Duncan’s Economic Blog

Forgetting 1937

Posted in Uncategorized by duncanseconomicblog on July 10, 2009

A couple of weeks back Adam Lent wrote:

Maybe someone can solve this for me. Which one of these is more likely to thrust the UK into further economic turmoil in the next two years: another massive bubble and crash in the City or the Monetary Policy Committee making some duff decisions on interest rates?

The smart money has to be on the latter: financial bubbles take many years to develop and the big crashes are rare events. By contrast, the Monetary Policy Committee sets the Bank of England interest rate every month, made a complete hash of this last year and will soon be confronted by some very fine judgements about when to start raising rates as we come out of recession.

And yet (and this is the puzzling bit) everybody is rowing about how we regulate to avoid further bubbles but no-one seems bothered about whether we have the right structures, the right personnel and the right remit to ensure that the MPC doesn’t make the wrong call once again.

He is completely correct. Economic policy news has been dominated this week by the White Paper on Banking Regulation. This is undoubtedly important. But it’s not the immediate challenge.

As I said yesterday, the economy is still at a dangerous point. And yet already talk is turning towards ‘exit strategies’ and the withdrawal of the monetary stimulus.

Officials decided yesterday not to expand the 125 billion- pound ($203 billion) spending plan and said they will pause purchases of government bonds at the end of July. That suggests they may be preparing to wrap up the policy, said Credit Suisse Group AG, Citigroup Inc. and Fortis Bank Nederland Holding NV.

“We’re at a turning point,” said Nick Kounis, an economist at Fortis in Amsterdam and a former U.K. Treasury official. “We know the economy has probably stabilized. Even though they can’t see the effects of what they’re doing, they may be starting to worry about overkill.”


“Not extending the program this month makes it more likely they will stop it next month,” said Michael Saunders, chief western European economist at Citigroup in London. “Growth prospects are better and the inflation outlook is higher. This may be cordoning off their scope to keep going.”


Bank of England Deputy Governor Charles Bean said June 24 that it appeared that “it looks like we may be around the trough” of the slump, and policy maker Andrew Sentance said that “there are signs of stabilization, but it doesn’t tell us how strong the recovery will be.”


“The economy isn’t strong but the extreme risks quantitative easing was addressing have diminished,” said Robert Barrie, chief U.K. economist at Credit Suisse in London, and a former Treasury official. “It is the beginning of the end for QE.”

Let’s be clear. The economy is still contracting and unemployment is still rising. The major world economies are experiencing deflation. But informed economic debate is focusing on withdrawing the stimulus.

This is madness, the mistake of 1937.

The BOE made a policy error by not cutting interest rates last summer. They mistook a temporaryrise in the oil price as the beginning of an inflationary spiral. I now worry they are on the verge of making a similar error.


6 Responses

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  1. Mr. Mxyzptlk said, on July 10, 2009 at 11:23 am

    Mervyn in any other organization would of been made to walk the plank

    This is madness no this is the Bank of England

  2. charliemarks said, on July 10, 2009 at 9:02 pm

    V. v. odd. Wonder what Gordo, fresh from warning we could be in a double dipper, makes of this development.

  3. […] are exciting times to be a member of the Labour party.  And as with the economy, now is not the time to cut and run.  Now is the time to invest in the prospect of sustainable […]

  4. […] Duncan Weldon has said repeatedly, Krugman is right on this one, and Ferguson is wrong.  If the Ferguson camp can make him into the […]

  5. […] strategists and the PR people, should be on the way Labour is dealing with the economy, and the 1937-style  disaster that may well ensue if the Tories get into […]

  6. […] strategists and the PR people, should be on the way Labour is dealing with the economy, and the 1937-style disaster that may well ensue if the Tories get into […]

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