An interesting speech from the Bank of England Governor tonight – including, for the first time in a long while, a suggestion that the economy might well be starting to bounce back. But what most stands out from Sir Mervyn King’s speech in Cardiff was a pretty direct slap-down to Lord Turner, the FSA chairman who is vying to replace him as Governor.
Lord Turner, you might recall, made a speech recently in which he said that the Bank should consider “still more innovative and unconventional” monetary policies. The implication was that it should not rule out controversial schemes such as cancelling the bonds the Bank holds in its vaults from its Quantitative Easing policy – or the famed “helicopter drop”, under which the Bank could give every family a one-off sum – say £1,000.
I covered this idea in a piece some months ago. If the Bank had chosen to dispense the money it spent on QE, rather than using it to buy government bonds, it would be able to give every household in the UK over £10,000.
However, in his speech tonight, Sir Mervyn issued a stern rebuke essentially dismissing both of Lord Turner’s ideas as “dangerous”, hinting (although not saying explicitly) that they were the thin end of the wedge that ends in Zimbabwean hyperinflation.
Sir Mervyn said: “Abstracting from the colourful metaphor of ‘helicopter money’, such operations would combine monetary and fiscal policies… Not only is combining monetary and fiscal policies unnecessary, it is also dangerous. Either the government controls the process – which is ‘bad’ money creation – or the Bank controls it and enters the forbidden territory of fiscal policy.
“It is peculiar, to say the least, that some of the same people who believe that the Governor of the Bank is too powerful also believe that he should stand on the steps of Threadneedle Street distributing £50 notes – a policy which you will appreciate is rather hard to reverse. For the same reason, the Bank could not countenance any suggestion that we cancel our holdings of gilts. The Bank must have the ability to reverse its policy – to sell gilts and withdraw money from the economy – when that becomes necessary. Otherwise, we run the risk of losing control over monetary conditions.”
The slap-down will come as a blow to Lord Turner. Although he did not mention either notion specifically in his speech, a number of journalists reported that it was his “private view” that the Bank might consider cancelling its gilt holdings. Sir Mervyn’s criticism is likely to bolster the candidacy of his deputy Governor, Paul Tucker.
Sir Mervyn King’s speech from Cardiff can be found in full here, but it also contained other highlights – in particular a hint that the recession might soon be over.
– The end of the recession? Sir Mervyn hinted that there is likely to be a positive print for third quarter GDP figures, out on Thursday morning, saying: “the zig-zag pattern of quarterly growth rates of GDP that we have seen this year is likely to continue, as we may see on Thursday when figures for the third quarter are released.
He added that, looking further into the distance, there are “more encouraging signs. First, the labour market gives a very different picture to that conveyed by the output data. In the private sector, more new jobs have been created than over any other two-year period since the mid-1990s.
– The end of the squeeze? “Although recent increases in domestic energy and food prices are likely to leave it a little above target well into next year, the fall in inflation means that the squeeze on real take-home pay, which accounted for much of the weakness in consumer spending over the past two years, has eased somewhat.”
– More capital for UK banks? Sir Mervyn indicated that British banks may need to pump even more cash into their balance sheets if they are to recover. He said: “The window of opportunity which [the Funding for Lending Scheme] provides must be used to restore the capital position of the UK banking system. I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalisation of their financial systems. Only then will it be possible to return to a more normal provision of the vital banking services so crucial to an economic recovery. In the 1930s, faced with problems of sovereign and other debt similar to those of today, the pretence that debts could be repaid was maintained for far too long. We must not repeat that mistake.”