Monetary tinkering or real reform?

Emile Woolf

August 29, 2023

It’s a rarity for politicians and high-ranking officials to admit their past mistakes, and rarer still for them actually to learn from those mistakes. Mervyn King’s decade as Bank of England Governor ended in 2013, meaning he presided over the very first “temporary” use of Quantitative Easing (QE) – a policy that was quickly mimicked by central banks everywhere. 

Defenders of QE claimed that, whatever its dangers, it succeeded in saving many banks from the consequences of their own greed-driven prodigality. Those being the same banks who; granted mortgages on hugely overvalued sub-prime properties; offered “liar loans” to borrowers without even rudimentary creditworthiness checks; and the same banks who monetised the bubble into circulation by wrapping all this dross in parcels of financial instruments carrying Double-A status before “selling” these junk bonds to the next institution in the suckers’ queue.

Critics of QE, on the other hand, don’t need the benefit of hindsight to see that the banks it saved from annihilation were unworthy of the money-showering bail applied by central banks – indeed, many of us in this camp bemoaned the complete absence of corrective incarceration that the high-and-mighty banking executives so richly deserved!

The trouble is, it didn’t end there. 

The exhaustive money-printing and interest-rate suppression by central banks became the remedy of choice for any and every economic hiccup. Lord Forsyth, Chairman of the House of Lords Economics Committee, was criticised in City circles for accurately referring to QE as an “addiction”. 

Yet in 2020, just as QE was about to be wound up, the pandemic struck and the Bank, with the tacit connivance of the Treasury, launched another spree of money-printing that let banks buy bonds with money that was then shovelled into circulation through furlough payments, business grants, “Help-to-Buy” loans, universal credit and the host of equally distortive welfare benefits. These now constitute the norm in a society plagued by the dependency that those benefits have cultivated. 

Mervyn King vindicated

As for my earlier reference to Mervyn King, his recent comments clearly demonstrate that he has understood the folly of unlimited monetary proliferation, admitting that central bankers are trained to believe that changes in the money supply and inflation are unconnected. This is why they failed to see that vast quantities of printed money during the pandemic would fuel inflation – a correlation that not only makes logical sense but for which there is historical evidence. 

The chancellor and the Bank’s governor have now thrust QE into reverse, no doubt hoping that “monetary tightening” will “squeeze” inflation out of the system and eventually bring it back towards their 2 per cent target. However, interest-rate manipulators have no reliable metrics in short-run for identifying the point when “tightening” becomes “throttling”. Trying to lower prices by decreasing consumers’ purchasing power will instead lead to unaffordable borrowing costs for businesses and higher unemployment – in effect, slowing the economy into recession territory.

Twenty-five years after granting the Bank of England the right to set interest rates we know that a blanket rate cannot properly price in the preferences of an entire market, and distortion of price-signals is the result. A visionary leader would therefore recognise the need to uproot the Bank’s 1998 mandate and replace it with “protecting the pound’s purchasing power”. By unshackling interest rates from Bank control, they will revert to their real function of reflecting the time preferences of transacting parties, allowing a market rate to emerge. A final word for suffering borrowers: don’t blame interest rates, which are modest by historic standards – they merely seem high after a dozen years of near-zero madness, accompanied by helicopter money that spawned a multitude of zombie companies and a proliferation of other malinvestments.

The necessity of fundamental reform

To revive our work ethic, legislators should heed Parkinson’s second law: “Work expands to fill the time available” – which is why our economy now employs as many people in “human resources” as in agriculture. Such is the habit of nurturing idleness that some universities now employ more administrators than they receive students. 

But it’s not too late. The simple fact remains that only sound money, aggressive deregulation and tariff-free trade will restore Britain’s status as a place that welcomes innovating and efficient business.

But executives striving to get a grip on their businesses in this over-regulated compliance culture of opaque job titles and fearful managers will soon face further hurdles. The 300-page Online Safety Bill uses the word “duty” more than 300 times! Just the requirement to undertake ”risk assessments” every time a product is modified will discourage companies from bothering to establish platforms in the UK.

The alternative to fundamental reform is, of course, more of the same: punishing levels of debt, negative growth and eventual economic collapse.

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