Wednesday, 5 June 2019
Dozens of academics sign a letter to the Guardian. This should be entertaining.
When dozens of academics sign a letter to the Guardian, there’s a good chance the letter contains a fair amount of nonsense. And so it is with this letter published yesterday. Title of othe letter is "Next Bank of England governor must serve the whole of society."
Their first point is thus.
“First, environmental breakdown is the biggest threat facing the planet. The next governor must build on Mark Carney’s legacy, and go even further to act on the Bank’s warnings by accelerating the transition of finance away from risky fossil fuels.”
Well now for the woolly minded that seems to make sense. After all environmental breakdown is a serious issue, plus the Bank of England is a powerful organisation, thus it must follow that there’s much that the BoE can do about environmental breakdown, surely?
Well no actually. That’s false logic.
The most the BoE can do is implement some sort of bias against industries which are into fossil fuel consumption when it comes to QE: i.e. buying corporate bonds. But there are several problems there.
1. QE has only been in operation for a small proportion of the time since WWII, and has always been viewed as a temporary measure.
2. The actual number of corporate bonds bought by the BoE relative to the number of UK government bonds bought as part of QE has been minute. The equivalent proportion for the Fed was A BIT higher, but not much higher.
3. The fact of the BoE buying the bonds of corporations A & B while not buying those of X & Y does not have a significant effect on the costs of funding those corporations. At a wild guess, having the BoE buy the bonds of corporation Z might cut the costs of funding the corporation by about one percent.
4. The latter ridiculously small change in the cost of funding corporations is near irrelevant to the powers that government has when it comes to discouraging fossil fuel consumption or subsidising solar and wind power. That is, there is in principle absolutely no limit to the size of tax that government can place on fossil fuels or the size of the subsidy it can offer for renewable forms of energy.
5. The decision to favour non fossil fuel consuming industries is very much a political decision, and that is not a decision for a central bank. Thus the authors of the Guardian letter really ought to be pestering politicians to instruct the BoE to implement an "anti fossil fuel" policy: they should not be trying to get the BoE do implement that policy without reference to politicians.
The next point in the letter is thus.
“Second, rising inequality, fuelled to a significant extent by monetary policy, has contributed to a crisis of trust in our institutions. The next governor must be open and honest about the trade-offs the Bank is forced to make, and take a critical view of how its policies impact on wider society.”
Well presumably that’s a reference to the fact that QE has boosted asset prices, which in turn has obviously benefited “asset owners” i.e. the well-off. But there is a problem there, which is that it can well be argued that the entire government debt should be QE’d!!!
To be more exact, Milton Friedman and the two co-founders of MMT (Warren Mosler and Bill Mitchell) have argued for a “zero government borrowing” regime. Obviously an initial effect of that is to boost asset prices, but that effect can always be nullified by extra tax on the well-off and/or more social security and similar for the less well-off.
Indeed, that’s a nice example of so called “Pareto efficiency” (an idea thought up by the Italian economist Vilfredo Pareto). Basically a policy is Pareto efficient if it increases GDP (or output per hour), and nothing else matters. In particular, if one group of people are made worse off by a policy, that doesn’t matter, because tax and or the social security system can be used to ensure that that group is not adversely affected.
At least that’s my definition of Pareto efficiency. If you want to be sure you have a grasp of the idea, obviously you’d be advised to look at a few dictionaries of economics and text books.
The letter’s third point is thus.
“Third, the UK economy is increasingly unbalanced and skewed towards asset price inflation. Banks pour money into bidding up the value of pre-existing assets, with only £1 in every £10 they lend supporting non-financial firms. The next governor must seriously consider introducing measures to guide credit away from speculation towards productive activities.”
Well the claim that “Banks pour money into bidding up the value of pre-existing assets..” is presumably a reference to the fact that a large proportion of bank lending goes to mortgages applied for by people who are buying EXISTING houses rather than NEW houses.
Well my answer to that is: “What else are banks supposed to do?”
Firstly it is perfectly reasonable for a bank to demand security or “collateral” when granting a loan. Or do you seriously want the bank which holds your money to lend to drunks lying in the gutter who have no assets? If so, you’re asking for your money to be flushed down the drain pretty quickly.
To be more realistic, do you really want your bank to engage in so called “NINJA” mortgages? NINJA stands for “No Income, No Job or Assets”. It was exactly the latter sort of lending that helped give us the 2007/8 bank crisis.
Second, as you may or may not have noticed, houses normally last a hundred years or more. That inevitably means that a large majority of those buying a home, buy an EXISTING house, rather than one that has just been built.
The final sentence of the letter reads, "We need a governor genuinely committed to serving the whole of society, not just financial markets". Well actually one of the main decisions taken by central banks every month is deciding whether to implement more (or less) stimulus in the form of interest rate adjustments, QE or whatever. And the purpose of that is always to minimise unemployment without exacerbating inflation too much.
Well now minimising unemployment is very much a form of "serving the whole of society, not just financial markets" isn't it?