Back in 1997 Gordon Brown announced that the Bank of England would have freedom to control monetary policy. It was heralded as a move away from short term political interference towards a long term framework of prosperity. Does this need rethinking?
In this country the elected government has two economic levers, fiscal and monetary policy. These are not entirely separate. Increased spending impacts on variables targeted by monetary policy and vice versa. However because of the 1997 decision the pricing of money has been left to experts who largely go unchallenged. What’s of concern is that “group think” appears to have set in and the answer lies in lower rates and more QE.
This is academic and experimental policy. It has also been far from satisfactory in the real economy. For example:
Lower rates have encouraged both private and public sector leverage;
Asset prices have been inflated. In particular housing;
Bank margins have been eroded at the same time banks need more capital;
Pension scheme deficits have ballooned;
Doing more for longer has increased uncertainty - bad for investment, productivity falls.
Flat zero bound yield curves just aren’t the answer. Neither is further spending which is predicated on the assumption that government can invest at a ROC exceeding zero.
What is required is that politicians start to engage and where necessary be critical of monetary policy. This is how democracy works. Otherwise we are leaving a major policy tool in the hands of experts without any real challenge and we all know where that can go.