August 12th, 2011
I would welcome responses and insights on something that has troubled me since I first heard of comments made by the Governor of the Bank of England, Mervyn King on Wednesday,10th August (presenting the Inflation Report) and reported since.
Namely that the Bank of England has no role in the allocation of credit across the economy – in particular to small enterprises. Instead he argued, credit allocation is a matter for government.
Alex Brummer of the Daily Mail asked the Governor if
”there are monetary policy steps which can be taken, or can the Bank take steps directly, to try and make sure some money gets to those parts of the economy?”
This was the Governor’s reply:
“I’m afraid not. I think this is a problem of the structure of the banking system, and questions about the allocation of credit. And those are fiscal actions and they’re for government, not for a central bank. It’s very dangerous for a central bank to stray, as you know, into political territory, and we don’t intend to do that.
The amount of lending by the banking system to non-financial companies is falling. It’s been falling for some while, and it’s still falling. This is a natural consequence of the deleveraging of the banking system. But let’s be clear about it, it is falling; and it’s particularly problematic for small companies because at least big companies can go to the stock market to issue equity, or to the corporate bond markets to raise money through the issuance of bonds. Small companies don’t have that opportunity, and they’re suffering as a result.
But this is a question about the allocation of credit within the economy, and that’s very much a fiscal decision, and that is a matter for government.”
First, is credit allocation a fiscal matter? Surely not. Surely it is a matter for monetary policy and regulation.
In light of the Governor’s statement, one really must ask: what is the Bank of England for? And, if it is not for managing the allocation of credit across the economy, do we really wish politicians to make those decisions to, e.g. small businesses? Given the number of businessmen represented in Parliament, and given the number of bankers elected at the last election, we have a pretty good idea of how they might use this power.
So, given that we cannot trust the private sector to allocate credit wisely either acting alone as they do now, or indeed guided by their friends in Parliament and Whitehall: given this, surely then it is the role of the “guardian of the nation’s finances” to manage, regulate and ensure the sound allocation of credit to the real economy? And if we have a “problem with the structure of the banking system” – surely Mr King should be arguing for this problem to be remedied: urgently.
If not, what is Mr King for?
August 12th, 2011
 Chart courtesy of Gavyn Davies, FT 25 January, 2011 "UK GDP figures too bad to be true".
12 August, 2011
Post updated: 17.03 12 August, 2011. Maybe its because I was born and grew up in an ex-colony, but yesterday’s speech by the Chancellor, delivered as part of the emergency debate on the riots did strike me as reeking of empire. The tone was censorious – both of Britain’s feckless, heavily indebted citizens but also of all world’s economies. (I am tempted to ask once again: who set the framework for the creation of ‘easy money’? Feckless citizens or Parliament? Who was responsible for Competition and Credit Control, (CCC) and then the City’s ‘Big Bang’ and the massive growth of credit/debt that followed? Conservative governments, not feckless citizens – because CCC was implemented without parliamentary scrutiny. My recollection is that until the 80s it was very hard to get a credit card, or credit. By the noughties bankers were spraying credit card promotion bumf into every post-box in the land – on a daily basis. Where were our politicians then? Cheering them on.)
But the speech was not just censorious, lecturing our OECD partners when really the UK does not have much of an economic leg to stand on.
It was also frightening.
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August 7th, 2011
RBS chief executive Stephen Hester Source: Getty Images
Dear readers…This is my blog posted on the New Statesman website today, 7 August, 2011 – with one minor correction in the fourth sentence.
“Let’s get one thing clear: this is not a crisis of, or for governments. This is first and foremost a banking crisis.
EU governments do not need a fragile, reckless and immensely wealthy private banking sector. However, as the financial markets made clear last week, the fragile private banking sector urgently needs Eurozone taxpayer largesse.
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July 8th, 2011
The austerity brigade is rattled. Young Daniel Knowles over at the Daily Telegraph is so worried, he has had to rise to the defence of the Treasury and Office for Budget Responsibility – and then resorts to proposing Greece’s economic strategy for the UK. Why? Because orthodox economic ideology has been challenged by none other than Daniel’s ‘hero’ that notorious womaniser, President Bill Clinton.
Bill gets it. On the deficit that is. Thanks to Left Foot Forward and Mehdi Hasan we have all read Clinton’s speech:
“(the) UK’s finding this out now. They adopted this big austerity budget. And there’s a good chance that economic activity will go down so much that tax revenues will be reduced even more than spending is cut and their deficit will increase.”
Daniel Knowles challenges his hero, on these grounds:
- “The government cannot spend so much that net revenues actually increase. By Clinton’s logic we should increase spending until our deficit goes away. ”
- “The Office of Budget Responsibility..using a Keynesian model, estimates that the fiscal multiplier is about .35”……that means that…overall the deficit is will be smaller than it would have been without cuts….. (Note: Knowles Update: I actually made a mistake with that statistic – 0.35 is the estimate for the multiplier for VAT. Estimates of the fiscal multiplier overall, including those of the OBR, IMF and others, are closer to 0.)
- Greece: spending cuts have reduced the deficit from 15.4% of GDP in 2009 to 9.5% now.
The first two points are rightly, morphed together in Knowles’s argument. The first is to do with the impact of government spending. In a slump – which we are living through now – it is vital for the government to spend to fill the investment vacuum created by an over-indebted and extremely nervous private sector, desperately trying to de-leverage its debt. Right now the UK private sector is busily hoarding cash, because they are – rightly – worried about their levels of debt; and because they fear – rightly – that if they do invest, customers (both private and corporate) will not walk through the door – because customers too, are heavily indebted and worried about the threat of unemployment and falling house prices.
So given these circumstances of widespread fear and paralysis in the economy – what the ONS calls ‘flat-lining’ – say the government invests £1 billion in libraries. What would happen next?
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June 30th, 2011
It’s a gorgeous day here in Oxford…had a little wander yesterday during the lunch-break, and came across clusters of worried-looking students wearing a strange garment which flapped – like a short gown – sporting white, pink and red carnations. So I asked them why? It turns out that on the first day of exam writing, Oxford students have to wear a gown with a white carnation; on the second day it’s pink, and on the final day it’s red….and they are not admitted into the exam room unless they are wearing the above….Charming.
We’re on day three of this World Forum on Enterprise and the Environment…and spent yesterday trying to determine the agenda for research and inquiry to address frightening levels of biodiversity loss. We were asked to look back 50 years – and consider what had been lost, and to then look forward 50 years, and prefigure what might be lost……
I lamented the loss of sparrows. Recollected how when visiting Washington recently came across a little flock of sparrows scrabbling on the ground – and was suddenly struck that it had been years since I had seen such a sight….the feeling of loss was both intense, and surprising.
When it came to loss within the next fifty years: my group wrote FISH on our post-it note – and then fell into mournful, if momentary silence.
The group included some rebellious characters – who felt more research – more evidence – is not needed, is not enough to drive change. What is needed is an understanding of motivation – of what it is that drives people to act beyond their own interests.
Our ‘rapporteur’ is a delightful man, Professor John Robinson, of ‘Futures’ at both the Smith School, but also the University of Columbia….who summarised our debate succinctly, and then wrote a limerick.
We care about biodiversity
And are very concerned with the perversity
Of continuing to grow
Without attempting to know
What pathways won’t cause great adversity.
June 29th, 2011
More from the World Forum on Enteprise and the Envirionment.
Professor Kathy Willis says (and I paraphrase crudely) that increased carbon emissions may not necessarily lead to desertification as widely predicted, but may instead lead to more ‘woody cover’ i.e. forests in e.g. the world’s tropical areas…
Her evidence is quite convincing, drawing on previous ages of rising carbon, and also on an experiment of growing Acacia in different carbonised environments, that show that in the high-carbon environment, the Acacia roots were far more woody……so we may end up with more tropical forests, not less..A good thing for carbon sequestration. But one of threats to this good news outcome is the spread of biofuel farming….which might inhibit the spread of woody cover, in large parts of Africa.
Lots of talk about futures: an Indian ecologist once commented that we in the West lack imagination: when looking at futures, we think in polarised terms of ‘heaven’ and ‘hell’….The future could be something in-between…..
June 29th, 2011
Listening to Dr Simon Stuartof IUCN – Species Survival Commission… has great slides, which hopefully will be on the website. Tracking birds as biodiversity indicator, measuring extinction..Notes significant and largely irreversible extinction trends..Amphibians, rapid decline..reef-forming corals, the most threatened… Sturgeons, Cycads, Sharks and rays….mangroves…
State of biodiversity going down, pressure on biodiversity going up, our reaction: going down….
Good news: without conservation impact would have been worse (but not a lot better!) for birds and for mammals…but not for amphibians….”no time to go into reasons for latter.”
Biodiversity indices are now being used for MDG 7…for 2020 targets. increasing global coverage of biodiversity indices and reducing biases…but huge challenge in monitoring at global level: most datasets put together for other purposes…without a data collection system behind them, not much use….
No evidence yet of serious policy changes based on the finding of biodiversity indices….So evidence does not seem yet, to encourage action…May that be because effective communication does not span evidence and action?
Chinese Professor Zhiyun, Director, Key Lab of Systems Ecology for Chinese Academy of Sciences. He is asked: What is China doing about rising consumption of e.g. meat?…Responds about wildlife facing extinction….
This is the link to the Bank for Natural Capital provided by Dr. Trista Patterson…and also @teeb4me on Twitter. Love this video: Your Invoice; ‘Mother Nature here….here’s your invoice.”
June 22nd, 2011
Bernard Madoff’s 90ft yacht ‘Bull’ is offered for sale in Monaco for €3m this week. Image source: associated press.
I learnt to my cost that the role of Cassandra is no fun. Why “Apollo’s cursed gift is a source of endless pain and frustration.”
While it is possible to note that the ‘tectonic plates’ of the financial system are shifting and that those shifts presage a ‘financial earthquake’…unless one can get the timing of these things right – one’s insights are, rightly, scorned and ridiculed.
But I am now more attuned to the signs.
In the run-up to the 2007-9 crisis advertisements for yachts started appearing in the FT’s ‘How to Spend It’ magazine. First, there were one or two. Then more. Then they expanded and became double-page spreads. The vast backgrounds of sea and sky, set against the shiny white of the boats were blinding to the casual, disinterested reader. But as the credit-fuelled asset bubble expanded, text on these glossy ads disappeared. There was just the sea, the sky, the vast burnished white boat and some numbers: $7 million.
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June 22nd, 2011
The olive grove harvest. Image source: www.oxfam.org
As a follow-up to yesterday’s post on Greece: the Greeks are doing the one thing that hurts bankers most – they’re turning down invitations to their party.
In my book, ‘The coming first world debt crisis‘ I tried to spell out what actions individuals could take to defend themselves against the predations of voracious lenders.
“After all,” I wrote, “the finance sector depends on us, the world’s debtor-spenders, to come to the ball. We can turn down the invitation. We can decline the credit card, overdraft or loan. We can refuse to dance to Finance’s tune. We can live within our means.”
Well the Greeks have taken the advice, but gone further. They are taking their money out of banks.
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June 21st, 2011
Irish Finance Minister Noonan and Luxembourg Treasury Minister Frieden attend an EU finance ministers meeting in Brussels. Image source: www.reuters.com
I find it hard to write about the crisis in Greece….because the tragedy unfolding there is so reminiscent of the tragedies that unfolded in Africa, Latin America and South East Asia in the 80s and 90s – and I was very close to those. Seeing the same economic mismanagement replicated in well-armed Europe is scary. Watching as tensions rise between the peoples of Europe…given our bloody history….is frightening. So I have been silenced by rage.
But my outrage boiled over today, because of what the FT wrongly calls a ‘subtle’ change unveiled by EU finance ministers to the terms of the massive Eurozone bailout fund – a fund backed by European taxpayers. This is how the FT explains it:
Any bonds issued in future by the eurozone’s new €500bn rescue fund on behalf of Ireland, Greece or Portugal will not enjoy “preferred creditor status” – an alteration to the fund intended to help those nations return more swiftly to private capital markets.
For those who do not dabble much in sovereign debt, let me explain. Common to the whole of the international financial architecture/system for sovereign lending, there is one principle that overrides all others. That the IMF/World Bank are ‘preferred creditors’. Just as when a company goes bankrupt, the supplier that sold it widgets, is ranked lower than the bank that provided the overdraft – so in international ‘law’ – taxpayer-backed lending from the IMF and World Bank is ‘preferred’ when it comes to repayment – over all private commercial lending. And it is preferred because it is public money.
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