King’s faux pas made in first half of central bank tenure
But QE was only one factor – there was also a global stampede for “haven” assets such as gilts. Yields on German, Scandinavian and Swiss government bonds fell sharply too, even though there was no QE in those countries. And if the Bank of England had not bought all those gilts, someone else would have done so.
Did QE stoke inflation and thus exacerbate the squeeze on real incomes? Yes, directly and indirectly. Ultra-loose monetary policy has weakened sterling; over the past five years, it’s down 32 per cent against the dollar and 11 per cent against the euro.
This has made imports more expensive. But again, other factors were at work too – VAT rose, and commodity prices remained high. If QE stoked inflation, then surely there would be an inflation problem in the US and China, where the authorities have also pumped huge amounts of money into the economies? There is not much evidence of this.
The first half of the King era was far less controversial by comparison. But I would argue that if there were big policy mistakes, they were made here. During the go-go years, the Bank of England made very little effort to prick the absurd bubble in UK house prices or the boom in reckless bank lending that drove it.
True, the Bank of England did not formally regulate banks – that responsibility passed to the Financial Services Authority in 1997. But it did have a mandate to maintain financial stability that it could have used more effectively.
Instead, it preferred to target consumer price inflation. There is barely a central bank in the world whose mandate extends to controlling asset price inflation or bursting bubbles.
Whether they should was a question posed by Alan Greenspan, then chairman of the Federal Reserve, in a now famous 1996 speech: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?”
His answer was that we don’t – and the Bank of England seems to have agreed, leaving markets to look after themselves.
Lately, Sir Mervyn has been more forthright, criticising the “Help to Buy” scheme and castigating banks for public lobbying.
His successor, who has arguably presided over a substantial real estate bubble in his native Canada, would do well to adopt Sir Mervyn’s new-found scepticism. – (Copyright The Financial Times Limited 2013)