Opinion: Monetary policy is political, so where’s the democracy?

We are in extraordinary economic times, which have led to extraordinary measures from the Bank of England in its attempt to help steer us out of the storm. The Bank appears to be terrified at the prospect of deflation and the depressive effect it could have. Not only have base interest rates been pinned to a historical low of 0.5% for well over three years, the Bank has also used Quantitative Easing to pump £325 billion of newly created money into the economy.

We now know more about the effect that QE is having and it should send shivers down the spines of progressives who are concerned about the levels of inequality in the UK. QE has boosted the value of assets owned by the wealthiest 5% by the almighty sum of £120 billion. This is an incredible shift of the country’s wealth into the hands of the already-rich, and yet this news was far down the news agenda last week and has caused a mere blip on the political Richter scale.

Compare this to the Conservative Chancellor’s decision in March to cut the 50p top rate of income tax to 45p. This was the major political event of the Budget and the resultant debate was a primary cause of Labour opening a 10 point gap over the Tories in the polls. But the money involved in 50p rate cut is around £100 million.

In other words, the effect on inequality of QE is 1000 times greater than those of the top rate income tax cut, but the political effect has been the opposite. The reason is obvious: the tax cut was enacted by elected politicians, but QE has been instigated by unelected bureaucrats. If a Chancellor was responsible for a £120 billion transfer of wealth to the richest it would be the greatest of political scandals, but when the Governor of the Bank of England causes this it gets just a passing mention.

It’s not just QE either. Low interest rates have winners and losers too, with the indebted seeing their debts shrunk at the expense of the more prudent. I hasten to add that this doesn’t automatically make these monetary measures wrong – some economists turn a fascinating colour when they consider the state our economy would be in without these measures. Nevertheless, it is clear that monetary policy has deeply political effects and it is entirely reasonable for these effects to be questioned by the public and ask whether the ends are justifying the means.

The Liberal Democrats are the party which holds democracy closest to our hearts, so seeing monetary policy having these huge political effects with the scantest of democratic oversight should make us severely alarmed. Bank of England independence was broadly praised before the credit crunch hit, but harder times require us to reassess whether it has too much power with too little popular scrutiny.


* Duncan Stott is a Lib Dem member in Oxford.

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  • The job of modern government is to create quangos and enquiries so they don’t have to take responsibility for anything. Hence the independence of the BoE and the creation of the Office for Budget Responsibility, etc. The current government went further in the case of the OBR by giving it a name that is political propaganda in addition to making sure that the ‘R’, Responsibility, explicitly doesn’t lie with the elected officials . A cunning method of implying that the last lot were irresponsible and that the current incumbents are not responsible for anything that happens subsequently.

  • um, considering monetary policy without factoring the effect of debt liability is to ignore half the rationale.

    Personal, corporate and national debt levels grew to record highs throughout the past decade, and wealth transfer was occuring where and because this money was spent and invested unproductively. QE merely catches up with the changed reality, provided it’s roughly proportionate in volume and fed in smoothly at the right places.

    It’s easy to blame a central bank authority for conspiring to manipulate policy for various ends, since this ignores the active role of consumer decision making. It is to take an authoritarian perspective, with a presumption towards hands-on intervention.

    It’s easy to state these are extraordinary times, it’s missing the point unless you can explain how extraordinary numbers of people made and in some cases continue to make some extraordinarily bad decisions. It is to copy tabloid style, with a tendency toward breathless sensation.

    The govt is trying to exit an era of over-consumption and rebalance this with greater emphasis on a productive private sector. The policy aim has changed, so it’s natural that the assumptions behind policy choices must be adapted.

    If we disagree with the aim of reducing the deficit then we should be clear about it, if not it makes no sense to argue the playbook is the same.

    I also think it’s important to acknowledge a time leg between policy enactment and opinion polls on the subject.

  • Bill le Breton 3rd Sep '12 - 10:43am

    So you would rather not have any of the £600 billion extra the report says has been produced by QE? Who in the rest of the 95% of the population would you rather did not have £480 billion pounds worth of assets – pensioners, charities, employers?

    Your mistake, if you don’t mind me saying, stems from your statement that the “The Bank appears to be terrified at the prospect of deflation and the depressive effect it could have.”

    If only that were true. The Bank and its MPC are presently implementing a monetary policy deliberately set to target the 2 year inflation forecast at 1.5%! The MPC is filled with admittedly unelected inflation hawks. It’s policy has been directed at systematic disinflation – hence the most recent feeble quarterly figures for NGDP growth of 1.7% annualized.

    But you fail to mention that each spring the Treasury – I take it that means the Quad – review the MPC’s target and their performance.

    I have been arguing elsewhere that our problem is that the Bank of England (sanctioned by the Quad) has been following a similar disinflationary monetary policy to that of Japan over the last twenty years.

    Have you ever looked at Bernanka’s 1999 paper, Japanese Monetary Policy: A Case of Self-Induced Paralysis? ? http://www.princeton.edu/~pkrugman/bernanke_paralysis.pdf

    Please have a look. Then you will reach his conclusion which we Liberal Democrats would do well to dwell on:

    “Needed: Rooseveltian Resolve

    “Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take — namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and
    to do what needed to be done.

    “Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.”

    Strike out Japan here and write Britain.

  • Duncan, you are right to point out the breathtaking absence of democracy in the area of most influence on ordinary people’s lives. There is much ballyhoo about making the second chamber more democratic.
    And yet, what might be called the THIRD chamber, (The Bank of England), that arguably has more power and influence on people’s lives than the Commons and the Lords put together, has absolutely NO democratic oversight.
    So who owns and runs this all powerful, non democratic, Bank of England?
    It seems it is owned by The Treasury Solicitor, Treasury Solicitor?
    The Treasury Solicitor is a Corporation Sole. A Corporation Sole?
    A Corporation Sole is a Legal Entity. ???
    It seems the further you dig, the closer you get to the Magna Carta in convoluted legalese, and the further away you get, from understanding just who controls the unelected THIRD Chamber that has infinitely more power than any other perceived democracy.
    If it doesn’t scare you, it should. They can (and probably will), QE our children’s future into oblivion. And no-one can democratically stop them.

  • Richard Dean 3rd Sep '12 - 11:58am

    If £325 billion has been pumped in but asset values have only rised by £120, where has the rest of the money gone?

    QE is not really “instigated by unelected bureaucrats”. Doesn’t the Chancellor have some say in what is done? (and so some responsibility for it)? The absence of a “willingness to be aggressive and to experiment” higlighted by Bill le Breton does seem astonishing. I wonder why it is absent?

    Am I right in thinking that QE has been used to support banks that would otherwise have failed? While this seems admirable, it’s also peculiar. In any other industry, inefficient companies get into trouble, approach faiklur, and get bought by more efficient companies. This harsh competitive reality is good foran industry if it keeps the industry as a whole efficient, competitive, and cutomer-driven. QE would seem to be preventing this happen in the banking industry, and so preventing the industry from becoming efficient, competitive, and customer-driven. Is this a good thing?

  • @Oranjepan – I don’t feel like your comment addresses the substance of my piece.

    “um, considering monetary policy without factoring the effect of debt liability is to ignore half the rationale.” Err, yes, monetary policy obviously has an effect on debt liability as well as asset values. Private debt isn’t distributed equally amongst citizens, so a policy of boosting money supply effects different people in different ways. This reinforces my point about the political nature of monetary policy.

    “It’s easy to blame a central bank authority for conspiring to manipulate policy for various ends” – I didn’t do this. I’m not questioning the MPC’s motives here. I’m questioning their accountability.

    “explain how extraordinary numbers of people made and in some cases continue to make some extraordinarily bad decisions” – that’s a very good question, but it’s not really relevant to my point about the undemocratic nature of what seems clear to me to be an unelected body making decisions with political outcomes.

    “If we disagree with the aim of reducing the deficit then we should be clear about it” – I agree with the need to reduce the structural deficit. Why does that have any bearing on whether the monetary policy needs democratic oversight?

  • @Bill le Breton
    “So you would rather not have any of the £600 billion extra the report says has been produced by QE? Who in the rest of the 95% of the population would you rather did not have £480 billion pounds worth of assets – pensioners, charities, employers?”

    The £600bn wealth splits about 50:50 between boosting pension values and asset values. So the £120bn asset price boost seen by the wealthiest 5% is because they hold around 40% of all assets. Whether or not this is ‘extra’ money is a bit semantic – it’s value that would otherwise not exist were it not for QE. And as with all prices, someone somewhere is paying to support these boosted values.

    “But you fail to mention that each spring the Treasury – I take it that means the Quad – review the MPC’s target and their performance.” – with what outcome?

    Your further points are an interesting critique of current monetary policy. There are all sorts of arguments to be had for a looser monetary policy than at present, or a tighter one, or the mechanisms that the MPC should be using. It all depends on what sort of economy you want. This should be part of our national debate, but while the policy remains in the hands of the unaccountable, the debate will be futile.

  • Bill le Breton 3rd Sep '12 - 12:35pm

    Richard the report suggests an increase of £600 billion (of which £120 billion went to … etc) NOT as others have tried to suggest that all the benefit went to the top 5% of wealth holders.

    QE has helped avoid a deeper recession, perhaps even a depression.

    Its chosen form is such that this is where it went. Other forms of QE would have had different consequences. All I say is that we shouldn’t through the baby out with the bath water by trashing QE.

    We shall see whether the ECB acts this month. And whether Bernanke does more agressively in the US what he prescribed for Japan back in ’99.

  • Bill le Breton 3rd Sep '12 - 12:50pm

    Duncan, I have argued long here that the MPC is undemocratic, unaccountable and that, given the dire situation, the responsibility for monetary policy should be repatriated to the GOvernment from a quango made up of economists who in the majority have contiinued to get their predictions and warnings wrong . I believe that Prof CRafts’ Centre Forum paper reminded us that this was done with effect during the 1930s.

    So, a simple order in council could do this, I suppose. And I would support your campaign for this.

    The Quad could change the target (ie from 2% CPI to 3%) or the nature of the target ie to NGDP +5% for example).

    I am told that David Laws considers that doing so (ie changing the target) would create such alarm in the city that he is against it (though in favour of unconventional action – pointless without a change in the target). It would be good to hear from the horse’s mouth whether this is so.

    If so, it is just such timidity that is holding us back, that is preventing a distinctive Lib Dem monetary policy and is stopping someone like our leader emulating FDR at Conference.

  • Duncan,
    complaining about a lack of accountability definitely leaves the implication that the MPC is either failing to implement policy, is making mistakes in doing so, or that the policy is wrong in the first place.

    However Treasury officials would certainly be calling for heads if they didn’t accept arguments for the decisions being made to hit the targets set. Or more likely they’d act somewhat more subtly through the appointments process to ensure the balance of board members was more reflective of the government of the day.

    The point being that we live in a representative democracy with indirect accountability, rather than in a direct democracy with universal veto. That’s not no accountability, that’s a different manner of holding to account.

    Which only leaves open the idea that you’re disagreeing with the inflation target as the driver of monetary policy.

    I accept the validity of your critique (even if I don’t think you’re quite expressing it correctly), though whether your suggestion actually proposes something necessarily better remains open to question. So it’s vital to look at the underlying causes of the current predicament.

    Mine is a different angle – rather than the MPC’s independence being the cause of a block on accountability to Parliament, Government is failing to effectively communicate clear messages about how implementation of the policy should impact upon financial decisions, or tailoring these messages to each sector of the economy coherently.

    And that’s down to a split in the differing media strategies of the two coalition parties, rather than any non-scrutiny by a cross-bench of parliamentarians. It’s a problem of leadership, not one of administration.

  • Having read several comment here, I felt that I had perhaps misread or misunderstood the original piece, so I went back to the top of the page to re read the article. No, I have not misread or misunderstood.
    I issue is not about whether QE is a good or bad idea, or whether we are on the right track or wrong track, to a better economy.
    The issue is that the control of the nation’s money supply (and by definition its value), is in the hands of an ‘legal entity’ that has NO democratic oversight. In short, a group of unelected people (MPC), meet periodically and decide between themselves, the value of YOUR, home, mortgage, insurance costs, future pension value, and whether your children will be sold into debt slavery for decades into the future, to pay for our ‘credit’ sins today.
    And there is NO democratic way to stop them.

  • Bill le Breton 3rd Sep '12 - 2:06pm

    J Dunn and Duncan you may both enjoy this that someone has just shown me: http://www.bloomberg.com/news/2012-08-29/contrary-to-rumor-central-banking-is-a-political-act.html

  • Richard Dean 3rd Sep '12 - 2:43pm

    I am not convinced by Bernacke (http://www.princeton.edu/~pkrugman/bernanke_paralysis.pdf). Did his methods work for Japan? His four prescriptions for escaping a liquidity trap seem to fail as follows:

    1. keep interest rates zero and control inflation …. but this is what we are already doing, and it’s not working
    2. devalue the currency … but the benefits of this disappear if every country in a trading group devalues
    3. helicopter drop … will certainly cause inflation, but not growth!
    4. expand open market ops into wider markets, such as for corporate bonds … which interferes with normal competitive pressures and so weakens industry in the long run

    In common with many economists, Bernacke seems to believe that money is a driver that stimulates activity, rather than a symptom of activity driven by other factors. But in a society where income is very unequal, a static economy can be stable because the well-off have political power to prevent change, while those that want change are not well off and do not have the power to enforce change – except by extreme driver actions such as riot or coup.

  • Bill
    Indeed, The Fed (also undemocratic), is even worse than the Bank of England, because they are ‘printing’ the worlds reserve currency into oblivion.
    What I find truly bizarre is that we as ‘an electorate’ feel proud of ourselves for getting George Osborne to do a U turn on the pasty tax, after we metaphorically jumped up and down on his head to change his policy.
    But, we are powerless to do anything democratically, to stop Mervyn King and Ben Bernanke doing QE3,, QE4.. QE5….. slowly but certainly, turning the value of $’s and £’s into toilet tissue.

  • Bill le Breton 3rd Sep '12 - 5:27pm

    J.D. We would probably fall out about QE, but perhaps not about who should control monetary policy in a democracy, especially at a time of national emergency.

    Yet two things are often forgotten. First, the Chancellor (and surely in a Coaltion the Quad) has each spring to revisit the target and this is an annual chance to change the target. And second, that it is quite easy to take back control over monetary policy into democratically elected hands. It was only ‘given’ to the Bank in 1997. It is a political choice and Parliament is not powerless – it chooses to pretend to be powerless.

    I assume that each spring a massive brain in the Treasury writes the necessary paper for Osborne and Alexander with the ‘no change’ conclusion which they initial in a trice before returning to their favourite subject of fiscal policy – so much easier to understand.

    As I mentioned above Professor Crafts’ Centre Forum pamphlet reminds us that the last time the economy was in such a mess the then Government did ‘nationalise’ the Bank of England.

    A third possibility is an effective rule based proceedure that removes the discretion from the MPC – say an NGDP level target, which could be reviewed and debated each year in Parliament. In fact it might even become an issue during a general election.

    We could then sack the MPC as redundant, removing the most costly quango of them all. And relate the Governor’s bonus directly to his/her ability to hit that target.

  • Robin Martlew 4th Sep '12 - 5:50pm

    Quantitave Easing does leave me puzzled, but I understand that it is a way of, what we used to know as ‘printing money! ‘ Wouldn’t it be more productive to actually create jobs using such money for funding increases in such things as care for the elderly, the quality of education by smaller class sizes, building more houses or roads, research and local work which would feed into local economies. Wouldn’t this reduce unemployment and the need for benefits, increase the tax take and contribute towards paying off the deficit. Or am I missing something?

  • Peter Watson 4th Sep '12 - 5:59pm

    @Robin Martlew
    I’m also confused by quantitative easing, but according to George Osborne it is “the last resort of desperate governments when all other policies have failed”. So that’s alright then.

  • Bill le Breton 4th Sep '12 - 6:32pm

    Robin and Peter,

    It would have been far simpler and less controversial, but I think the direct funding of government spending in this way was outlawed by the Maastricht Treaty. It would have been the way to fund infrastructure projects and indeed I called for this here four years ago to much derision from the deficit/inflation hawks.

    Those who wonder why I go on and on and on about NGDP level targeting and the need for the Bank of England to say that it will conduct whatever is required (in the way of QE) until that target is reached may be interested in this article from the Washington Post on the Jackson Hole Conference. http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/03/michael-woodford-may-have-written-the-years-most-important-academic-paper-heres-why/

  • Robin Martlew 5th Sep '12 - 9:22am

    Peter & Bill Hey!
    Sorry! I am also too ignorant to know what NGDP is about I can only get as far as National Gross National Product or perhaps Notional? which seems too ‘notional for me! I’ve tried Net and Normal but haven’t got on with the oncept any better! Sorry Bill I would have read your contibutions with much greater interest had I understood bettet! Should we perhaps be aiming at ignorami like me and bye-passing the cognocenti (however one spells it?) There do have to be opportunities to talk sense in English even if it isn’t the ‘done thing’!

    I do think that there are quite extensive’knock on’ effects that need addressing, but somehow the whole idea needs opening up doesn’t it? How do we go about that? I’ve tried and got the same reactions at Bill.
    In my local circle I am recognised as a bit of a crank on this issue so I have more or less given it up locally in an attempt to be taken seriously on other issues.

  • Robin Martlew 5th Sep '12 - 11:28am

    Hello and sorry!
    I should have read the bit from the Washington Post before rushing to reply! I now,;I understand NGDP. I’m afraid it doesn’t help because the principle seems to be much the same. My thought was that new money should be injected at the bottom, not on a ‘trickle down’ basis.
    If as you suggest Bill there are european conditions which preclude this then; for those ideas to become practical we need our MEPs and MPs to arguing for a change.

  • Bill le Breton 5th Sep '12 - 7:45pm

    Robin, I am sure we could get away with it, especailly if we did it on infrastructure projects. It needs a will. It needs politicians to understand it and just do it.

    We shall overcome!

  • @Dage Page
    I think it depends on the circumstances.

    We already have an amount of indirect democratic accountability, both through the appointments systems as well as regular select committee hearings.

    It doesn’t matter if you don’t like the outcomes, or you don’t like the processes, or both. Complaining is a empty rhetoric unless you’re using the system properly, or suggesting real improvements.

  • So what would you suggest?

    Make Mervyn King the Lord Chairman with a seat in the Lords where he should answer questions?

    Or, a place in Government as an independent member of the Cabinet where he can answer to the political representatives of the nation?

  • Eddie Sammon 10th Jun '14 - 12:29am

    I’m bumping this article because the west’s corrupt banking system in a disgrace, which includes the central banks. “Tight fiscal policy and loose monetary policy” means “austerity for everyone else except for the banks”. People say the banks can’t afford austerity, but unemployed people can? It’s an absolute disgrace, how dare they threaten death spirals if we stop giving them free money whilst they are paying million pound bonuses. Yes I understand the importance of competition, but it’s gone too far so it now becomes blackmail.

    It’s one of the biggest issues of our time and the left only seems to want to tackle the private banks whilst the right only wants to tackle the central banks or maintain the status quo.

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