Friday, September 24, 2010

Interview with Kate Barker

Bank of England Will Have to Hold its Nerve

First part of the Interview deals with monetary policy. Second part of the Interview discusses the Housing Market, starting at 08:17 Barker refers to the end of 'subsidy' for the Housing Market and the move into the "second leg down".

Posted by dill @ 03:10 PM (1702 views)
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11 thoughts on “Interview with Kate Barker

  • Ahh Kate Barker who blindly focused on the supply side of the housing market for her most recent report into the housing market. Every boom needs a few blind eyes … see no evil hear no evil … nudge nudge know wha’a mean?

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  • Great find. Refreshing to see someone who was on the MPC in the recent past admit that they deliberately propped up the housing market after the credit crunch – this was explicitly denied more than once at the time. And it’s mildly encouraging to hear (assuming her views are reasonably consistent with people who are still in the game) that the view is that this is a better time to manage a steady reduction in house prices.

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  • It’s Merv the nerve now.

    I seriously think that the BOE has rendered themselves impotent.

    QE with rate setting. There can be only one.

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  • Did I miss the first leg down, then?

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  • 3.20 she says it all – they know how to deal with inflation but basically until they see very little chance of deflation they are unlikely to aggressively tighten. Why? Because the policy tools they have to control deflation and not tried and tested. it is relatively easy for them to tighten against inflation and squeeze using monetary policy.

    She says they would therefore rather have some inflation (and above target) if the choice is against the threat of deflation. They must be looking at deleveraging and sh1tting themselves. She mentions household debt, bank debt and that effectively they just bought some time, hoping for the economic backgroudn to support prices.

    Now they cant afford to buy any more time, she concludes that there will be falls, but not falls off the edge of the cliff. 15mins she talks about spare capacity, and admits that she wonders about how much capacity that there is. this unknown is a key.

    All in all very good interview – basically shows you how they are thinking. Although growth is not targeted per se, she believes its a corollary of inflation – negative growth correlates to disinflation / deflation.

    Whether you agree with her views or not, at least you can understand more why the BoE are doing what they are doing.

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  • techieman

    She never explains why inflation is preferable over inflation. Deflation effectively gives wage earners a pay rise over inflation which gives them a pay cut.

    So a pay rise is a bad thing because … ?

    (it can’t be taxed and make the government money perhaps … ?)

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  • preferable over deflation I meant.

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  • paul i am surprised at your question. personally i dont agree that deflation is a bad thing – IF it can be controlled. Similarly IF inflation can be controlled and is relatively stable and small then its not a bad thing either. She doesnt explain why because she doesnt really need to.

    The issue with deflation is basically the liklihood of a deflationary depression / deflationary spiral and the likelihood that for example companies will not want to increase productive capacity against falls in demand and the increased cost of credit. of course the credit burden increases too on a relative basis. People hold back from purchases because they can get things cheaper next month.

    A couple of days back i put up some steve keen videos. that explains it. Basically we have gone too far with credit expansion which is inflationary and produced real estate and stock market bubbles (regardless of benign CPI numbers which mask true inflation) so now we are likely to have deleaveraging which needs to be avoided “at all costs”.

    Of course if you are in the inflation camp (whether rightly or wrongly) you must want to increase your debt because inflation pays for it (assuming capacity constraints and wage increases wth inflation) and the asset (eg HPs) on which that debt is secured increases with inflation. You really only become better off because of the gearing.

    We have lived in this era for decades and its judged as the “norm” i.e. thats why they speak of “emergency” now.

    If you want to look at this question further to get an “independant” view of why inflation (if resonable) id better than deflation, (remember i am “biased” apparently) then i am sure there are some good sources on they internet. As i said i would look at the lecture by Steve Keen as a start point.

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  • techieman I’m not sure why you’re calling yourself biased but I suppose I welcome the honesty.

    Inflation and deflation are flipsides of the same coin. Just as you can have a deflationary spiral, so you can engender an inflationary spiral – which is exactly what the Bank of England did with assets. It is a phenomenon that the UK has bitter experience of.

    Barker therefore DOES need to explain why inflation is preferable to deflation – particularly at this stage in the boom bust cycle – because we have been having far too much inflation in recent years (both official and unofficial or masked inflation), engineered by Bank of England policy.

    Deflation would allow people more discretionary spending to make the central plan of “spending our way out of recession” (remember that widely publicised economic plan?) a reality.

    The only problem for the central bank is that they cannot make money by seigniorage and increases in discretionary spending cannot be taxed. Those are the REAL reasons why inflation is preferred by central bankers over deflation.

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  • “techieman I’m not sure why you’re calling yourself biased but I suppose I welcome the honesty.” – dont think i am – just people here seem to think so. i just see what i think is happening / going to happen thats all. i could be wrong of course.

    “because we have been having far too much inflation in recent years (both official and unofficial or masked inflation), engineered by Bank of England policy.”

    I agree with the first part but not the second. i think basically they didnt really realise what was going on. they are now trying to fight a natural reaction to this, i.e. deleverage, but they can only do that for so long – hence the need to pay money back after the stimulus. Even if they did realise it – once you have sold your soul to the bankers and put TVs in every house and 4x4s on every drive – its hard to take that back.

    “Deflation would allow people more discretionary spending to make the central plan of “spending our way out of recession” (remember that widely publicised economic plan?) a reality.” YES IF no one had any debt – but then if they didnt have debt there wouldnt be such a problem.It needs to be looked at in the aggregate. Personally (and probably like you) i have no debt, and i see deflation in HPs which is what i will spend my “stash” on.

    Therefore as i have said previously to me a liitle biut of exchange rate induced inflatiojn isnt so bad if HPs fall – of course they may not, but the odds are they will.

    “increases in discretionary spending cannot be taxed. ” – eh? no you got me there. Since VAT is a function of expenditure i cant understand your point.

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  • Adam Smith Fan says:

    Deflation and Inflation are both possible consequences of debt reduction. Which you get depends on how you go about the debt reduction. If all the debtors decide to stop paying their debts and declare bankruptcy you will get inflation because there will be a whole lot of banknotes in circulation with nothing backing them. On the other hand if the debtors all decide to pay back their loans as fast as they can and not take out new loans, you will get deflation. In a real economy you get both behaviours happening, so whether you end up with inflation or deflation depends on which one is predominant. Going by current events it looks as if payback plus lack of new loans is far outweighing the loan default/QE side. If the bankruptcy rate starts rising hugely or the government defaults on its bonds you can expect inflation otherwise it ain’t gonna happen.

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