The recession is worse than inflation – why the Bank understands all this wrong

INFLATION reached 9% in April, but it may well be close to the peak. Inflation falls when people stop spending, but correcting lower prices is probably more harmful. The combination of tight fiscal austerity and tight monetary policy is likely to put savings in a downward turn. Brexit did not help.

The recession hurts more than inflation. Raising the unemployment rate by one percentage point, say, from 4% to 5% in terms of welfare, harms at least five times more than raising inflation by one percentage point. Rising unemployment harms the unemployed, but also lowers the well-being of all, as they have friends and family who are unemployed, college graduates have trouble finding a good job, and workers fear losing their jobs. The fear of unemployment hurts a lot.

Attempts to “solve” the problem of inflation by tightening monetary policy are likely to bring something more painful. Deeper, longer recession than in 2008/9, when production fell 6% in five quarters, it is becoming more plausible. The OECD already predicts that growth in the UK in 2023 will be the slowest in the G20 after Russia, and the reality could be worse.

Consumer confidence has reached its lowest level since 1974 and predicts a recession. GDP declined in April and March and was negative in December 2021, zero in February and negative again in March and April. Such figures may well end up being revised downwards, as this is exactly what is happening at turning points and is happening in France, where their estimate for GDP for the first quarter has recently been revised from zero to negative.

Lack of confidence in the MPC in Art Bank England, which is responsible for economic policy, is now a serious problem. In the latest inflation survey conducted by the Bank, only a quarter of respondents said they were satisfied with the Bank’s work, which is the lowest figure since the survey began in May 2009.

Since July 2003, the Bank of England has had three executives, Mervyn King, 2003-2013 (0), Mark Carney, 2013-2020 (8) and Andrew Bailey, 2020- (1). In parentheses I rate them out of ten. The king must score zero. He missed the Great Recession and even in October 2008 did not know that the UK had entered a recession six months earlier. King didn’t feel the need to keep a close eye on what was going on at banks like Northern Rock, where thousands lined up near bank branches to pick up their savings. The previous bank in Britain before Northern Rock was in 1866 at London’s Overend Gurney Bank. King also failed to notice the catastrophic failures of RBS and Lloyds, which nearly led to the collapse of the global financial system.

Carney worked pretty well and scored eight points, although his forward-looking leadership policy didn’t work so well, but there were no disasters on his watch. Obviously, he was highly skilled and had many other high-paying alternatives that he could have accepted if he had previously been the head of the Bank of Canada. Carney always made me feel like a professional, so he gets an eight bullet. Very good: could do better, but worth every penny. Unlike the other two.

Bailey, an insider who joined the bank in 1985, was hopeless, but not as bad as King. His communication skills were surprisingly poor. First there was the rate hike, and then there wasn’t, and then there wasn’t, and there was. Then the untouchable governor, who earns half a million pounds a year, told the workers that they should actually cut wages. My dear.

Since the rate increase to 5.75% in July 2007, for which I voted, there have been 158 MPC meetings without a rate increase in ten years. Since then, there have been only six increases – in November 2017, August 2018, as well as four increases in the last four meetings, one by 15 bp, three – by 25 bp. In my opinion, everyone was wrong. I would have voted against all four recent increases for fear that they would lead to a nasty recession, which seems to have happened. The MPC caused this in part by its actions.

In the wake of this recent surge in inflation, Bailey and other MPC members have said that another increase will occur again this week, but they will be confused by group thinking. They stuck to the thinking of the 1970s, but the world has changed since then. The unions had great power and again did not have. Today, inflation is largely driven by supply due to remaining bottlenecks after Covid and the war in Ukraine. Raising rates will not affect delayed wheat supplies to Odessa.

In these very uncertain times what is the use of a committee of nine if they all think alike? Where are the voices calling for peace and introspection? At the last meeting, six voted for an increase of 25 bp, and three frantically voted for an increase of 50 bp. (Haskell, Mann, and Saunders); the committee even acknowledged that the moves would lead to a recession. If they all think alike, you could create a commission that would be wrong: at least it would be cheaper.

There are plausible arguments to sit back and not raise rates at all, and watch the data come in when the economy seems to be stopping. During these two decades, with the exception of three governors, there were 32 MPC members who were largely undecided, although the exceptions were Vadhvani, Buiter, and Posen, who were part-time external members who disagreed and were right; the rest was essentially insignificant (maybe I’ll get in?)

There is no need for a committee of nine members if they all think and vote alike, based on the same background and experience with everyone living in London. All of them used to be bank insiders, civil servants, former city dwellers or learned economists on vacation.

Why not have a representative office from the rest of the country, as in the Federal Reserve in the United States. We need people in the MPC who bring something different to the table. Carney did it.

As the economy slows, scapegoats will inevitably emerge. Twenty-five years after the independence of the Bank of England in 1997, it may be time to rethink.

The recession is worse than inflation – why the Bank understands all this wrong

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