The big news for students of the unfolding economic story is surely Mervyn King’s appearance before the Treasury Committee. As anyone reading the last Inflation Report* will gather, the Bank’s estimates for the economy has turned down. Today, specifically, he is worried that Europe’s weakness will impact on us. Other signs are weak, like lower mortgage approvals. But as Simon Ward highlights (see earlier post today) the signs of cost-push inflation are present. Mervyn’s job is not easy.
What puzzles me slightly is this:
The governor also repeated his insistence that the government’s three-year special liquidity scheme, which allowed banks to exchange hard-to-sell assets such as mortgage-backed bonds for more liquid gilts, will not be extended, and urged banks to find other sources of funding before the scheme starts to expire early next year.
Now, the Inflation report said:
it is likely that credit conditions will remain restrictive for some time and that the need to strengthen public and private sector finances will weigh on spending.
The Bank has a tool that helps credit conditions; it thinks the economy faces a risk of weakess; it doesn’t want to help a portion of the credit problem beyond a fixed date. What does the Governor think this announcement of an impending end to such support will do to conditions today?
In my doggerel about QE, I quipped:
the Lady of Threadneedle Street's a curious kind of prude Who'll debauch herself on public debt, but think it beastly crude to grant her money favours in the world of private credit Even though a loss is still a loss, not matter what risk bred it.
Clearly the prospect of unbearable loss is not what is putting the Bank off: if inflation expectations rocket, the Bank could take a £40bn bath on its gilts, and the Treasury indeminfies it. So the nervousness about private credit must run deeper; a fear that it distorts the real economy. I would argue that the greater distortion is coming from the unusually stressed and uncertain condition of banking, which means you only get credit if you’re big. Remember, the NIESR likes credit easing too …. this is not just for commies.
UPDATE: Paul Tucker’s speech about, well, everything at first glance, looks like a must read. I’m afraid. It touches on where it thinks the MPC has gone wrong in the past few months about inflation.
*I personally think it is a wonderful education, and worth printing out to ‘enjoy’ at leisure. What is happening to me?