Bank of England & Carney: This Doesn’t Sound Good
Scott Sumner links to this article from the Financial Times. I’m feel queasy. Take a look:
The [UK] Treasury opened the door to a more aggressive monetary policy on Wednesday, as aides to the chancellor welcomed the next Bank of England governor’s radical views on stimulus measure for flagging economies.
In a speech on Monday, Mark Carney suggested setting targets for the overall size of the economy, or nominal gross domestic product, rather than inflation. While Treasury officials said there were currently “no plans” to ditch the BoE’s 2 per cent inflation target, a spokesman for George Osborne added that “there’s quite a lot of interest in what he has to say … It reaffirms the fact that he is the central banker of his generation.”
You’re probably thinking I’m going to snicker at the “central banker of his generation” line. Nope, I’m still in shock that they equated NGDP with “the overall size of the economy.” But it gets worse. Scott quotes from another FT article:
In an August interview for the BBC, Mark Carney was definitive about the Bank of England governorship. “So is that a ‘no’ or a ‘never’”? he was asked. The reply came: “It’s both”.
Public denials of interest were reinforced in private by Mr Carney and his aides. Such was the certainty that the question on Monday was how did “never” become “yes”.
That affirmative took Westminster and the City of London by surprise when Mr Osborne announced that the Canadian would take over from Sir Mervyn King at the British central bank, in preference to an array of domestic candidates, with a mission to shake up the bank as it assumes sweeping new powers.
Announcing the appointment of the first foreigner to the post in the BoE’s 318-year history, Mr Osborne told the House of Commons that the ex-Goldman Sachs banker was “quite simply the best, most experienced and most qualified person in the world to do the job.”
. . .
But come the summer, Mr Osborne was a disappointed man. The Financial Times story in April, saying Mr Carney had been approached for the governor’s job, had forced the Canadian to issue ever more vehement denials. The Treasury believed them and was told “no” definitively, so officials believed.They insist Mr Carney was not lying because his denials were true at the time.
Oh wait, I know the answer to this one: When they asked Carney before, and he said he would “never” take the job, that was simply his forecast of his future actions. And heck, if you looked at him right that second, he was right on target. That’s all you can ask of a central banker. To wait and see if his policy “works” is to ignore the insights of Market Monetarism.
Let’s put the economics aside. Does it worry anyone besides me just a teensy bit that this guy hasn’t even figured out where the BoE coffee pot is, and his people are already lying for him? Far be it from me to distrust an ex-Goldman Sachs banker, but still…
People are only bad scheming evil fat cats if they work for private coorporations/banks. As soon as they are part of any public entity like the central bank incentives are upside down, and they are nice crummy white bearded wise benevolent honest and completely altruistic chaps. Even if they lie and keep information back that the public would be outraged for, then they only do it for our own good. So they are not really “lying”. Lying is only bad if you do it to enrich yourself on the expense of others. “Lying” how they do it is only done to shield the common man from unnecessary damage, to protect him from his own animal spirits. /s
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Oh boy, I worry, and not just a teensy bit…
oh forget the “crummy” above. I thought it meant something else, something like “likeable” or “kind”..
🙂
Bob, while not saying it’s right, isn’t this the usual process of public denial followed by a call to higher service? Like when they ask someone if they will run for President, or some other office, and they say no, that’s not their plan. And then they run. Saying openly that you want the job is just not dignified.
As for the denials, well it’s just the old saying “In government, nothing is official until it’s been denied”
I know this post isn’t relevant to Bob’s, but I felt compelled to say something.
Apparently I live in a different universe than Paul Krugman. It seems our worlds are both experiencing identical economic problems, but the actions taken by our policy makers have been completely different. Here’s the short blog post: Lost Decade Watch.
First, I want to agree that it appears we’re heading towards a lost decade, and as one commenter noted, perhaps a lost generation, in accordance with the Fed’s employment outlook to 2015. But here is where I found out we’re in different universes, when Krugman said this: “Faced with an economic crisis where textbook macroeconomics told us exactly how to respond, people of influence chose instead to obsess over budget deficits and generally punt on employment;“.
Now it’s one thing to be speaking in the past tense, about the last 3 or 4 weeks of fiscal cliff talks, but he’s not. He’s referring to policy since the start of the Great Recession. You know, where we essentially have racked up the largest inflation adjusted deficits in the history of the country, and compared to GDP, deficits we haven’t seen since WWII. And I guess in Krugman’s parallel Earth there wasn’t a $831 billion dollar employment stimulus package signed in Feb. of 2009, or a $915 billion dollar omnibus package signed in Dec. of 2011. And his Central Bank must not have held interest rates effectively at zero since Dec. of 2008. His Central Bank also must not have done multiple rounds of quantitative easing, and are now on an indefinite mortgage security buying binge. No, on Paul Krugman’s Earth his government is full of deficit hawks and tight-fisted central bankers who could give a damn about the unemployment rate.
Exit question: assuming Krugman and I are on the same planet, what would Bernake/Congress/Obama had to have done in order for him to not say this: people of influence chose instead to obsess over budget deficits and generally punt on employment?
“what would Bernake/Congress/Obama had to have done in order for him to not say this”
>> Have the Fed finance $1 trillion of new treasury debt issuance and appropriate it to the Defense Dept hiring all those unemployed to involuntarily fight more war against those “folks” halfway across the world who hate us for our freedom. GDP and AD through the roof! Unemployment virtually nil! Individual standard of living be damned.
Or he’s simply becoming more provocative with the additional tv appearances, selling books, etc to appease an unfortunately large audience that wants to hear this message of deficits be damned as the government spends us toward his vision of prosperity.
There has been a great amount of talk about how Hayek might have viewed the market monetarists.
I personally supsect that he would have viewed them negatively. He often said that the great danger would come if economists ever ceased to believe in the quantity theory of money. He offered a caveat however. He believed that it would be a worse danger if economists ever began to take it too literally.
The market monetarists have taken the quantity theory too literally in my view. They believe that Central Banks can inject the right amount of money to achieve some mythical optimum NGDP growth path, then sustain it at just the “right” growth rate that they think appropriate.
There are several big problems. One is the ability of the Fed to predict the future demand for money. Another problem is that the market monetarists do not even seem to agree amoung themselves what the appropriate growth path might be, or even how to precisely measure the growth path.
This always has seemed like quakery to me. It is a trap set by the over-empahsis on statistical aggregates, and attributing too much direct causal power to the numerical aggregates themselves.
I admit that these aggregates feedback information to the actors in an economy. I will even concede that money injection in the midst of a bust can decrease the negative feedback and discoordination that a steep deflation might precipitate. In the end, I admit to believing in monetary equilibrium theory to a point. However, the growth rate of NGDP is not the primary “cause” of unemployment and real economic growth, and everyone should realize that very high inflation, or even runaway inflation, is a risk with targeting an NGPD under certain conditions.
It is much like sending everyone to one side of a ship to offset a slight lisp to one side. As everyone runs to one side, not only is the weight of the passengers shifted, but the water below flows to the opposite side of the ship and topples it over. Something akin to this might happen in the current monetary policy with the banks chock full of reserves, and a seeminly never-ending committment to print. We are playing a very non-linear game with very linear type thinking. No, the inflation hawks have not been right up to now, but the job of a good prophet is to warn folks that if they do not mend their ways, disaster might come.
The subtle difference between telling a lie and breaking an oath.