Soon you will hear many competing voices within the halls of the Bank of England, mainly from those who claim they had nothing to do with previous decisions and that anyway they profoundly disagreed with them at the time but were constrained from saying anything out of loyalty and how glad they now are that they can finally speak their mind or, more to the point, agree with whatever you think is best etc., etc.
So before they muddy the situation to the point that nothing really changes can I offer some suggestions?
1. GET SOME REAL PEOPLE ON THE MONETARY POLICY COMMITTEE (MPC)
The MPC looks like a Cambridge University economics club: most members either went to or have strong connections with Cambridge University, worked at an American investment bank or did both. Get some people who do or have worked in the real world – you need to hear from the people on the ground outside of London. It may stop it from being the monthly academic slug-fest that it appears to be.
2. PLEASE STOP THE POLICY OF QUANTITATIVE EASING (QE)
The BoE website says that QE “does not involve printing more banknotes“. And yet one sentence later it says, “The Bank of England electronically creates new money and uses it to purchase gilts”. In an electronic world, QE is money-printing. Otherwise, if QE is such a good idea, transfer the whole of the gilt market into the BoE and have done with it because if it’s such great a policy then more of it must be better.
3. GET RID OF THE FAN CHARTS
The latest versions show that inflation will be between 0.5% and 5.0% in 2013 whilst GDP will be between 1% and 4% but with diminishing probability towards the edges. They are basically a joke that nobody other than those who like to look at pretty pictures or think that economics is an extension of the natural sciences has any regard for. Lose them, quietly.
4. THERE IS A VALUE-FOR-MONEY ISSUE TO BE ADDRESSED WITHIN THE BOE
About 1,800 people work at the BoE. The total budget is some £278m in 2012/13 of which £128m is for “Policy Functions” out of which £68m is spent on “Monetary Policy”. So 24% of the total budget of the Bank of England or 53% of the Monetary Policy budget is spent getting things wrong… .
5. STOP SETTING NUMERICAL TARGETS FOR ECONOMIC INDICATORS LIKE INFLATION
Economic history is peppered with misguided economic ideas like targeting money supply or specific exchange rates (many of us still shudder at Chancellor Nigel Lawson’s attempts to shadow the Deutschemark) or in your case, inflation. Take a leaf out of the book of the Federal Reserve and give yourself some wiggle room to be more responsive and drop mention of any numerical target. You will have to rewrite the stated Core Purpose No. 1 of The Bank’s Strategy. It’ll save you a lot of letter writing to the Chancellor and hand you back the element of surprise.
6. BECOME THE GOVERNMENT’S BANKER AGAIN
I can’t remember a time when a bank manager rang me up and said “You have a massive overdraft. Don’t worry I’m not judging you – borrow some more and what’s more here’s the interest back that you paid us. Go knock yourself out – throw a party!” Even Ben Bernanke has tiptoed into the area of warning the US that it can’t go on borrowing as it is doing. Politicians from all parties and the general public need to hear some bold, objective advice that they can trust on the sustainability of our public finances.
7. INCREASE INTEREST RATES
I’m not kidding – put interest rates up and make the banks pass it on to savers. It’ll also help the pound. But don’t do it in isolation: create a Maximum Mortgage Lending Rate (MMLR) that does as it says and cap mortgage rates at the current level. Take control of bank profitability and reduce the spread between borrowing and lending to control banks’ actions. If it isn’t worth the risk they won’t lend, especially at reduced margins. If you want to encourage them, increase their margins by increasing the MMLR when it fits your “macro prudent” framework. This would also fit nicely into your new role as the Prudential Regulation Authority.
8. BECOME YOUR GAME OF THRONES CHARACTER
I recently completed an on-line psychological test to determine which Game of Thrones character I most closely resembled. This grossly inaccurate test supposed me to be the scheming, diminutive, wit Tyrion Lannister. As Tyrion Lannister I would advice you to work out who the nutters are and go in hard and go in early. You won’t get a second chance.
All the best,
Stewart
