That confirms my suspicion that no-one can give a really good reason for why the FLS exists.

I guess it isn’t really monetary policy as the Bank of England isn’t buying assets and injecting fresh cash into the economy, but just acting like a bank and lending existing money it has. At the end of the day the sums are very small, at just £16bn so far, and most to a few big banks who had plentiful liquidity anyway.

If one were to consider FLS as a sort of BoE-inspired fiscal policy, it is ironic that the majority of the MPC by voting against more QE are actually “monetarily offsetting” their own fiscal policy. Remarkable, but true to form.

Hopefully, we will still see you occasionally even if only as a mere “commenter” on some of the other MM sites.

Fingers crossed on Carney.

The rationale is the same for both. If Osborne successfully updated the inflation target to allow a more expansionary and effective monetary policy, and the economy returned to robust growth, Labour would likely loose the next election. Just as relatively competent monetary policy from the Fed probably helped Obama’s reelection.

Therefore, Balls has to call for expansionary fiscal policy and conservative monetary policy, possibly because it is unlikely to work. Why would Balls explain to Osborne the best way to help the economy recover?

Regardless, Ball’s description of Osborne as “economically illiterate” is correct. Osborne’s biggest responsibility as Chancellor is setting the inflation target. It has been clear for at least four years that the current inflation target is not working. Yet Osborne has done almost nothing to fix it. This strongly suggests Osborne does not understand the importance of monetary policy or the details of the inflation target. Indeed he has appeared to want to abdicate responsibility for the setting the target at all.

In comparison Labour and Balls in particular were very proactive in setting up the target in 1997 and revising it in 2003.

E.g. read Ed Balls’ 1997 speech on inflation targets:

http://www.hm-treasury.gov.uk/d/Ed_Balls_macroeconomics_lecture.pdf‎

The entire “growth vs. austerity” debate has been awful. In the main, I don’t blame politicians (my ill-feeling for Ed Balls is primarily based on detailed issues of policy, because I disliked Labour when I was on the left because of Iraq and I haven’t developed any more love of them now I’ve become a classical liberal!) as they’ve always been terrible when it comes to economic policy, which is fair enough: it’s not the job of politicians to understand the finer points of theory; they have bigger things, like making actual decisions and gettign re-elected, to deal with.

No, I blame UK macroeconomists. From 1945-1992, when they were supporting almost every single wrong decision (from the Dalton experiment to devaluation to the Barber Boom to joining the ERM) and getting it wrong on a huge range of things (e.g. Kaldor and Balogh convincing the hapless Harold Wilson to think that lowering interest rates would be good to reducing demand in the 1960s) they’ve failed on a massive scale, to the dangerous point where a very large number of people on both sides of the political divide don’t take them seriously.

However, this is WORSE than all of those other cases. In the past, UK macroeconomists (especially at Oxbridge and particularly at Cambridge) had the excuse that they were operating with a very bad theoretical framework of Neanderthal Keynesianism, which was much worse than Neo-Keynesianism. Even a remorseless logician ends up in Bedlam when they start from false premises. Today, however, there’s no such excuse, because New Keynesianism has conquered just about everywhere and New Keynesianism is a very good macroeconomic framework.

They’ve got the theory, but they’ve refused to use it and instead have either gone for austerianism or Paleo-Keynesianism. It’s an embarassment. Obviously, there are some exceptions, but when even Charles Goodhart is making terrible critiques of NGDP targeting, it’s clear that the profession has failed us. New Keynesianism gives us a very good answer to what to do under present circumstances in Britain: use monetary stimulus to offset fiscal austerity. We did it under very similar circumstances in the 1930s and it worked.

As it happens, the smartest noises have come from economic historians, as far as I can tell. Nick Crafts has been brilliant in drawing analogies with the 1930s and has generally been a much better macroeconomist than the people who don that title.

In 1981, 364 economists got it wrong. In 2013, 365 economists should get it right and push for NGDP targeting. (365, because it’s one louder than 364.)

And I say all this as someone who HATES economist-bashing! British macroeconomists have done a great job in reforming their theories over the past 20-30 years; it’s still problem-ridden, but not significantly worse than say the US anymore. Why don’t they actually use those theories when advising people like Ed Balls and George Osborne?

I suppose the household debt has sort of been “nationalised” by the our government, and financed by the BoE. Total UK debt to GDP must have continued to rise, and households will have to pay back the debt our government has taken on our behalf, via taxes, at some point.

It’s funny, though, the argument about the optimum level of household debt given the fears, including my fears, in 1998 about the levels. Obviously, “affordability” of the debt has massively improved as interest rates have fallen and those debt service/household income ratios have remained more or less stable. Although, I’m unsure whether they include repaymwnt of principal and not just the interest element.

Off topic, it looks as though the Chairman of the Fed may be losing control of his committee in his final days, just like Mervyn over here. The market confusion caused by having the outgoing chief being over-ruled by his board members is very unhelpful to say the least.

Obviously, the answer is an NGDP Futures market to take away individual (or small groups of individuals’) discretion of something as important as monetary policy. Scott Sumner for Fed Chairman! And then to abolish his own job and replace it with a computer, appropriately programmed.