My column for the FT is online (as well as in the paper). You need to subscribe to read it. Of course you should … In brief, I say that to make it work, we need “politicians to reassert control over what is a mix of fiscal and monetary policy. Parliament will pick up the bills for QE, whether it succeeds or fails. This makes it still more remarkable that our political leaders are silent about what may turn out to be the only weapon left for staving off recession.”
Osborne spoke this evening. He reiterated a commitment to inflation targeting, worshipped Reinhart and Rogoff, again implied (silly) that having more housing costs in CPI would have made a big difference, talked of more macroprudential tools. The closest he has come to suggesting the Bank’s purist approach may be failing is:
Indeed we are in danger of making similar mistakes in the aftermath of the crisis, with too little consideration of the impact of higher capital and liquidity requirements on overall financial conditions and the pace of recovery. And despite everything we know about the aftermath of banking crises, there is still no single institution that is responsible for ensuring that the monetary transmission mechanism is functioning as it should, so that policy rates are properly passed through to businesses and consumers.
The Monetary Transmission Mechanism is NOT functioning, clearly. But fixing it means – politicians getting involved. Subscribe to the FT, you must ….
Osborne robustly defends giving the whole caboodle to the Bank. And (note, Robin Hooders), he is not against taxing banks. Just taxing transactions.
I also believe we should pursue international agreement for a levy on the banking system, similar to the levy on wholesale funding proposed by President Obama or the levy already implemented in Sweden
The big headlines will be generated by his reemphasising the “cut now, cut deep” thing that was fashionable in September, then not fashionable, then fashionable again, then not. I think this logic is plain silly:
A credible plan is not really credible unless you’re prepared to make a start on it this year.
A plain assertion. I am planning to jog 100 miles a month this summer. I am not going to start now. It would not be a good idea.
He also claims that private demand is weak because of uncertainty, that would be removed if the government got cutting now.
Businesses and individuals look to the future, and while they are not the perfectly rational creatures assumed by the theory of Ricardian equivalence, uncertainty over the future paths of tax rates and government spending does play an important role in their behaviour. This is particularly true when it comes to consumer spending and business investment, and as the Governor has made clear, the Bank of England tries to take these effects into account when making its forecasts. So a credible fiscal consolidation plan will have a positive impact through greater certainty and confidence about the future.
I can vaguely see how this might apply, though not in quite the same way as Osborne. If you thought there was a real risk of an interest rate spike in 4 years, you might do nothing now. But I think Ricardian equivalence is nonsense as a mechanism right now. And rates are 4% long term. So it is not uncertainty about taxes that would bother me as a businessman, but a worry that August 07 might happen to me again. So dealing with monetary policy is the crux. But this does interact with fiscal policy, which Osborne concedes.
He makes a better point about the suddenness of a debt crisis. The sudden stop. August 07. This is true. But the UK’s debt maturity speaks against this being such a risk.
All in all, this is a long, interesting and detailed speech with a real grasp of the theory – as far as this economist can tell. I don’t agree with some of its conclusions. But I would query anyone who thought Osborne was stupid – he is not. But he may be wrong.