In the run up to 2008 banks remodelled their business to take advantage of complex financing transactions and new products. This produced growing profitable businesses. Getting to the bottom of what was going on was not only devilishly difficult but it just didn’t suit everyone involved. Since then we’ve experienced the worst financial crisis since the 1930s. We’ve changed the way things work and we have added a lot of rules. But does the same inability to challenge the dominant pattern of thought still prevail? I think it does. This is why.
Here are some facts:
Base rate remains at 0.50% whilst the central bank balance sheet has ballooned with £375 bn of asset purchases.
Base rate is now governed by a 7% unemployment rate (with triggers).
The refined Sterling monetary framework makes liquidity more readily available to the banking system against a wider range of collateral for a lower cost.
The Bank’s Funding for Lending Scheme has provided funding directly to banks at rates lower than the market price.
The CPI inflation target of 2% has been consistently breached for 47 months in a row.
The Bank’s new Governor recently floated the idea that “By 2050, UK banks’ assets could exceed 9 times GDP….”
What we have seen is a great experiment in monetary policy with more to come. And because economics is not an exact science the outcomes remain unknown. The speed at which this has taken place means that it is highly likely that some of these policy decisions will prove unsound. Furthermore these policies are far from zero cost.
They lead to substantial wealth transfers from savers to borrowers, support unsustainable businesses, create (housing) market bubbles, encourage devaluation, increase inflation rates, reduce real income and spending and potentially reduce wealth creation by dragging down future growth rates.
But what really is of concern is the lack of challenge that the Bank of England faces. Indeed with so many groups being adversely affected you would expect some noise but there is little. Why?
I suspect it boils down to complexity, lack of transparency and self-interest.
Very few people, this includes many working in finance, understand the policy, processes and governance of the Bank of England and how it interacts with the Treasury and government. There are parallels here with the 2008 debacle. Perfectly sound arguments that refute the current received wisdom aren’t being heard. It’s as if central banking has gained its own “escape velocity” where it is largely immune from challenge.
This is less worrying when policy is “accommodative” but a totally different story when it becomes “creative”. We have got these things wrong in the past. Is history about to repeat itself?