks can be regarded as a ‘liberal platitude’. The important point is that while such measures are not socialist per se they lay the basis, through increasing regulation and control,for transition to socialism.However, it is obviously necessary to have some idea of where that transition is headed.

    1. C MacMackin says:

      Sorry for using a harsh phrase. When I call it a liberal approach, this is a reference to (North) American liberalism with its naive belief that everything will be fine if the government just enforces anti-trust and anit-monopoly laws. It must also be said that regulation and breaking up the banks are not necessarily the same thing. You could have one without the other and your original post only explicitely referred to the latter.

      I don’t agree though that breaking up the banks can be seen as a step towards something more left wing. The balance of forces needed to acheive that goal (especial in a global financial hub like the UK) would need to be tilted far more in favour of the working class. So much so, in fact, that nationalisation would become a possibility and we might as well press for that. Also, once banks are nationalised, it would make sense for many of them to be quite large, so breaking them up now would just create more work for us later.

  7. Peter Rowlands says:

    I think that the key point is that the banks had to be bailed out in 2008, so it is necessary to create a situationwhere this would no longer be necessary, by reducing their size and by greater regulation. This would be educative to the people we are trying to convince, and I don’t knbow why JMD hasn’t covered this.
    I don’t know enough about banking to pronounce on their optimum size, and you are probably right to say that at least some large banks would be necessary, but they wouldn’t necessarily have to be of HSBC dimensions, and we have our proposed Investment Bank anyway.

    1. Mervyn Hyde says:

      Peter I have tried enthusing posters on this site into understanding how the Banks work and provided links to enlighten them.

      Unfortunately only those that already understand the system seem to respond positively.

      It is not a better regulated Banking system that is required, although that is essential in keeping a tight rein on them, but a new way of money creation.

      Positive Money is one of the institutions I follow and engage in where they want to introduce a commission which spends directly into the economy on all aspects of social provision and infrastructure expenditure.

      My view is that we don’t need a commission to do the job of government but see it at least as a positive initiative.

      This is their site and shows some very basic videos which highlight how money can be made to work for people and not just the Bankers.

      http://positivemoney.org/about/

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