No braking at Gambon – a monetary policy guide for petrolheads

If you had to choose a person from the following list, and only this list, to be Chancellor of the Exchequer, would you choose James May, Jeremy Clarkson or Richard Hammond? Tough choice, but go on: indulge me!

The last time I wrote here, I predicted that the Quad had reached a turning point on monetary policy. I did this not on the evidence of Vince Cable’s New Statesman article, but on a report in the Financial Times that Osborne was set to change the regime imposed on the Bank of England.

Well, the ‘turn’ came two thirds of the way through the budget speech and it was easily the most significant moment: “The remit for the MPC set at Budget 2013 has been updated to clarify the trade-offs that are involved in setting monetary policy to meet a forward-looking inflation target. For clarity, the target “applies at all times”, as distinct from a requirement to be met at all times, because the latter could be mis-interpreted as strict inflation targeting with zero weight on the secondary objective, contradicting the flexibility to respond efficiently to shocks and disturbances that move inflation away from target. The MPC’s forward-looking policy decisions must be consistent with ensuring price stability in the medium term. The appropriate policy horizon is subject to the operational independence of the MPC.” *

Wake up there at the back. Our boys in the Quad have bet the farm – that is to say the future of the Liberal Democrats – on this change. At the very least we need to understand it. Which is why for those who haven’t the time or the inclination to delve into the obscurities of monetary policy (when rates are close to zero), I asked for your choice of driver as we make this historic turn.

I hope none of you chose the tear-away Hammond who brings a new meaning to off-road driving. I bet a lot of you chose James May in the well sprung Roller with the turning ark of a No83 bus. Well that’s who Clegg and Alexander, with Laws whispering in their ears, chose.

The change is cautious, unbelievably obscure and highly discretionary. Read this again, “the target ‘applies at all times’, as distinct from a requirement to be met at all times.” Get it? “because the latter could be mis-interpreted as strict inflation targeting with zero weight on the secondary objective” – clear as mud, then. And the “second objective”? Why not say “Growth!”

The MPC can steer where it wants, stay off-road for as long as it likes, provided that at some time in the future it finishes back on the road. For how long can we go ‘off road’? “The appropriate policy horizon is subject to the operational independence of the MPC.” viz James May. Hammond would have been a disastrous choice!

So, why does the author (for the first time in his life) want a Clarkson in the driving seat?

We are going to have some monetary stimulus, but we are going to have to wait until July at the earliest when the new Governor of the Bank of England (whose policy we must assume this is) arrives. Clarkson wouldn’t wait before applying the metal to the floor. It’s very important if this stimulus is to work for the passengers (investors, employees and purchasers) to know the route and the theory, so that their expectations are properly informed. Otherwise it won’t work. Clarkson would communicate this loud and clear, leaving us in no doubt that along ‘his way’ growth was round the corner. As for discretion, there would be no confusion over his intention. We’d all know what to expect. Clarkson rules OK.

And finally Clarkson wouldn’t tolerate a dozen back seat drivers (the MPC), trying to get their foot on the break and hands on the wheel.

So, on monetary policy, HMG and HMT are nearly there, but not quite. Mr Carney needs to be given the Clarkson rule; ‘no braking at Gambon”.

* The Haynes Manual for this vehicle can be found here.

For the advantages of a ‘rule based’ over an ‘adaptive’ sub-frame for stability: Lars Christensen who is also an authority on the Chuck Norris sat nav system.

* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams

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10 Comments

  • Richard Dean 22nd Mar '13 - 1:26pm

    Nothing much happened in the economy.

    The Chancellor realised that, if now homes are to be built, there’d be income tax to collect, so he issued a nearly cost-free guarantee about financing, thereby attempting to increase current demand at the expense of future demand.

    The Chancellor sensibly abolished an escalator, since it wouldn’t make sense in the context of a stagnant GDP.

    The Chancellor understood that the least well off tend to spend what they receive, so increasing the tax threshold to £10k would increase demand – 24 million at £700 each is £16.8 billion more demand, if everyone spends it.

    The Chancellor realised that this was a bit much, and announced a further £11.5 billion or so cuts, thereby decreasing demand by just this amount.

    … and there were a couple of small tweaks to the Bank of England’s remit.

  • Paul In Twickenham 23rd Mar '13 - 1:32pm

    “If you can’t beat them, join them”.

    I had hoped that we would see a massive investment in house building, particularly in the social housing sector, that would lower the barrier of entry into the housing market while simultaneously generating much needed employment in the building sector.

    Instead we had a “help to buy” scheme which has no requirement that you are a first time buyer, no limit on salary of applicant and a limit of £600,000 on property value. This is a subsidy on house buying for the affluent. An estate agent in South-West London (my neck of the woods) is quoted in The Telegraph today as saying of the people who will most benefit: “If I was being cynical I’d call those Tory voters.”

    I give up. I own a couple of properties and will sit back and watch my assets grow in nominal value like a good like sheep, rather than bother being an engaged citizen who recognizes that being in a society is not just about lining my own pocket. And this is what the Liberal Democrats supported in this budget. It makes me sick.

  • Bill le Breton 23rd Mar '13 - 6:59pm

    Paul, I can understand your disappointment, but the change in the Bank of England regime is hugely significant. At the last meeting of the MPC, King could only get two other members to vote with him on further monetary stimulus. The change to a mandate that includes a growth as a second objective sends a clear message to the hawks on the MPC and it gives Carney greater scope.

    Matthew, as I understand it you don’t believe that a central bank can create money (as well as commercial banks) so I am not surprised that you don’t believe that the problem of lack of growth is inactivity by the Central Bank.

    For anyone who is interested in Market Monetarism, Ryan Avent of the Economist, Scott Sumner and David Beckworth explain it here: Cable’s great triumph in this budget has been to get regime change at the Bank of England. The first change in years. It looks as if we now will have a Central Bank pursuing a dual target of both growth and inflation. It has taken Cable and his office many months getting the issue considered.

    The actual change may not have gone as far as he may have wished, but it is very possible that the new Governor of the Bank of England will have been given enough scope to increase nominal income (or nominal GDP). If by this time next year Mr Carney hasn’t been able to achieve that, expect further change.

    For those interested in the ideas behind these moves, Ryan Avant of the Economist plus two other Market Monetarists had a seminar at the American Enterprise Institute yesterday and the film is here http://www.aei.org/events/2013/03/22/mend-it-dont-end-it-revamping-the-fed-for-the-21st-century/

  • Bill le Breton 23rd Mar '13 - 7:02pm

    Bit of a mash-up above, but I hope you do have a look at the seminar linked to (eventually) in my comment.

  • Michael Parsons 24th Mar '13 - 12:34pm

    It’s a very long-winded video! We might remind ourselves that is the huge private financial institutions that went bust through foisting ill-judged loans far and wide for their CEO’s sort-run bonus advantage; not the governments who then violated elementary market practice by bailling them out ands so have started to run down social expenditure and an increase in tax – presumably because the politicians owe the financial lobby their election expenses and propaganda costs; that as a result we face not an econmic crisis but a crisis of democratic political control.

    The apparent flight to government bonds is generated by absence of alternatives – partly through deliberate crashing of the gold price at the London fixings (so as to retain money-liabilkities under control of the banking system), and partly by propaganda to sell bonds as part of the mechanism for switching savers’ money upwards to the very rich when bond-pricescrash (asthey will) as interest-rates rise. and so the pension and savings funds for the majority will be unable to keep their annuity promises.

    To get a clear picture we should remember that (a) we are witnessing a concerted attack by the hyper-wealthy non-tax-payng oligarchy (including Germans in Panema) on the use of the democratic State as a tool for redistributing and controling the wealth, and taxing away the gains that arise from artificual scarcity and corruption and market-fixing and (b) the continued ignorance of the genral public: people in general fail to unbderstand that no-one can have money in a bank (to simplify); if savings etc are once deposited in a bank, the depositor has lost them- they are simply bank liabilities, figures, which may or may not be recognised. This has become very evident from N orthern Rock’s “collapse” up to the present plight of those who fondly imagined they held money in Cypriot Banks. In practice this has long beem observable (apart from being basic economic m onetary theory) in ther so-called ‘comingling’ of liabilitiesd in USA to farmers and local authorities with general labiities so that they can be switched to London banks lleaving the deluded ‘depositors’ penniless.

    We need to rethink our approach to ‘money’ to find and use alternatives to bank-debt such as : gold; bitcoin; legislation to set up local authority time banks for direct logging and exchange of labour-value; small local banks outwith the present system; local currencies – the Brixton pound, the Bristol pound etc already run as an example; a revived State-run National Giro for user-free money transmission, so ending the levies on all payments made through cards etc. which currently give the oligarchy a rake-off on our cash-payment systems; the introduction of interest-free (i.e. risk-sharing) bank lending-systems; and over-all regulation to direct the State’s money-issuing powers on to immediate British production ; as oppsed to Mr Cable’s scheme for infrastructure raik spending which bIds fair to pay French companies to build and run railways here with a largely immigrant workforce to the advantage of the brutal EU financial tyrrany and of course loss of local public control.

    Basically- we need to rebuild, or atleast start to attempt to build, democracy.

  • Paul In Twickenham 24th Mar '13 - 6:29pm

    @Bill – yes, I’m disappointed but it’s more than that.

    The Liberal Democrats could say “we’re the junior partner in a coalition and as such we must filfil our basic obligation in respect of confidence and supply – but as a party we do not support giving tax breaks to the rich and the creation of an asset bubble in residential property that must surely pop as and when interest rates eventually return to historically normal levels”.

    But not a word, not a peep. Today Mr. Alexander was explicitly asked about this matter on the Andrew Marr programme and chose to respond with weasel words that mean exactly nothing. “We will consult”, he said. Oh. Right.

  • Bill le Breton 25th Mar '13 - 6:38pm

    Michael, Thank you for taking the time to look at the video – yes, very long. But UK monetary policy is gradually moving in this direction. The budget outlined a big step in this direction and for a ‘starter’ on Market Monetarism it is well worth listening to the first twenty minutes.

    You write, “The apparent flight to government bonds is generated by absence of alternatives”. And of course that is the key – when that happened in late 2008, the Bank of England (and many other Central Banks) failed to increase the availability of safe assets.

    Much of the energy behind the continuing flight to safe assets is the belief that there is an insufficient supply of them … so get in quick, get in deep, and stay in. The reverse side of this is that less-safe assets plunge in value and everyone becomes risk adverse. So a recession became an a Great Recession.

    Paul, I agree. The irony is that our part of the Quad – Alexander and Clegg are now further to the right or more Austrian on economics than Cameron and Osborne.

    Cameron and Osborne will have gone for a bit of a Barber Boom for 2015. Conservatives understand power.

    The move of the Bank’s regime in the budget speech – the new framework – owes much to Cable (who I think would have gone further towards NGDP level targeting), Laws who finally got frustrated with King and the HMT advisers caving in to Carney.

    And, once in post, I think Carney will go further. Why? Here’s his December 2012 guidance to the Bank of Canada – the section on “Further Enhancing Guidance May Require a Change in Framework” – the change he is referring to here is going beyond what he got in the Budget. http://www.bankofcanada.ca/2012/12/speeches/guidance/

  • Michael Parsons 25th Mar '13 - 7:31pm

    Thanks Bill
    My worry of course is that in a fiat money system presided over by CB’s there are no safe assets: when pressed the banks/ECB/IMF finding they can no longer gull depsitors of their cash simplky steal it as in Cyprus.
    So the challenge is to get out of that system along the lines I indicated, of which there are many.
    A simple first step to maklng safe assets available outwith the HSBCetc gangland would be to remove VAT from silver coins. Not because precious metal has some mystery but because to acquire it you have to sacrifice real assets, real effort, (unlike the banking system’s issuing of fiat money – which destroys the credibility of money in its basic sociological function of formalising reciprocal altruism, since it is acqjuired without the limits imposed by real opportunity cost and so fouls up the productive economic system).

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