We learn from the former Governor of the Bank of England, Lord Edward George, that, faced with the prospect of recession ‘at the beginning of the decade’, the Bank’s Monetary Policy Committee (MPC) encouraged house prices and personal debt to rise. Speaking to the House of Commons Treasury Committee George said, inter alia:
`In the environment of global economic weakness at the beginning of this decade external demand was declining and related to that business investment was declining. We only had two alternative ways of sustaining demand and keeping the economy moving forward: one was public spending and the other was consumption But we knew that we were having to stimulate consumer spending; we knew we had pushed it up to levels which couldn’t possibly be sustained into the medium and long term. But for the time being, if we had not done that the UK economy would have gone into recession just as had the United States. That pushed up house prices, it increased household debt.’
In other words, the MPC cut interest rates in a situation which, by their criteria, did not justify it. This is a fairly startling admission. In acting this way the MPC was doing precisely what it was designed to prevent politicians from doing: trying to maintain demand in the economy by tweaking interest rates and stimulating consumer spending. In his letter to the Bank of England in May 1997, ‘The new monetary policy framework’, announcing the formation of the MPC and setting out its terms of reference, Brown referred to Labour’s manifesto commitment that they would ‘ensure that decision-making on monetary policy is more effective, open, accountable and free from short-term political manipulation‘. (emphasis added) ‘Short term political manipulation’ is precisely what Eddie George is describing. Gordon Brown gave away the right of the chancellor of the exchequer to do this when he created the MPC. As it turns out, at the first sign of recession the MPC behaved just like any demand management ‘Keynesian’ politician of the type that was supposed to have been made extinct in the Thatcher years with one huge difference: before Mrs Thatcher the government would have used public, state spending to create demand in the domestic economy; the MPC have used credit card debt and borrowing against the value of houses in a striking innovation in the annals of `Keynesian’ demand management. In 1976 Prime Minister James Callaghan became notorious on the Labour left for his speech to the Labour Party conference in which he stated that it was no longer possible to spend your way out of a recession. Lord George is boasting/admitting that the MPC did precisely that. But at what cost?
RR