Home > Bank of England, Monetary Policy > Memo to Central Bankers: Reflate or Resign

Memo to Central Bankers: Reflate or Resign

I can never decide which is more outrageous:

a) the failure of central bankers to stabilise the path of aggregate demand, or

b) the apparent inability of (most) economists, politicians, and members of the press, to hold those central bankers to account for their failings, on behalf of the UK population.

Haven given up direct political control over UK aggregate demand management in 1997, a vast democratic deficit has emerged between the desires of the UK population and the intentions of the professional technocrats appointed to run AD policy.  UK economists look at the real GDP figures, and shout at the Treasury wrong place to provide demand.  The MPC look at the CPI figures, and cower beneath their seats, afraid of… what?  The hard money lobby?  The inflation monster?  Their own precious credibility?

Left Outside quotes Mervyn King at the Treasury Select Committee:

When this crisis began in 2007, most people did not believe we would still be here. I don’t think we’re yet half way through this. I’ve always said that and I’m still saying it. My estimate of how long it will take to recover is expanding all the time. We have to regard this as a long-term project to get back to where we were, but we’re nowhere near starting that yet. We’re in a deep crisis with enormous challenges.

This is an absolutely outrageous thing for Mervyn King to say.  King’s MPC have been wrong in their reading of the UK economy since early 2008, when they caused this “deep crisis” by pegging Bank Rate at 5% all the way past the collapse of Lehman Brothers, fighting a spike in oil prices.  Yet there is no remorse, no indication of culpability.  Just a warning that they’ll carry on regardless.

Does anybody remember February 2012, when the MPC refrained from doing “too much” QE because:

a larger increase [in asset purchases] risked sending a signal that the Committee thought the economic situation was weaker than it was

Well, what do you know!  Now King admits that the economic situation really is exactly as weak as everybody thought it was all along.  Oh well, never mind, Merv.  We all make mistakes, eh?

Does anybody remember back to the sunny days of May 2012, when half the MPC decided it was a fantastic time to get the CPI rate down?  Right after the UK had just experienced two quarters of falling output.  Three and a half years into the worst depression since the Great Depression.  From what bizarre perspective was that ever a good idea?

And now the MPC are here to tell us… we’re in a deep crisis which is going to last forever?  Gee… thanks for the heads-up, Mervyn.

It’s time to step up.  Economists, politicians, and the press must hold the MPC’s feet to the fire until they provide a robust revival of aggregate demand.  Or effect their removal from office.  Do not let me hear any rubbish about monetary policy being “impotent”, or I’ll stick Professors Bernanke and Svensson on you, followed by a rampaging horde of the under- and un-employed.

Back to Left Outside: central bankers must be held to account.  Ryan Avent writes up a glorious obituary for central bankers.  Lars Christensen has a fantastic quote from a anonymous correspondent:

“Central bank governors are like the Pope.  They must preserve the survival of the institution.  The necessary legitimacy comes from infallibility.  The church through the Pope because he speaks for God always speaks the truth.  The incompatibility of legitimacy and admission of error means that every statement and action must presume the validity of past statements and actions.  If central banks do commit error, there is no going back, only the compounding of the error. ”

Right on the money.

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