Wednesday 20 May 2009

Bank of England: no sign of paddle in creek yet

Bank of England: no sign of paddle in creek yet

One issue that has struck me throughout the financial crisis (i.e. since August 2007) is the relative ineptness of policy and control of the economy.

The Bank of England and FSA did not see the disaster coming, when it did happen they did not know what to do. then they sort of said sorry, then they did something, now they are doing more.

Yet 'doing something' has turned out to be a path aiming to take us back to 2007, i.e. the peak of the asset bubble. To achieve this they are trying to buy assets through Quantitative Easing and hloding interest rates low to stimulate lending.

All of this has huge potential to stir up another asset bubble the next few years. At least this time I will know what is about to happen and can plan accordingly.

However, the BOE's statement of last week was quite breathtaking. In it, they said they saw updside and downside risks to their current strategy. In effect, they don't know what will happen, but they are trying anyway, following Friedman's ideas of Monetary policy.

This is a truly bad state of affairs as it seems to me that the Government is trying Keynes, the BOE Freidman. One of them will be wrong and that will cause another economic catastrophe.

If the BOE is right, then we avoid a 1930's depression and merely get 'Lost' decade. If the Government are right, we get a depression and huge deficits. Yeesh.

Roll on 2020. Glad I am still on the beach!


Mark Wadsworth said...

As somebody else once said "We are up Shit Creek without a paddle, a lifejacket or even a boat"I'm not sure what makes you think the BoE are being 'Monetarist', they are splurging the cash around, aren't they?

Thud said...

A lost decade...I've had a couple alraedy and can't afford any more.

Electro-Kevin said...
This comment has been removed by the author.
Electro-Kevin said...

When this bubble happens will people be able to sell their houses and move to other countries with huge amounts of capital like they did during the last one ?

Southerngent said...

I hope so electro, am well on my way to gettin Aus visa and from what i see the houses are moving again.
Just a shame sterling is so far down. anyone with a crystal ball - tell me when the pounds gonna bounce back...plz....Aud doesnt seem to be having much of a banking crisis

Electro-Kevin said...

That's my point, Southerngent.

What will the new house boom be worth in terms of currency exchange ?

Stringy said...

oh dear

Anonymous said...

Problem is that the BoE isn't really that independent. Government borrowing limits are not set by the BoE as they are by the ECB, for instance. They are set by government. So if the government is hell bent on introducing measures that make a mess of the economy the BoE only has one lever to pull to try and compensate for this mess. Also, the BoE targets for making less of a mess are set by government. Since the BoE has a growth target (which the ECB does not), it must attempt to stimulate growth by pulling on the one lever it has - lower interest rates. Since that is not working due to the amount of debt already being unsustainable the remaining solution is to write off a large proportion of the debt in the system by simply printing money.

Fact is the BoE is about as independent of Gordon Brown as a PC is independent from its operator.