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.
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.