Bank of England

Tony Curzon Price (London, openDemocracy): The Bank of England's report on the state of finance has about 3 worrying graphs per page.

Here's just one example - the amount that UK banks will need tofind next year to pay back loans that are coming due.

Any wonder the banks are hoarding all that taxpayer investment they
are getting and not lending on? And if you were asked to invest in a
business that you knew had to stump up these sorts of sums next year,
would you worry that your investment was just going to stright into the
pocket of a creditor whose lending terms are tougher than your
ownership terms?

I'm all for the State being the bank of last resort, but I don't have any taste for the taxpayer being the dupe of last resort. Why don't we let these banks go under while putting in place an emergency financial system. I am glad to see that Walter Munchau has started to suggest this option.

Anthony Barnett (London, OK): There is a very long and interesting post by Andrew Lilico over on Conservative Home which attacks the idea of an independent Bank of England. This is the point where the famous 'pound in your pocket' comes slam bang up against the constitution.

Lilico wants the next Conservative government to reverse this and bring back interest rates decisions under the direct control of the Chancellor of the Exchequer. The Tories are to be congratulated for having this discussion. If they debate and think through their policy on the framework of the UK’s economic government in a principled way like this they will in fact be off to a much better start than Labour was in 1997. It may sound odd for me to say this, as I was one of the few on the left (along with Will Hutton) who supported Bank of England independence at the time. While afterwards the decision was hailed as a political and economic triumph. Lilico has forced me to look back and re-assess. I am not going to try and talk about the economic arguments, however, the issue that most concerns me is the political one: what is the best democratic way of deciding the base rate with respect to trying to influence the rate of inflation?

Lilico’s history is foreshortened. Originally, independence for the Bank was a Tory policy, one developed by Nigel Lawson when he was Chancellor. He forced reluctant officials to draw up a secret plan in 1988 which he presented to Margaret Thatcher as an inflation buster. He describes the whole episode in his memoir The View from No 11 (where he reprints the memo in an appendix). He writes,

“I amazed and horrified my officials by asking them to devise a concrete proposal for an independent but accountable Bank of England…. The purpose of my proposal was to entrench the use of monetary policy to fight inflation and secure price stability. This would be a far more useful constitutional reform than any advocated by Charter 88 and other constitution mongers.”

Lawson describes how Thatcher ruled out any possible diminution of her ability to “pull the levers of power”. But with a pedigree like this it is easy to imagine that both labour and the left opposed the idea and saw it as handing over what should be parliament’s democratic responsibility to the lackeys of global capitalism in the City.

This is not exactly Andrew Lilico’s argument but it is close. He says that supporters of BofE independence are friends of the “benign dictatorship argument”.

“Having an independent central bank removes the ability of government to trade off short-term output rises for long-term inflation. But this is a genuine political choice. I do not favour having higher output today in exchange for inflation tomorrow and the next day, but that is my political philosophy. Other people might prefer to be able to make this trade. Removing democratic control over monetary policy may prevent people from making short-sighted errors. But democracy is all about letting people make their mistakes for themselves…. the failings of democracy compared with rule by experts are well-known, and have been discussed for thousands of years. The fact is that in mature political societies we have decided that it is best if we can elect and reject our rulers, particularly those who have control over our money. Control of monetary policy carried out by central bankers that turn out not to be good at it, or who decide to pursue goals thought undesirable by everyone else, could be extremely damaging. We need to be able to exercise democratic constraint.”

Tony Curzon Price (London, oD): The Bank of England' swap is a clever device. If banks are not lending to each other because they are hoarding cash, the swap will be popular and will solve the problem. If they are not lending to each other because they are worried that the borrower might go bust, then the swap will not restart bank lending. The FT's editorial on this is admirably clear.

Tony Curzon Price (London, oD): I've had my complaints about the Today show (here and here), but listening to Evan Davis these past few days has been a pleasure. I was first startled out of my tooth-brushing about a week ago, when he had Alisdair Darling on the line. A long drone of irrelevant and tendencious facts about the health of the British economy was allowing me to give full attention to my molars when Evan said:

Tony Curzon Price (London, oD): The FT's Martin Wolf, whose commentary I have consistently admired throughout subprime, has another excellent column in which he asks for house prices not to be propped up by government intervention (much as I did below).

Rupert Read (Norwich, The Green Party): Low interest rates and easy money in the States and in Britain, and almost everywhere else, led to a crisis in the 'sub-prime' mortgage market and then a credit crunch, which has brought on fears of a recession in the States and in Britain, and almost everywhere else. After a series of interest rate cuts, the latest response of central Banks including the B of E and the Fed has been $200bn of more easy money released by the latter and aggressive open market operations by the former directed towards the same end, along with co-ordinated actions to ease credit by all the other major central banks around the world.

Tony Curzon Price (London, oD): Nationalisation, as a few of us have long claimed, was the only solution that satisfied the political constraints. Once the Bank of England had lent as much as it did to the Rock, and the taxpayer was explicitly providing it with the one thing any bank needs above all others to operate - credit-worthiness - then it was clear that in reality the taxpayer owned the asset. Whether in name or not, the taxpayer was doing the owner's job: nationalisation was just a way of making reality accord with law - by changing the law.

Anthony Barnett (London, OK): Saturday's FT had a report by Stanley Pignal on the increasing use of cocaine. He says,

"The new data suggest that cocaine use is no longer limited to bankers working long hours".

Could someone get the tabloids to launch a campaign for more "Bobbies in the City". Perhaps even the creation of a special stop and search "Powder Squad"; after all the bankers are a danger to the public especially old ladies with their extra pensions coming from shares.

Tony Curzon Price (London, oD): 2008 will see the start of a recession that will do all the work left undone by other failures, to turn the Brown era into a sad trail of failed promises. The recession starts in the USA. The Fed will soon slash interest rates, thus saving Wall Street while massively reducing the price of all dollar goods even further than they have been. UK banks and the City will continue to look shaky -- watch the Commercial Property Loans portfolios and derivatives going awry -- and the Bank of England will be expected to slash interest rates. The pound will tumble on expectations that Mervyn King will comply. Book your UK seaside holiday destinations early this year, they will be popular.

Tony Curzon Price (London, openDemocracy): Do you remember the torture of the high-jump competition at school? You knew that however good anyone was, the bar would inexorably be pushed higher. Eventually, everyone would fail.

I expect that those high-jumpers were training for life in the City. As Mervyn King pointed out in his evidence on Tuesday, a system in which fund managers were required to beat, every quarter, the average returns of all their peers in order to earn their mega boni was bound to eventually end in failure...albeit with some performance enhancement along the way. If everyone is good, the average rises, so it is ever harder to be regarded as "good". Competition of this sort is devastatingly efficient at exploiting the weakness of a system.

Tony Curzon Price (London, openDemocracy): How should we interpret the massive investments from sovereign wealth funds being taken by UBS, Citi and Morgan Stanley to shore up their capital reserves? Just when the central banks are making huge amounts of liquidity available cheaply, why are these banks going elsewhere for capital? This seems strange: the public is trying to force cheap money into your pockets, and you go elsewhere to shore-up your balance sheet. Are the Chinese and Gulf States offering even cheaper money?

Tony Curzon Price (London, openDemocracy): Banks are utilities. A plank of Mervyn King's defence of his handling of the Rock is that he tried to persuade his international colleagues (to no avail, apparently) that the international banking rules known as Basle II should require banks to maintain a certain degree of liquidity, not just a certain capital adequacy. That is, it should not have been good enough for the Rock to say "we have capital worth one fifth of our loans": it should also have been required to say "and one fifth of that can be turned into cash within 15 days..."

Anthony Barnett (London, OK): In his 1992 memoir of his decade as part of Margaret Thatcher’s “core team” (six of those years as Chancellor of the Exchequer), Nigel Lawson includes the secret memo he wrote advocating that the Bank of England be made independent with respect to setting interest rates. Lawson writes that it “would be a far more useful constitutional reform than any advocated by Charter 88 and other constitution mongers”. Thatcher turned down the idea which, famously, Gordon Brown, assisted by Ed Balls, was to implement in a surprise announcement when Labour took office in 1997. I’ve always supported the view that this was a progressive move and not a surrender to the City. But it could strengthen parliament too - provided it has the power to approve or veto the independent members of the Monetary Policy Committee whom the Chancellor nominates. Yesterday, Brown made his last appearance before the Commons’ Treasury Select Committee and announced that the appointment process would become “more transparent”. He was promptly attacked by George Osborne for not going far enough. The Commons' Treasury Committee, Osborne argued, should be involved in “formal public scrutiny” of who is appointed. This seems pretty weak to me. Even Lawson foresaw the possibility of their being “subject to the Select Committee’s approval”. This is what matters if parliament is to become a force in the land, not creating a complicated process of nomination by the many. Let the Chancellor propose, but let the Commons committee dispose. It needs more real power.