Redwood's stupid questions

Is John Redwood an idiot, or is he just impersonating one? I ask because he asks several questions of the Bank of England, most of which are either stupid, or have already been answered. Here goes.

How much money are you going to print? Is it £75 billion, or £150 billion, or as the Governor suggested, less than £75 billion?

Stephanie Flanders asked Mervyn King this in this interview. He said:

I think it’s hard to judge. I think [£75bn] is the right figure to begin with, but we’ll monitor it and then we’ll see whether we need to do more or, indeed, less.

Redwood asks:

What do you want to achieve from printing all this money? How will we judge your success or lack of it?

Again, Ms Flanders asked this. He replied:

The idea here is to try to ensure that [the] increase in the supply of money in the economy as a whole rises to a level consistent with the beginnings of an economic recovery and to keeping inflation close to our target.

Redwood asks:

Should we assume you are no longer worrying about inflation?

Again, his reply to Ms Flanders:

We are absolutely focused on one boring thing which is to make sure that we pick up
spending in the economy to keep inflation close to our 2% target. What is boring, perhaps, is
this absolute insistence that we will try to keep inflation as close as possible to our 2% target.

Redwood asks:

Are you trying to reach a specified level of corporate borrowing rates? If so what are these? How are you doing?

The FT’s Chris Giles asked pretty much this at the last Inflation Report press conference (pdf). Mr King didn’t give a number, but said he wanted to reduce illiquidity premia in credit markets, and “ensure that there is a resurgence of primary issuance of those forms of borrowing by companies in the markets.”

Do you have a target for monetary growth? It has been fast in recent months. Is it fast enough for your liking? If not, how much more monetary growth do you want?

Again, Mr King answered this at that press conference - he has no target.
Note here that when Redwood says monetary growth has been fast, he’s referring (I suppose) to overall M4, which has grown 18.8% in the last 12 months. However, Mr King’s worries about slow monetary growth are based upon M4 excluding non-bank financial companies. The growth rate of this is just 2.9%, compared to over 8% a year ago.
Redwood has some other questions which journalists haven’t asked him, partly because they are not stupid enough. For example:

Are you trying to get down to a specified level of longer term interest rates for the government to borrow at? If so, why have these rates been rising over the last month?

Of course, the Bank cannot target gilt yields. These are set largely by global factors (conventional gilts are a close substitute for bunds and Treasuries) over which the Bank has no control.

Do you have some plan to improve the value of the pound, to stop the imported price rises? Can you stop the incompetent government putting up all the public sector fees charges and taxes in an inflation busting manner?

Of course not, and of course not.

Why should we believe that longer term inflation will be under control? We all know measured inflation will be seen to be falling over the next few months, but the issues you settle today will affect inflation in 2010-11.

There can, of course, be no assurance that inflation will stay low. But there are two big groups of people who believe it will.
One is economic forecasters. A poll of these (pdf) by the Treasury in mid-February found that the consensus is for CPI inflation to stay below its 2% target until 2012.
The other group is the gilt market. Breakeven inflation rates are under 1% for sub-three year maturities, and under 3% for sub-15 year maturities. This means the people betting real money (albeit mostly other people‘s) expect inflation to stay low.
There is a common theme underlying Redwood’s questions, other than stupidity. He seems to be asking for precise numbers, and precise targets. But macroeconomic policy - as Mervyn King would almost certainly tell him - cannot work like this. The future is inherently unknowable, and the monetary transmission mechanism is uncertain. Policy-makers cannot simply pull hydraulic levers and get predictable responses.  Mr King’s answers might be vaguer than Redwood would like. But the vagueness is a feature of the real world, not Mr King’s obfuscation. Any proper conservative would find such a view quite congenial.
Now, I don’t think Redwood really is as idiotic as his questions make him seem. I suspect instead that he’s trying to make an issue where none exists.

Comments

[Marcus Hunt]

The trouble is that you have been totally wrong about every market or economic call you have made in the past year. Meanwhile Spock has been spot on; not only that, he has also been right about the economy over the last ten years. This was all ignored, of course, because he was part of the "nasty party", whilst someone like Vince Cable is lauded to the skies. A little self-awareness and modesty might be in order, I think, because simply not liking someone or calling them names isn't really analysis, is it?

[Bob B]

The key insights are that Redwood perpetually engages in searches for partisan issues to hack away at Labour regardless and his undergraduate degree is in history, not in economics, which tends to show.

All this is partly because he has something of a credibility problem among Conservatives ever since he launched a leadership with a "barmy army" against John Major in 1995:
http://news.bbc.co.uk/1/hi/uk_politics/2177192.stm

And has never quite overcome being dubbed a Vulcan in honour of his extraordinary resemblance to the character of Dr Spock in the Star Trek series on TV:
http://www.imdb.com/character/ch0001439/

The extent of Redwood's misunderstandings of salient economic issues is amply demonstrated by his criticism of the Bank of England late last year when he complained that the independent Bank had kept interest rates too high for too long. Curious that, we had a consumer debt mountain of £1.4 trillion and a house-price bubble proportionately larger that almost all other affluent countries because interest rates were kept too high ?

[Matthew]

Marcus, are you sure he has been spot on in his economic calls? He kept predicting a recession in 2001 that didn't seem to materialise.

[Bob B]

I can't understand why Redwood evidently feels impelled to attack the Bank of England and Mervyn King. Surely there are better political targets.

Yvette Cooper was the minister responsible for housing from 2005 through 2008. What exactly did she do about 125% mortgages and the ensuing house-price bubble when Charles Goodhart was warning us about it back in 2002:

"CHARLES GOODHART, a former member of the Bank of England's monetary policy committee [and economics prof at the LSE], warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

"His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . "
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/04/06/cngood06.xml

A chart in The Economist of 3 April 2008, based on IMF data, shows how the size of the house-price bubble in Britain, from 1997 through 2007, compares with the bubbles in other affluent economies - the bubbles in Ireland and the Netherlands were worse (subscription barrier):
http://www.economist.com/finance/displaystory.cfm?story_id=10974135

[kinglear]

Always remember Merv was one of the 364 economists who signed that letter.....so he actually has utterly and completely no idea about the real world.

[Neil]

RE. "that letter", and out of genuine curiosity: Which year has the negative growth taken us back to so far? And how far do we have to slide back for the 364 to have been correct?

[Bob B]

"Always remember Merv was one of the 364 economists who signed that letter.....so he actually has utterly and completely no idea about the real world."

Thanks for that. Recall also that the late Alec Cairncross was another of the signatories of that letter signed by 364 economists and he had been appointed chief economic adviser in the Treasury by a Conservative government in 1961, a post he continued to hold through to 1967 during the following Labour government:
http://www.universitystory.gla.ac.uk/biography/?id=WH0197&type=P

and

http://en.wikipedia.org/wiki/Alexander_Cairncross_(economist)

Presumably, he too must have had no idea about the real world, which is a bit strange given that he worked in the Ministry of Aircraft Production during most of WW2 and became the Director of Programmes there.

We might also recall that the notorious Medium Term Financial Strategy was the macro policy framework of the government at the time of the letter and that Strategy - popularly known as "monetarism" - was formally abandoned as unworkable in the autumn of 1985: the fact is that the actual monetary aggregates seldom, if ever, accorded with the targets set by the government.

This was the later obituary of the IMF on "monetarism":

"...instability of monetary demand, especially in the context of supply shocks and declines in potential output growth, complicated the task of monetary authorities. As a result, during the 1980s most central banks – with some notable exceptions – either abandoned or downplayed the role of monetary targets".
IMF World Economic Outlook, October 1996, p.106.

Btw try comparing the inflation, growth and unemployment rates in Britain during the early 1980s with those rates in the other major European economies at the time.

[kinglear]

My father built aircraft in WW2 and said the Ministry of Aircraft Production didn't live in the real world...

[Bob B]

And I was taught economics by one of the three economists who worked in the Ministry of Aircraft Production during the war. All three went on to illustrious professional careers afterwards.

The important question about aircraft production was - and I discussed this with one of them - whether it made strategic or economic sense to dedicate so many resources to producing masses of heavy bombers for area bombing by 1000 bomber raids which were hopelessly inaccurate - a strike within 5 miles of a pre-selected target counted as a hit. But that wasn't the fault of the Ministry of Aircraft Production. It was recognised there at the time that raids by the light Mosquito bombers were far more successful in hitting targets but those lacked the propaganda value of 1000 bomber raids.

But why not address the issue in my post of whether "monetarism" made sense - since the thread is about Mervyn Kings and economic policy. If Mervyn King was at fault in signing that letter back in 1981 then so was Alec Cairncross, who had been appointed chief economic adviser in the Treasury in 1961 by the Conservative government at the time.

[kinglear]

Calm down Bob B, take it easy.I went to the LSE too you know, which is why I have a healthy scepticism about all things economic (beyond believing that everything everywhere is eventually always down to economics)
Anyway, in 1961 it was Harold MacMillan whose idea of economics was up goes a guinea bang goes thruppence down comes half a crown, rapidly followed by Alec Douglas-Home, whose idea was to use matchsticks.
My point ( and I think Redwoods, although I would stand to be corrected) is that Prudence/moderation in all things/circumspection is a better policy than outright extremism.Of course, our present government has strayed so far from these concepts that is now reduced to getting its minions to smear people to take our minds off what a hash of things they have made.

[kinglear]

And by the way what do you make of this?
"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. "
A chap called Bastiat wrote that quite a long time ago.
I would defy you to show that this shower have any clue as to the results of their actions - actually, I think Merv the Swerve said as much recently to the Finance Select Committee

[Bob B]

A further reason why Conservatives and their friends on macroeconomic policy issues can't be taken too seriously is because of what happened after Nigel Lawson, as Chancellor, formally abandoned monetarism as unworkable in the autumn of 1985.

Exchange rate targeting to join the European Exchange Rate Mechanism (ERM) became the next anchor for the government's macroeconomic policy. In those years, the Bank of England took orders from the Treasury on setting interest rates and the primary motivation during the mid 1980s in setting interest rates switched to maintaining a "competitive exchange rate". That meant keeping interest rates low to reduce the attraction of holding balances in Pounds. The outcome of that policy was an unsustainable boom in the economy by the end of the 1980s bringing a house-price bubble and a surge in inflation.

The problem developed because Nigel Lawson had skipped reading Tinbergen: On the Theory of Economic Policy (1952) - using one policy instrument to target two policy variables - which can move off in divergent directions - is just asking for trouble downstream:
http://www.garfield.library.upenn.edu/classics1986/A1986C401200001.pdf

And that's what happens if all that macroeconomic theory stuff is regarded as just a load o' horse manure when the real meat is in microeconomics. Recall what happened after John Major, as Chancellor, took Britain into the ERM in October 1990 - with Gordon Brown cheering that move on from the opposition benches? But then Gordon Brown - like George Osborne and John Redwood - is another history graduate.

Btw I didn't go to the LSE.

[kinglear]

Bob b ah well then you won't know about The Gates.....

[Bob B]

Seeing as how John Redwood - as well as George Osborne - are historians by graduation, you'd have thought they could have come up with an explanation by now about how Conservative governments led us into house-price bubbles in the early 1970s and then again in the late 1980s.

Is that some sort of Conservative tradition? Do Conservatives feel an unshakeable sense of historic destiny which impells them to create house-price bubbles when in government?

Now I'm not a regular fan of Hegel - one of the greatest historicists of them all - but I reckon he might have been on to something when he wrote:

"What experience and history teach is this – that people and governments never have learned anything from history, or acted on principles deduced from it." [Philosophy of History]

As for the house-price bubble during the Blair-Brown governments, that's perhaps because of Blair's instinctive Conservatism, which doubtless also explains his enthusiasm for privatisation and Mrs Thatcher's industrial relations legislation as well as his war mongering. David Cameron, George Osborne and John Redwood all voted for the Iraq war as well.

As for The Gates, are we talking of Bill Gates and Microsoft or Robert Gates, the Defence Secretary in President Obama's administration?

[Bob B]

Now for the really serious stuff - try: Real Estate Downfall
http://www.youtube.com/watch?v=bNmcf4Y3lGM

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