Help Mervyn King or Sack Him

Mervyn King acts as though monetary policy is currently about right to hit a medium term inflation target of 2%, but insufficient to put Britons back to work. This is because his job is to provide price stability because this is meant to stabilise aggregate demand. Stabilising aggregate demand is something which was achieved very well until 2008 when it allowed it to crash and unemployment to rocket.

The mandate for price stability he has been given is not currently compatible with full employment. Merv has been told to target price stability and financial stability and although he has been relatively dovish in executing his duties, he has not been nearly forceful enough in explaining their shortcomings.

I don’t really want to call for Merv’s head because he seems to be more dovish than average for the Bank of England’s Monetary Policy Committee. I am beginning to think he is no longer capable of delivery the recovery we need. His recent comments indicate that he isn’t being clear enough why he can’t deliver the recovery people want. Today he gave evidence to the Treasury Select Committee that suggested we should be grateful for a decade of stagnation.

When this crisis began in 2007, most people did not believe we would still be here. I don’t think we’re yet half way through this. I’ve always said that and I’m still saying it. My estimate of how long it will take to recover is expanding all the time. We have to regard this as a long-term project to get back to where we were, but we’re nowhere near starting that yet. We’re in a deep crisis with enormous challenges.

In June he was one of the MPC members calling for further QE in response to the worsening situation in the Eurozone. He was entirely right to do so, even if it is the least he could have done that wasn’t nothing.

Regarding the stock of asset purchases, five members of the Committee (Charles Bean, Paul Tucker, Ben Broadbent, Spencer Dale and Martin Weale) voted in favour of the proposition [no extension of QE]. Four members of the Committee voted against the proposition. The Governor, David Miles and Adam Posen preferred to increase the size of the asset purchase programme by £50 billion to a total of £375 billion. Paul Fisher preferred to increase the size of the asset purchase programme by £25 billion to a total of £350 billion.

He has now admitted he is either unable or unwilling to do anything more. We know that there is plenty more the Bank could do because he voted for one of those things in June. We also know that there are other examples of Banks running highly accommodative policy through the exchange rate, some serious, some not so serious, which the Bank has not yet even attempted.

Mervyn King knows he isn’t going to do much about unemployment. A genuinely reflationary policy which put people back to work would threaten price stability and the Bank isn’t authorised to make that call, only the Treasury is. Since Meryvn is acting like he is happy current policy is on track but that the track includes at least five years of suffering we can help him by criticising him. He has to be enticed to explain to everyone that unemployment could be lower but that the Treasury doesn’t want it to be and that he can’t do anything on his own. Mervyn King wants more accommodative policy but is unable to deliver it with the current MPC and Bank mandate.

Rather than ignore this he should be making clear the limits of the mandate he has been given. If he is happy with doing nothing about unemployment he should be made to say so and ejected from his job, if he is unhappy he should make it clear his hands are tied unless the Treasury change his mandate. If he is unhappy with being honest about the limits of what he can delivery legally and what he can delivery technically we need a new Governor of the Bank of England.

In the US, as in the UK, criticism of central banks has predominantly been that monetary policy has been too loose. Monetary policy looks loose if you only look at interest rates but other indicators tell us monetary policy has actually been incredibly tight. Nominal GDP growth has been low all through the developed world, as has inflation. Even in the UK where inflation has been high a large portion of this has been due to tax increases not monetary looseness.

Criticism of the Fed from people like Scott Sumner and Paul Krugman have helped to shift the Overton Window, the bounds of acceptable discussion, to include the possibility that money is too tight. I don’t think it is viable to have somebody in charge of macroeconomic stabilisation who thinks it is acceptable to spend ten years recovering from a crisis. Either we help Meryvn come out of his shell or we help organise the coup of Threadneedle Street.

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PS The Treasury Select Committee need to update their website more quickly. Sir Merv’s testimony is still missing. The latest story is a push piece about Merv’s upcoming appearance, but there’s no link to the testimony now it has happened. I had to crib from the Telegraph.

Vince Cable is still the best member of this Government

Lars and Britmouse got there first, but let me point you towards Vince Cable‘s recent speech. The mainstream media focused on Vince’s reference to homebuilding in the 1930s. That is understandable in a country as obsessed with housing as the UK is, but the really interesting part was on monetary policy.

As in the 1930s, homebuilding now would be a sideshow, the real impetus to growth in the 1930s was leaving the gold standard, devaluation and reflation. This is exactly the policies  I and others have been calling for. Homebuilding was a consequence, not a cause of the UK’s recovery.

Without the Bank of England supporting the government no policy effort will be successful and this is what Vince says. Furthermore, without communicating that clearly the policy will fail. This is exactly what people like Scott Sumner and David Beckworth have been saying…and know it finds itself in the mouth of Vince Cable:

The right way to understand loose monetary policy is in terms of expectations: of whether future money demand will be growing fast enough to make borrowing to invest or spend worthwhile.  It is not enough just to look at the base rate.  Look at Japan: because of its persistent deflation, its zero-interest rates still do not reflect easy money conditions.  Anyone investing is facing the persistent pressure of falling prices and falling profits.

In the 1930s, the abrupt departure from Gold – so much condemned by the City – had the strongest possible effect on expectations of rising money GDP.

…What tools does the Government have? The first is continued use of monetary policy, and stronger communication of the policy aim it is meant to achieve – robust recovery in money spending and GDP. The Mansion House speeches signalled a clear intention to continue aggressive monetary policy.

Ladies and Gentlemen, that is Vince Cable advocating a NGDP target as a commitment device, exactly what this blog and many others have been arguing is essential if the UK is ever going to recover. There is some hope.

The Rt Hon Richard Benyon MP, Parliamentary Under-secretary for Environment, Food and Rural Affairs

Dear Minister,

Thank you for you letter.

Even though I am no longer your constituent it is nice of you to continue to write to me. Almost exactly two years ago I wrote to you about Refugee and Migrant Justice. I am pleased to know you are still interested in immigration.

I must admit, I was a little, confused by the content of your letter. When I wrote to you I was asking for funding reform for a charity that your government was starving of funds. There were more than 10,000 asylum seekers who could have been affected. They would have effectively been cut off from legal help in navigating the  thicket that is UK immigration law. Last year they were abandoned as Refugee and Migrant Justice closed its doors.

Your letter boasts of how mean you have been to immigrants. Shurely shome mishtake?

I once thought of you as a competent Tory, something in short supply, but it turns out I may have been wrong. It is of course very efficient of you to have a list dedicated to people with “concerns” about immigrations. I do find it slightly amazing you don’t have a separate list for people whose “concerns” regard the conduct of your government.

Turing to your letter, your first point about capping the numbers of non-EU workers allowed to enter the UK interested me a lot. I am happy to see you are proud the Tories have generated such an anaemic recovery that nobody wants to live here. I still do, just, but your letter is certainly giving me pause to consider that too.

Allow me to thank you for letting me know you have “reformed the student visa system.” It is good to know who to blame when my friends are forced out of the country. I’ve just finished my studies at LSE, so like last year it is my friends you will be forcing out. The deportation of people more diligent and intelligent than I is something of which you should be so proud.

I am pleased to hear that your Government is taking steps to cripple one of the UK’s most competitive export industries. Your government’s own Department for Business, Innovation and Skills estimates Higher Education contributes around £8 billion a year. Congratulations on making me poorer in friends and money.

I am impressed by your measure to punish skilled workers who earn less than £35,000 a year  by deporting them. It is certainly a tremendous way to extend your government’s programme to punish people who dare to be working class beyond this country’s shores. How it is to make me better off I am not sure.

Of course merely punishing working class people is not enough, some of those working class people want to breed. Punishing poor people in love by preventing poor people bringing their spouse to the UK is a lovely touch. Again, I am unsure how this is to make me better off.

I don’t want much from an MP. Effectively labelled spreadsheets is pretty low down the list. Not relishing the opportunity to punish people for being poor, in love, or freshly graduated and intelligent are even more fundamental. Perhaps what I find most offputting is that you presume I share your Party’s enthusiasm. More evidence of the Tory Party’s natural arrogance.

I am pleased to say you are no longer my MP Richard, but I do hope this letter finds you well.

Yours sincerely,

Left Outside

The 1636 Surat Earthquake

President Methwold’s Diary, August 29. Whilst I sat writing, Chout our broker and our Persian scribe being both near to me, the floor of the chamber under me and the wall against which I leaned contrived to move so long as to give me occasion to seek what might be the cause; but finding none visible, I demaunded of those with me what they felt; which were not yet recovered from their woonder; who answered that they felt the like motion; and so did divers others that sat so near as to answer the said question, and so many more in the house and town besides as to confirm that it was the first earthquake that ever I was sensible of. It contrived whilst a man might deliberatly tell sixty, with a gentle equal motion, and therefore I hear of no hurt that happened by it. [Spelling and Grammar cleaned up by LO]

It is fun being an historian. How many people alive now know there was a weak Earthquake in Surat, India, in 1636? How many have read a first hand account of it? Probably only a few hundred and now you are one of them.

For the nth time, already!

I just want to inform all my international readers that there are no institutional problems with the UK adopting NGDP  level targeting. Failure is a choice.

First of all, for those keeping score, we’re still doomed. Secondly, the coalition can still, at any time, prevent doom, by changing the Bank of England’s mandate to target nominal gdp and to ease policy until it returns to trend.

If NGDP level targeting can be adopted quickly somewhere it is here. If somewhere needs to lead by example, I would recommend the UK too. NGDP is below trend, our banking system is weak, we are closely tied to the Eurozone, inflation expectation are falling and all anyone needs to do is to convince David Cameron’s cabal that this policy would get them elected. Conservatives *love* getting elected.

Britain has a parliamentary system with a lot of power vested in the executive. This is normally very good for getting things done. Sadly it also means you get bad legislation passed “when something needs to be done.” Something needs to be done and for a change it would be nice were the Government to do the right thing.

The Markets Don’t Predict a Bright Future

Loathe as I am to piddle on Scott’s victory parade, I think some perspective is needed. NGDP targeting is catching on, it certainly has supporters within the UK Government like Vince Cable and his staff and in the commenteriat. Likewise, it is gaining ground with Jeffrey Frankel, A professor at Harvard and in Japan and with Paul Krugman and yada yada yada…things are looking up for this obscure policy, which is a good thing.

Yet this optimism doesn’t appear to be buoying markets. If NGDP targeting has been gaining popularity you’d like to see some sign of it in the stock markets, yet the last three months have been awful.

There’s an awful lot of red pixels. Of course inferring anything from market data is very difficult, that is after all the point of markets, to process information. Events in the real world of central banking are likely to dominate discussions of NGDP targeting. But, were monetary policy regime change to be likely you would expect to see some optimism in the numbers, and these are very pessimistic numbers indeed.

Scott should be happy with his progress so far, he has undoubtedly helped put NGDP targeting and monetary easing back onto the policy agenda, when it might have been ignored. However, he is premature in saying the future is bright when all signs suggest it is very likely quite dim.

A Note on the Monarchy

The Monarchy is such good value I’m told because we get to keep all the revenues from the Crown Estate. This, publicly owned and operated estate, was stolen from the people of Britain through the thousand years since the Norman conquest and is valued at a £1 billion.

The wealth owned by most members of the Royal Family is simply theft legitimised by history. When exactly was this land and wealth earned? When they were rampaging psychopaths or after we had removed all formal power from them? They should be stripped of all land and private property, they haven’t earned it. If they want to be continue to be Royalty they can draw a wage for their job like the rest of us. Don’t even get me started on the Duchy of Cornwall!

Rant over.

Some Tidbits

The ECB’s governing council was divided today over monetary policy. While rates were left unchanged at 1%, a minority of the governing council wanted a rate cut. This may make an early rate cut more likely

Not everyone at the insane European Central Bank is insane.

This is very good from Martin Wolf:

Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it.

This is very bad from Alister Heath:

Financial markets behaving like a bunch of addicts convinced their next fix – bailouts or cheap central bank money – on its way. Pathetic.

I have no idea what Heath, editor of City AM, is talking about. I can only presume he is worried that the world’s central banks are taking too much risk onto their books and hence socialising risk, or that they are being too inflationary. The second seems laughable and the first seems sensible. Government’s have a lot of risk baring capability at the moment and the private sector doesn’t.

We have a political class, in Alister Heath, who see suffering as noble and effective policy as immoral. The only small sliver of hope is for those “doves” in the ECB to make headway and begin to oust people. You can’t change Mario Draghi or Alister Heath, but you can run them out of town. It seems like those are the only things which are going to work.

The Worst Review I Have Ever Read

I like Laurie Penny’s writing, but its not subtle. Laurie’s recent review of a Game of Thrones was so poor that it has driven me to write a review of her review. Necessarily, here be Spoliers, beware. Superficially Game of Thrones appears like a normal, goodies versus baddies fantasy adventure. Were it my job to write about it though, I might bother to gain more than a superficial understanding of the stories plots and themes. This is over a thousand words of take down, which is relevant to hardly anyone, so I’m putting the rest below the fold.

The ECB as Schroedinger’s cat

The European Central Bank is at all times both fulfilling its legal mandate and ignoring it. Until you look closely it is impossible to tell which it is, and once you have decided which it is it can only be because you have lost sight of its mandate as set down in law. This explains a lot: Even I can’t decide whether Mario Draghi relentlessly adheres to or has completely abandoned the whole ECB mandate.

One of the reasons that Europe is collapsing and the whole world is heading for a recession within a depression is that the ECB is charged solely with maintaining price stability not supporting economic growth. Their duty, they argue, is to without prejudice support a European wide inflation rate below, but close to 2%. However, the mandate as set out in law is so convoluted as to leave the ECB council capable of simultaneously adhering and violating both the letter and spirit of the law. No wonder Europe is a mess.

They are not just charged with maintaining price stability, as interpreted, they are also empowered to…

Without prejudice to the objective of price stability, it shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. [my emphasis throughout]

This implies that although the ECB cannot ignore inflation, it has leeway to support the policies of member states and the Union as a whole. By this criteria the ECB should have done everything in its power to keep inflation and inflation expectations running at really, really, really close to 2%. Instead they have crashed. The mandate is wider than price stability and includes supporting economic policy making rather than sabotaging it.

However, the mandate continues…

The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 119 of the Treaty on the Functioning of the European Union.

This part of the mandate implies that the ECB is empowered to not support the policies of member states if they are not compliant with “free competition, favouring an efficient allocation of resources.” That would certainly have empowered Trichet, and now Draghi, to withhold such support as is possible if they consider member states’ policy “insufficiently favourable to an efficient allocation of resources.”

At the moment it appears Draghi is refusing to cut interest rates below 1% to blackmail Greece and France into policies deemed favourable to “Article 119 of the Treaty on the Functioning of the European Union.” This seems like something that should be impermissible for a central bank but it is in fact within the Feds mandate. So refusing adequate policy until member states change policy is merely the ECB laying greater weight on supporting certain policies over others, as it is mandated.

The mandate references Article 119 which says…

1. For the purposes set out in Article 3 of the Treaty on European Union, the activities of the Member States and the Union shall include, as provided in the Treaties, the adoption of an economic policy which is based on the close coordination of Member States’ economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition.

2. Concurrently with the foregoing, and as provided in the Treaties and in accordance with the procedures set out therein, these activities shall include a single currency, the euro, and the definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Union, in accordance with the principle of an open market economy with free competition.

3. These activities of the Member States and the Union shall entail compliance with the following guiding principles: stable prices, sound public finances and monetary conditions and a sustainable balance of payments.

The ECB has overseen a colossal balance of payments crisis, with the Eurozone periphery persistently running deficits and the core running surpluses. In 1992, at the signing of the Maastricht treaty, they saw this problem coming and specifically empowered the institutions of Europe to deal with it, and they have failed. This imbalance, rather than government profligacy is at the core of the Eurozone crisis. Certainly under Trichet, and now under Draghi, this part of the ECB’s mandate has been completely ignored.

A mandate is fulfilled or unfulfilled, but it is impossible to tell if the ECB has, is or will fulfil its mandate in its entirety. The ECB has failed or succeeded, and is on target to achieve or betray its objectives, it has achieved its aims “impeccably” or it is insane.

To be honest, I’m too tired to work out which it is, all I know is that all this makes me very pessimistic.

We are in a full throttle crisis

Just in case anyone thought that using words like “distress” or “difficulty” was appropriate, they’re not. We are in as much danger as we were in 2008 but we are facing this catastrophe much poorer and shellshocked. Our politicians have a bad case of policy fatigue, everything they’ve tried has failed so they think nothing will work, despite them having tried only those things destined to fail. Welcome to your recession within a depression.

As I said, have a nice weekend.

New Followers

Hello,

I’ve noticed a (very) minor spike in new followers. Please make sure to make yourselves comfortable and to introduce yourselves in the comments on any posts that interest you; especially if you spot an error I’ve made or you just want to say how inspiring you find my writing.

Ciao,

LO

Trichet, Draghi, King, Bernanke versus Mellon, Norman, Moreau, Schacht

So here we are, with many of the world’s larger economies facing difficulty, with high unemployment common across the rich world, with financial conditions deteriorating, and with political systems paralysed. Markets are fleeing into the few assets that look safe, commodity prices, equities, and currency movements are all indicating a large and sustained drop in demand expectations. And the world’s most important central bankers are confused over whether or not to act out of concern over inflation and seeming terror that inflation might ever rise to and stay for a while at, oh, 3%. They seem horrified by the idea that central banks might—might—need, at some future point, to bring inflation expectations back into line, as they did in the early 1980s. Never mind, of course, that the experience of the early 1980s was a sunny day in the park compared to what the rich world has gone through since 2008, and heaven compared to what might loom ahead.

We’re making the same mistakes again. And by we, I mean them. And by making mistakes I mean causing catastrophic suffering. Our Central Bankers have failed us just as badly as those of the 1930s failed. Worse even, when you consider that our Lords of the Universe had the mistakes of the Lords of the Universe of the 1930s to learn from.

So remember, buy bunting, your spending is someone else’s income, its all you can do. Have a nice weekend.