Some Basic Lessons for the Governor of the Bank of England, Who Seems to be in Dire Need of Them

Yves here. Lambert noted with some incredulity that the Governor of the Bank of England really said that the UK nearly went bust during the coronavirus market upset: “Britain is not a currency-issuing sovereign?”

Boy, do I miss Mervyn King. And it was during his tenure that the Bank of England put out a primer and a little video that explained some key MMT ideas in layperson terms. It didn’t go as far as presenting direct monetization as a policy option; its focus was more on clearing up misperceptions about QE.

Richard Murphy pointed out that the Financial Times’ editorial board had made the intellectual leap to calling for the Bank of England to fund the government directly. So it is particularly disturbing to see this regression by the Bank’s governor.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

I have already noted the incompetence of the Governor of the Bank of England once this morning, Let me do so again. As the Guardian reported yesterday:

Britain came close to effective insolvency at the onset of the coronavirus crisis as financial markets plunged into turmoil, the governor of the Bank of England has said.

Laying bare the scale of the national emergency at the early stages of the pandemic, Andrew Bailey said the government would have struggled to finance the running of the country without support from the central bank.

This is a quite staggering claim which shows the utmost stupidity in the part of Bailey.

What it seems that he has failed to notice is that the Bank of England is owned by the government.  And its job is to provide the government with money on demand without limit so that the government can never go bust, which is what happened in March.

He’s also failed to notice that he is not some superhero for graciously agreeing to do this. He’s actually a civil servant who was doing exactly what was required of him. It’s the part of his job that goes with being in charge of the lender of last resort in case he hadn’t noticed. But apparently he hasn’t.

Just as it also seems that the Governor is unaware of the basic rules he needs to learn that govern the size of the Bank’s balance sheet. If we have inflation that balance sheet is too big. If we have unemployment it’s too small. That’s it. That’s all he needs to know. And it’s not hard. But right now we have unemployment and he wants to shrink the balance sheet.

So why is he doing that? Let’s presume he has a reason.

Is it that he thinks he must uphold the failed neoliberal order?

Is it that he thinks central bank independence his priority because the Establishment  cannot trust democracy?

Is it that he is unaware of the economy and unemployment to come?

Or does he really believe in a V shaped recovery that will deliver a complete bounce back when no one else does?

Or could it be that he does genuinely think the Bank is independent and really does do the government favours – for which he is to be personally thanked?

Is it that he does, then, think the money he creates is an exogenous variable when Bank of England money is / should be endogenous?

I genuinely don’t know the answers to any of those questions, but amongst them must be the clues as to why he’s done this if he is not incompetent (which the timing would anyway suggest, come what may) so he must hold some or all of these views.

And without exception they’re worrying.

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  1. The Rev Kev

    So what was the point behind that announcement. Even I know that the Bank of England could print whatever amount of money that was needed to fill any gap. Was it a trial balloon to people to say that the-economy-of-a-country-is-like-a-household-budget? Something to refer back to when Boris says that the UK has no choice but to re-introduce austerity to ‘balance the books.’ Certainly people like Mark Blyth could disabuse him of that notion, that is, unless bringing back austerity serves a political purpose.

  2. anon63

    What’s obvious or at least should be obvious by now is that our fiat and banking model, being a diseased relic of the Gold Standard, adversely affects the sanity of those who would preserve it – assuming they aren’t corrupt, that is.

  3. Tom Stone

    If things don’t work out for Mr Bailey n the UK CalPers will be looking for a new CFO shortly.

  4. Synoia

    There are aphorisms in the UK for nearly everything. This one seem to fit:

    There is no fool like and old fool.

  5. Eric

    Sorry. Not on topic but wanted
    NC staff to know that I am getting
    pop up ads blocking content at
    bottom of my (phone) screen.

    Hope this is something you can
    fix soon and not a new business

      1. Eric

        Thank You Lambert. Sorry for
        even thinking it could be
        Et tu Brute.

        It’s a new iphone SE. Tried the
        screen dump process, i.e. hitting
        up volume and on/ off buttons
        at the same time. No luck
        capturing anything yet.

        It’s an ad about 3/4” tall at the
        bottom of the screen. Not a big
        screen to begin with. I’ve been
        treated to ads for Progressive
        and G Shock? Watches, etc.
        with a very small triangle thing
        on the right that’s hard to hit
        with your finger.

        If you succeed in closing it,
        you get another pop up that
        says “Ads by Google”. There is
        a category to “Report Ad” and
        pick a reason. I check the
        box that says “Ad blocks content”. You then get an “Ad closed by Google” that still blocks the bottom
        of the screen and won’t go away.
        Heads Google wins, tails you

        The NC staff has better things to do than deal with this BS. Wishing you success in reclaiming your own screen presentation!

  6. False Solace

    Sounds like they’re prepping the public for more disaster capitalism — austerity which only strikes the many who work while enriching the few who live off financial payments and rent.

  7. Susan the other

    Thank you RM. Lovely list of sarc questions for the governor. I’d like to see his face if he were actually asked to answer these questions in an interview. Popcorn for everyone. One thing I plucked from the intro graphic is how the money “circulates” within an assumed balance. The government effectively borrows from the retirement fund/s to make ends meet. That does explain the circus-circus of the stock market both in the US and maybe also the UK. I love it when the pieces fit together. Gotta keep those retirement funds flush so the government can borrow from them. What a lost cause.

  8. Adam1

    The Governor must have a wierd version of short man syndrome complex wishing he was the US FED Chairman as the US FED is legally prohibited from directly funding the US Treasury – unlike the Bank of England. That said the modern father of the US FED, former chairman Marriner Eccles placed in the public record in 1946 that the FED can indirectly fund any size deficit the US Treasury desires. And even as recently as Alan Greenspan publicly proclaiming the government can create as many liabilities as it wished and was only constrained by available resources.

  9. Daniel Raphael

    Love the comments as well/much as the short article. Good stuff, NC–keep it coming.

  10. Sound of the Suburbs

    The BoE are doing the best they can.
    The BoE are doing the best they can with an economics that doesn’t consider debt, which really isn’t very good at all.

    The economics of globalisation has always had an Achilles’ heel.
    In the US, the 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at debt, neoclassical economics.
    Not considering debt is the Achilles’ heel of neoclassical economics.

    When you use this economics, policymakers run the economy on debt until they get a financial crisis.
    Policymakers don’t realise it’s the money creation of bank loans that is making the economy boom as they head towards a financial crisis.

    The economy runs on debt from 1980 – 2008, but we are on a one way trip to a financial crisis and get there in 2008.

    In 2008 the Queen visited the revered economists of the LSE and said “If these things were so large, how come everyone missed it?”
    It’s that neoclassical economics they use Ma’am, it doesn’t consider debt.

    Let’s try and use an economics that doesn’t consider debt to try and solve a debt problem.
    The neoclassical economists try and solve the debt problems of 2008 with more debt.
    When they are in a hole they keep digging.

    Twelve people were officially recognised by Bezemer in 2009 as having seen 2008 coming, announcing it publicly beforehand and having good reasoning behind their predictions.
    What do they say?
    You can’t solve a debt problem with more debt.
    What have we been trying to do?
    Solve a debt problem with more debt.
    This is how monetary stimulus works, as it can only get into the real economy through borrowing from banks.

    1. flora

      I don’t disagree, except to say personal debt of currency users is different from sovereign debt of sovereign currency issuers. The balance sheets are calculated with different backstops or variables, if you like.

      1. Sound of the Suburbs

        The two are linked.
        Japan had a major financial crisis in the early 1990s.
        Japan learnt from the US experience of the Great Depression.

        Richard Koo used to be a central banker at the Federal Reserve Bank of New York, and he looked at both sides of the bank’s balance sheets during the Great Depression.
        Richard Koo shows the US money supply / banking system (8.30 – 13 mins):
        1) 1929 before the crash – June 1929
        2) The Great Depression before the New Deal – June 1933
        3) During the New Deal – June 1936

        The money supply ≈ public debt + private debt
        The “private debt” component was going down with banks going bust and deleveraging from a debt fuelled boom causing debt deflation (a shrinking money supply).
        It was the public borrowing and spending of the New Deal that helped the economy recover.
        The money supply ≈ public debt + private debt
        The New Deal restored the money supply by increasing the “public debt” component of the money supply.
        Once the New Deal was working, they reduced Government borrowing and plunged the nation back into recession again.
        The enormous public spending and borrowing of WW2, eventually sorted things out.

        Japan saved the banks.
        Japan realised they needed to maintain the money supply with public borrowing and spending as they paid down private debt.
        The money supply ≈ public debt + private debt
        The “private debt” component of the money supply was shrinking, so they needed to maintain the money supply by increasing the “public debt” component.
        They wanted to avoid the debt deflation of the Great Depression (a shrinking money supply).
        This was the lesson of the “New Deal”.

        European policymakers have been making things worse with austerity and cutting Government spending.
        Greece was plunged into a Great Depression type event by the Troika.
        The IMF predicted Greek GDP would have recovered by 2015 with austerity.
        By 2015 Greek GDP was down 27% and still falling.
        The money supply ≈ public debt + private debt
        The “private debt” component was going down with deleveraging from a debt fuelled boom. The Troika then wrecked the Greek economy by cutting the “public debt” component and pushed the economy into debt deflation (a shrinking money supply).

        We are one step on, and Japan learnt from the mistakes of the Great Depression.
        The money supply ≈ public debt + private debt
        The “private debt” component of the money supply was shrinking, so they needed to maintain the money supply by increasing the “public debt” component.
        A private debt problem became a public debt problem.

        Adair Turner has built on Japan’s experience and has come up with the solution of Government created money.

        The money supply ≈ public debt + private debt
        You can maintain the money supply while paying down the overall debt as both private and public debt are too high already.

      2. Sound of the Suburbs

        Another link.
        It’s more complicated than it looks.

        The old rules of thumb they developed over the years by trial and error.
        Balanced Government budgets AND balanced current accounts
        You can’t take one without the other.

        The Americans used to enjoy the exorbitant privilege of having the global reserve currency.
        Then they forgot how it used to work and felt they needed to balance the budget.
        US Government bonds (US Government debt) are actually the main saving instrument in the global economy and so they could just run up Government debt to cover their trade deficit, but they forgot.
        Trump keeps going on about the trade deficit, because he’s forgotten all about the exorbitant privilege the US used to enjoy having the global reserve currency.

        Stephanie Kelton has a look at the data.
        This is the US (46.30 mins.)
        The private sector going negative is the problem as you can see in the chart. This is when the financial crises occur.
        When the Government deficit covered the trade deficit they were fine, but then they tried to balance the budget
        As the Government goes positive, into Bill Clinton’s surplus, the private sector is going negative causing a financial crisis.
        The current account deficit/surplus, public deficit/surplus and private deficit/surplus are all tied together and sum to zero.
        The Americans now have no idea how the momentary system actually works anymore, and the benefits it used to bestow on them.

        Some people do know.
        Richard Koo used to work in the Federal Reserve Bank of New York and is only too familiar with the flow of funds in the economy.
        Central banks use the flow of funds to see what is going on in the economy, it sums to zero.
        It’s essentially the same as the chart of the US above (46.30 mins.), but divides the private sector into household and corporate sectors to give more information on what is happening in the economy in monetary terms.

        This is Japan when they had a financial crisis in the early 1990s, the Government was running a surplus.
        Richard Koo shows the graph central bankers use, and it’s the flow of funds within the economy, which sums to zero (32-34 mins.).
        Richard Koo’s graph of the flow of funds shows the Japanese Government ran a surplus as the financial crisis hit.
        The terms sum to zero so, as one is going positive, another is going negative.
        The Government was going positive, as the corporate sector was going negative into a financial crisis.

        The equation
        The current account deficit/surplus, public deficit/surplus and private deficit/surplus are all tied together and sum to zero.

        The old rules of thumb
        Balanced Government budgets AND balanced current accounts
        This is OK.

        The UK now runs a big current account deficit, and if we balance the Government budget we will drive the private sector into debt and cause a financial crisis, like the Americans.

  11. flora

    Thanks for this post. Comparing the BoE and money creation with the ECB and the Euro, and the earlier post today about EU country banks being in increasingly dire straights, I wonder if the ECB and Euro are based mostly on a wish and a promise that is more PR than any sovereign reality.

  12. Maritimer

    Hockeystaner Here.

    A BOE Mystery: why was Canadian Mark Carney (Goldman,CDN Govt Finance) Governor of BOC, appointed Governor of the Bank of England from 2013 to 2020? An import from the colonies takes exalted positon in the Kingdom? The land of Smith/Ricardo cannot find a homegrown Banker. City of London be shamed.

    Rumor was at one time that Carney was to be CDN Prime Minister. Maybe Canada/UK were to be more closely integrated?

    Also, Carney has Canadian, Irish, British citizenship demonstrating that citizenship is becoming more and more meaningless and devalued in the Global Rackets.

    1. RBHoughton

      Very happy to hear that plaint about citizenship. It has become another item for consumption. Is it yet another feature of that trite idea of globalisation? There was an article yesterday on Blackrock owning the world. Are we dispensing with nations?

  13. RBHoughton

    In spite of the assertion that the BoE is independent, I read in these NC pages that the Governor is hired and fired by the Chancellor and is as independent as my pet dog.

  14. K teh

    No one capable of increasing productivity is going to do so for money printed on a computer. The MMT advocates lamenting the state of working people and small businesses, getting screwed by MMT, is like the white BLMers pulling over statues.

    Working people and small businesses, black and white, have much better things to do. Government units in all the MSAs are drowning, and no one is throwing them a rope.

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