Just asking after listening to Mervyn King conference on Sky this morning, and after consideration of how supposedly good businesses, i.e. the banks, have shot themselves (and us)in the feet. I wonder how government would have handled the rates? It seems to me that at one point they were far too low, which encouraged a lot of borrowing, and then they put them up and up again, and only stopped when it all went t*ts up, then put them down again in rather a hurry!
The Bank was instructed to keep inflation under 3% I think it was. But the measurement of inflation was a formula of Broons which fiddled the real situation. The whole thing was a fix. And anyway the Government controlled those who sat on the Committee.
i've been telling you for years :-) the rates are set to achieve cpi growth of money supply plus 2 1/2 to 3%(can't remember which) the cpi is a complete fake....
the real growth of money supply is presently around 20% per annum at present...
It was one of the few sensible measures this government did take.
Bank rate/money supply is the business of bankers and independent of politics.
The problem with allowing politicians the hand on such a tiller is that they act and are expected to act politically. This leads to short termism (an election around the corner and rates are reduced regardless of whether such a course is in the interests of the overall economy or not)
It is however, legitimate for bankers to set targets for long term inflation and to instruct the bankers to manipulate money supply to achieve this provided and only provided that they, the politicians, are prepared to work their way round any political difficulties that such manipulation can throw up.
So we have a choice of - rates being set by short-termist politicians or rates being set by short-termist bankers out to make a fast buck even if it means their business becoming insolvent
Perhaps bank rates should be set by a computer, though no doubt we would find that the person who programmed it would have a bias one way or the other...
The CPI and RPI are indexes, merely indicators. If either rises say 1% it does not mean that everybody's living costs have gone up by 1% . To make such a calculation, everybody would need their own individual index. Some would have suffered a more than 1% perhaps considerably so, others less perhaps even reduction. What it does mean is that overall money has increased or declined in value the percentage giving only an indication of the extent for comparative purposes.
The real percentage is specific to the individual and depends upon what the do or don't buy and their financial commitments.
The economy is a dynamic entity having national and international as well as other dimensions. It would be difficult if not impossible to create a computer model to simulate it. Even to set but one objective target probably under states the complexities within an economy.
A central bank should not be confused with a commercial bank. It operates completely differently an in different spheres.
Allowing the BoE to set IRs is a good thing but it should be more independent from Govt than it is. The problem which arose is that the inflation measure by which it has to assess IRs is the CPI ...a known nonsense measure of inflation.
Thus, we saw the bizarre situation where property prices were rising out of control but the BoE were lowering IRs because of CPI, adding further fuel to the boom. Then it all crashed.
Today, King alluded to "more instruments" being necessary to manage monetary policy but wasn't specific. I am not convinced that King is the right man for the BoE job. Too weak methinks.
It goes almost without saying that the CPI measure was introduced by our Dear Leader...
The problem was basically concentrating on the linking of interest rate to inflation targets. What was needed at least 5 or 6 years ago was a gradual increase in interest rates to curb personal and mortgage borrowing and reduce or stop house price inflation. Instead, too low interest rates encouraged borrowing, people bought goods and services, and paid tax on them, with borrowed money, and this gave the illusion of an expanding consumer economy and massive tax income to fund expanding public services. It had all the illusion of success and sustainability as a pyramid selling scheme and had to hit the buffers which it was allowed to do at full speed. There is no easy answer now
- it is sheer perfection in the art of painting us into a corner. (Isn't it strange that we tax the interest on savings but not on borrowing?)
And it was the clown's inability or unwillingness to see the difference between 'an unprecedented period of sustained economic growth', and an unsustainable expanding debt bubble which got us here. It had to burst - the credit crunch was merely the trigger.
No, because in fact we do tax interest on borrowing. It's just that the tax on the interest is levied on the person or organisation which receives the interest, i.e. the lender.
The problem was basically concentrating on the linking of interest rate to inflation targets is that it wasn't the interest rates that were keeping inflation down. That was achieved by the high growth in industrial capacity in the Far east and particularly China and to a lesser extent India resulting in the flooding of Western markets with cheap goods.
No, it would be quite easy if the aim was to set interest rates to control inflation consistent with economic growth. The input factors are already well known.
The difficulty is the political weighting to be applied each time the handle is cranked, but even that could be dealt with using a range from (say) 1-10.
That's because giving the BoE some moderate independence from direct govt control was seen as an improvement over the previous system. Many economists bought Brown's flummery and still do without realising or admitting that targetting CPI is a nonsense. As abelard says actual monetary inflation is waaaaaaay more than CPI records, let alone consumer inflation. You could see CPI as Brown's first big con-trick. His raid on pensions was the second.
His faux claims to be sorting out MPs expenses is his latest!
Brown is a con-trick socialist who lies, blathers and blusters!
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