Monday, December 22, 2008

Bank failed to spot elephant in room

Bank 'did not understand crisis'

"The Bank of England did not understand the severity of economic problems before the current financial crisis, its deputy governor says. Sir John Gieve told the BBC that the Bank knew "crazy borrowing" was taking place and the price of houses and other assets was rising unsustainably. But the Bank thought this problem was less serious than it turned out to be, he said in an interview for Panorama. The Bank relies too much on interest rates to control the economy, he added."

Posted by phdinbubbles @ 06:36 AM (1268 views)
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16 thoughts on “Bank failed to spot elephant in room

  • This will be embarrassing to El Gordo, as the BOE is effectively admitting that the recession is an internal problem; the government can’t pin the blame externally?

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  • Mandy said this a couple of weeks back. He said that the Cabinet (Blair, Gordo & Darling) knew about the housing bubble and thought they could manage it. After all, people were feeling wealthier and NuLab were voted back in.

    Alas, now comes the hangover. The unemployed are asking questions.

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  • “He was savaged when interrogated last autumn by the Treasury Select Committee for allegedly being insufficiently on top of the crisis at Northern Rock.”

    And why is he being savaged for on of the effects of the credit bust? Because the government and treasury were responsible for the cause.

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  • japanese uncle says:

    Just another incompetence defense

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  • Its more than an incompetence defense, its saying “we’re incompetent, so give us more money so that we can do our jobs better”. You could only ever get away with that in the public sector.

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  • @4

    agreed paul. How astounding to hear someone say “I’m incompetent, so give me more power”.

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  • Cost of housing (hp and rents) needs to be part of the measure of inflation that the BoE targets.

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  • Hardly a surprise when the economically retarded Blanchflower sits on the MPC. Since when was being repeatedly dropped on your head as a child a sign of economic brilliance? With that idiot saying cut, cut, cut, cut, cut, cut, cut, at every meeting is it an wonder that the BofE has let debt spiral uncontrollably?

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  • @MG
    “Cost of housing (hp and rents) needs to be part of the measure of inflation that the BoE targets.”

    Quite.

    Remit for the Monetary Policy Committee of the Bank of England and the New Inflation Target (2003):

    “9. The exclusion of certain housing cost elements from the CPI does not
    mean that housing developments will not be an important factor for monetary
    policy purposes or that house prices will be more volatile under a CPI-based
    target. Although the MPC will target CPI inflation, house prices are – and will
    continue to be – an important indicator in assessing macroeconomic
    developments for monetary policy.”

    They must have thought that the 400% rise in house prices in my street from 2000-2007 was sustainable.

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  • Hi symo.

    We’ve discussed David Blanchflower’s brilliance at some length here.

    He will be sadly missed from the MPC, and although many commentators (Robert Peston included) believe he’s left voluntarily because he’s “probably sick of being right all the time recently”, I suspect his departure is a tacit admission by the MPC that always pointing the nose of the plane upwards didn’t help when the plane stalled.

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  • phdinbubbles – Thanks for that ino. If they were supposed to be taking hp inflation into account then this makes them not only incompetent but criminally negligent.

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  • phdinbubbles – Thanks for that info.

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  • unbelievable, what a useless bunch, as discussed above if house prices were included in the cpi, we wouldn’t be in this s*it now!!

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  • Imho, it should certainly be within the mpc remit to target house price inflation if prices look like they’re outpacing the long-term growth trend. There is perhaps an argument that a certain amount of inflation was acceptable following the bottom of the last slump, but at the very time the BoE should have been targeting house prices in 2003 the remit was changed by Brown (surely not accidentally). Surely it is the job of a central bank to target such things. They failed to do so and have absolutely no excuse – unlike politicians they’re not elected and don’t have to make populist policies. It’s not the jobs of the mpc to be liked – they’re big girls and boys and should be able to take responsibility for their decisions. Rant over, for now.

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  • Crazy lending? The lowering of interest rates below the real level creates cheap money which creates a false economy in the financial sector, where lending money is highly profitable simply because the money is cheap, until the bubbles created by cheap money burst and all is lost, meanwhile the REAL economy shrivels like a leaf in autumn. The REAL economy has been undermined by competition with the false economy for personnel, goods and services as inflationary pressures are stoked.

    So the villain is ….artificially cheap money. And I wonder what the interest rates are today? That low! At this rate it will be more than ten years before recovery….

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  • Great post, Richk.

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