This is the final box for my cover story on five years of unconventional monetary policy in Britain. It is essentially a glossary.
Extraordinary monetary policy has in turn spawned a new financial vocabulary. These are some of the main terms.
Forward guidance. An indication by a central bank of how it is likely to react to specified economic developments. For example, shortly after Mark Carney, the new governor of the Bank of England, came into office in August 2013 the monetary policy committee (MPC) said it would not even consider raising interest rates until the unemployment rate touched 7%. In February 2014, after unemployment fell with unexpected rapidity, Carney announced a modified form of forward guidance involving several indicators including productivity growth, household incomes and stronger demand. He also said that the stock of assets already purchased under QE would stay at its present level until interest rates start to rise. Carney first implemented a form of forward guidance as the governor of the Bank of Canada. Back in April 2009 he announced that official interest rates would remain at their low levels, conditional on the outlook for inflation.
The Funding for Lending scheme (FLS). A scheme, introduced in July 2012, to encourage banks and building societies to increase their lending. James Carrick, an economist at LGIM, argues that FLS has in effect taken over from QE as the main way for the Bank to bolster liquidity in the economy.
Macroprudential regulation. A system of managing risks that threaten the financial system as a whole. In the UK it is the responsibility of the FPC. In contrast, the PRA deals with microprudential regulation: setting standards and supervising financial institutions at the level of the individual firm.
QE. A way of injecting money into the economy when official interest rates are close to zero. Although it is often referred to as “printing money” the transactions nowadays are electronic. The Bank of England creates new money that allows it to buys assets, usually gilts but sometimes high-grade corporate debt, from private companies. As a result the seller has more money to spend in the wider economy or to buy other assets.
Whatever uncertainties there are about the impact of unconventional monetary policy one thing is clear. The Bank of England plays a much more extensive role in the economy then it did five years ago. Instead of focusing overwhelmingly on inflation its remit has broadened to include economic growth, financial stability and preventing bubbles.
It is five years since the introduction of quantitative easing (QE) in Britain. This chronology is from my latest Fund Strategy cover story.
QE was first implemented in Britain five years ago. However, there were precedents in other countries. The Bank of Japan implemented a form of QE from 2001 to 2006. In November 2008 the Federal Reserve introduced quantitative easing following turmoil on Wall Street in previous months. There are technical differences in the implementation of QE between countries but in broad terms they all seek to bolster demand to head off deflation.
December 2008. Speculation about the introduction of QE in Britain began. By January 2009 the Bank of England, under a remit from the Chancellor, had set up a subsidiary company to allow it to purchase assets to improve market liquidity.
February 2009. Under the new Banking Act the Bank of England was given two statutory objectives: financial stability and monetary stability.
March 2009. The start of QE proper in Britain. It was announced that official interest rates would fall to a historical low of 0.5% and the Bank was given the power to purchase assets for monetary policy purposes. Initially it bought £75bn of assets but by November 2009 the total had reached £200bn.
October 2009. The then leader of the opposition, David Cameron, told the Conservative party conference that QE would need to be curtailed sooner rather than later. “If we spend more than we earn, we have to get the money from somewhere. Right now, the government is simply printing it. Sometime soon that will have to stop, because in the end, printing money leads to inflation,” he said. In May 2010 he became prime minister after the general election.
November 2010. The Bank voted to increase total asset purchases to £200bn.
February 2011. The bank set up an interim Financial Policy Committee (FPC). It held its first policy meeting in June 2011.
September 2011. Consumer Prices Index (CPI) inflation reached 5.2%, matching the high in September 2008.
October 2011. Almost two years after its last purchase, the Bank of England bought another £75bn of gilts, bringing its stock of assets up to £275bn.
February 2012.The size of asset purchase programme was increased by £50bn to a total of £325bn
July 2012. The Bank announced another £50bn of asset purchases to bring the total amount to £375bn. Some argue that this was the end of QE since the Bank has made no new purchases under the scheme since then. However, the stock of QE has not been reduced either.
In the same month the Bank and HM Treasury launched the Funding for Lending Scheme (FLS). The FLS is designed to incentivise banks and building societies to boost their lending to the real economy. It does this by providing funding to banks and building societies for an extended period with both the price and quantity of funding provided linked to their lending performance.
November 2012. George Osborne, the chancellor of the Exchequer, announced that Mark Carney, then governor of the Bank of Canada, would become governor of the Bank of England.
December 2012. The Financial Services Act, a fundamental reform of the system of financial regulation, became law.
April 2013. The new legislation regulatory system came into effect. The old Financial Services Authority was abolished and the Bank of England took over responsibility for protecting and enhancing financial stability. A new architecture consisting of the FPC, Prudential Regulation Authority and Financial Conduct Authority was set up. In the same month the Bank and the Treasury announced an extension to the FLS.
July 2013. Mark Carney became the governor of the Bank.
August 2013.The Bank gave forward guidance for the first time. It said it would consider making further asset purchases if the unemployment rate remained above 7%.
December 2013. CPI inflation rate fell to its 2% target.
Over the year the British economy grew by 1.9%, the strongest annual growth rate for six years.
February 2014. Carney announced a new form of forward guidance that depends on the performance of several indicators.
This is the main text for my Fund Strategy cover story on five years of extraordinary monetary policy in Britain. I will post the accompanying boxes over the next couple of days.
It is easy to forget how much Britain’s financial architecture has changed in just five years. Back in early 2009 the term quantitative easing was often written with inverted commas or with the prefix so-called. Only the most hardcore financial nerds would feel comfortable referring to the concept by its initials.
Nowadays not only has QE become a routine moniker but a host of other terms have joined it including forward guidance, funding for lending and macroprudential regulation (see box one). In parallel with this development the system of financial regulation has undergone fundamental reform. The Financial Services Authority is no more but the Financial Conduct Authority, Financial Policy Committee and Prudential Regulation Authority have come into existence. The latter two are under the direct control of the Bank of England.
These new sets of terms and initials reflect the important changes that have come to the regulatory system and economic policy. In relation to monetary policy specifically the authorities have searched desperately for new ways to shore up demand and bolster confidence. Once interest rates hit their historical low of 0.5% in early 2009 new tools were needed. QE is the most important of these but it is only one of a range of unconventional measures designed to keep the economy afloat.
Whether such measures have proved successful is open to debate. The problem, as is often the case, is that there is no counterfactual. There is no parallel universe where QE was not tried. Perhaps the closest is southern Europe where countries such as Greece and Spain have had no control over their currency or interest rates. Those countries have certainly suffered worse economic times than Britain in recent years with sharper falls in output and higher unemployment. However, such comparisons with other countries are inevitably inexact.
This leaves it open for supporters of unconventional policy to argue that without extraordinary monetary measures the economy would have faced disaster. They claim that Britain would have fallen into a 1930s-style deflationary spiral. The result would have been mass unemployment and a far harsher squeeze on living standards.
In contrast, the critics argue that unconventional monetary policy has only postponed the day of economic reckoning. It has kept the economy ticking over but in the meantime government debt levels are still rising, productivity is stagnant and asset prices are artificially high. Such problems, they contend, are better dealt with sooner rather than later. Postponement will only make them worse.
This article will grapple with these questions in three parts. First, it will examine the economic dimension of unconventional monetary policy with the advantage of five years of hindsight. Second, it will consider the impact on financial assets including bonds, equities and property. Finally, it will look at the difficulties presented by exiting from the prolonged period of monetary activism.
One reason it is difficult to judge the success of extraordinary monetary policy is that the rationale for it has changed over time. For example, in March 2009 the chief economist of the Bank of England, Spencer Dale, gave a keynote speech in which he said that: “The objective of the asset purchase programme is to boost nominal spending in order to hit the inflation target”. (“Tough Times, Unconventional Measures”, 27 March 2009) .
From this perspective QE was a temporary measure designed to ensure the economy did not fall into a liquidity trap as a result of falling prices. In such a situation both consumers and companies are reluctant to spend as whatever they buy in the present is likely to be cheaper in the future. This is the situation Japan found itself caught in for many years.
Consumer Prices Index inflation did drop in Britain in the six months following Dale’s speech, bottoming out at 1.1% in September 2009, but after that it started to rise until it hit 5.2% two years later. Yet the Bank continued to make new asset purchases under QE until July 2012. As time went on it became increasingly difficult to rationalise QE in terms of heading off possible falls in consumer prices.
With the benefit of five years of hindsight it is clear that unconventional monetary policy can no longer be described as temporary. Typically unconventional monetary policy is justified today as a way of shoring up demand and bolstering confidence. This can happen through several channels but essentially it works by bolstering the money supply. As a result credit becomes cheaper, borrowing becomes easier and asset prices can rise.
Government is one of the main beneficiaries of this process. James Carrick, an economist at Legal & General Investment Management, says: “It’s been easier to maintain government spending with limited tax receipts because you’ve had a lot of gilt issuance purchased by the Bank of England.”
For supporters of QE unconventional monetary policy has created the basis for the signs of recovery in recent months. The economy is estimated to have grown by 1.9% over the past year, inflation is at its target level and unemployment has fallen sharply in recent months.
Advocates of QE can concede that the economy still has some way to go before there is a balanced recovery. Output is still 1.3% below its peak level in the first quarter of 2008, business investment is weak and productivity is below its peak in 2007. For the optimists it is only a matter of time before such indicators improve. QE has put the economy in a position where they can be tackled.
For critics, who tend to be those who emphasise the importance of the supply side of the economy, the weaknesses are a sign that economic problems have not been resolved. Rather than promote an economic restructuring the authorities have simply kept things afloat on cheap credit. Such measures only postpone a time of reckoning that is bound to come sooner or later.
Those critics who warned that QE could lead to rampant inflation have, at least so far been proved wrong. As Andrew Godwin, a senior economist at Oxford Economics, says: “It is difficult to see any evidence of a massive uptick in inflation.” CPI inflation has at times been significantly above the Bank’s target level but it has not run completely out of control. However, it should also be recognised that asset price rises also constitute a form of inflation.
Where the critics have a clearer point is that unconventional monetary policy seems to have widened inequality. Since the rich typically hold more assets than the poor the wealthy have typically done much better as a result of QE. Many see this trend as particularly painful during a time of austerity.
Up to a point it is possible to square the positions of the two sides. Even the most ardent proponents of unconventional monetary policy have only promoted it as a temporary measure.
As Mervyn King, until recently the governor of the Bank, noted in his valedictory speech at the Mansion House in June 2013: “It can only buy time to bring about the necessary structural changes in investment, trade and capital flows.” (“A Governor looks back – and forward ”, June 19, 2013 . From this perspective the key question is whether the time bought by QE and other such policies has been put to good use.
Andrew Milligan, the head of global strategy at Standard Life Investments, endorses King’s point when he says that: “Both arguments are right. QE has had an impact but all it has done is buy time”.
The majority view among experts is certainly that, on balance, unconventional monetary policy has proved worthwhile. “Any downsides are outweighed by the positives,” says Oxford Economics’ Godwin. “We are in a much better place because of it.”
In a sense it is inevitable that unconventional monetary policy should affect asset prices. QE involves the authorities buying gilts, which in turn raises their price and therefore lowers their yield. Since gilts provide the benchmark against which other assets are priced – since their yields constitute what is generally considered to be a risk free rate – other bonds, equities and property will all be affected to some degree. The difficult question is the extent of the impact.
LGIM’s Carrick points a picture of fixed income investors being pushed towards slightly more risky asset classes. “There are signs that by boosting government bond prices that’s forced investors who normally invest in gilts into the corporate bond markets,” he says. “And that’s forced investors who normally invest in corporate bonds into the junk bond market.”
The effect on equities is more difficult to quantify although they have certainly recovered strongly since the dark days of early 2009. The FTSE 100 has risen from about 3,500 back then to about 6,500. Middle-sized firms have done even better. Part of the impact is no doubt down to the apparent escape from the edge of the precipice and the subsequent economic recovery. However, unconventional monetary policy has also played a role.
Nevertheless most experts see the stockmarket as at least reasonably close to fair value. “I don’t think you could say that QE has created bubbles”, says SLI’s Milligan.
As for property it is clear that monetary policy has played a significant role in its recovery. The average British house price has risen from about £150,000 in early 2009 to about £174,000, according to figures from Nationwide. Lower borrowing costs have certainly helped but, as with equities, there are other factors at play too. For example, emerging market investors have helped push up house prices in central London.
However the economy and the markets have got where they are there is the thorny issue of how to exit from extraordinary monetary policy. The authorities are certainly anxious about the possibility that a precipitate exit could cause problems. That is why they have experimented with forward guidance in an attempt to make sure markets remain calm.
In a narrow technical sense QE stopped in July 2012. Since then the Bank has not added to its stock of assets although it has not cut them back either. This is in sharp contrast to America where Fed “tapering” essentially means a slowdown in the rate at which QE is expanding.
But the US comparison is not clear-cut. For a start the Bank of England expanded its balance sheet more quickly than the Fed in its early stages. In addition, the FLS has in some respects taken over from QE’s role in shoring up the money supply.
Opinions vary on how difficult the exit will be in Britain. Oxford Economics’ Godwin is relatively sanguine. “As long as there is no uptick in inflationary pressures I think it will be steady as she goes.”
In contrast, Michael Howell, the managing director of Crossborder Capital, sees no easy exit.“They will have to be extremely cautious about deciding to take liquidity down”, he says.
In Howell’s view the Bank has in effect filled in a funding gap in the wholesale markets. Passing the responsibility back to the private sector will be a tricky task. “I think the Bank of England has got to at least keep the current size of its balance sheet, possibly grow it, but almost certainly not shrink it rapidly otherwise you’ll get another financial crisis.”
Despite the heated debates about unconventional monetary policy there are several points on which there is a clear consensus. There is a widespread agreement that the structural problems facing the British economy, such as a poor productivity record and low business investment, remain to be tackled. The disagreements are mainly around how close they are to being resolved.
There is also a consensus that a degree of austerity is likely for several years to come. For example, the Institute for Fiscal Studies, an independent think tank, says that it is highly unlikely that average living standards will recover to their pre-crisis levels by 2015-16.
Finally, whatever the merits or defects of extraordinary monetary policy it looks set to remain part of the financial landscape for at least several years yet.
Adair Turner is probably the closest the British establishment has to a go-to guy on finance and much else besides. During his long career he has provided both intellectual and practical leadership on some of the thorniest problems Britain faces.
His CV is remarkable. After many years at McKinsey, one of the world’s top management consultancies, he was director general of the Confederation of British Industry and then chairman of the Financial Services Authority.
He also chaired the Low Pay Commission, the Pensions Commission and the Climate Change Committee. Anyone who has heard him speak on any of these subjects, and indeed many others, will know he is always logical and lucid.
It was with this in mind that I was particularly interested to hear him talk about his new project recently on BBC Radio 4’s Start the Week programme. Evidently he is writing a new book on Britain’s excessive dependence on debt.
Details of the book itself are not yet publically available but it is possible to get an inkling of what he is saying from radio programmes such as Start the Week as well as speeches and articles. For example, on February 2014 the Institute for New Economic Thinking, a think tank to which he is affiliated, published a paper by him on “escaping the debt addiction”.
It is important to recognise in this respect that Turner’s focus is private debt rather than government debt. His concern is that economic growth should depend less on debt. The practical measures he proposed to achieve this objective included requiring much higher bank capital, establishing constraints on real estate lending and tightening regulation on very high interest consumer lending.
The problem with Turner’s argument is precisely that it is the mainstream view. It has become almost universally acceptable to talk about the “debt crisis” or “financial crisis” as if they are synonymous with “economic crisis”. It is also common to talk in terms of addiction as if the heavy use of debt is somehow akin to becoming hooked on drugs.
Turner has simply taken the conventional intuition, that the root cause of the crisis is to do with debt, and given it more rigour. He has not investigated whether there is a causal relationship between debt and the economic crisis.
The graphs that go with his presentation make this clear. Chart after chart shows that debt levels, measured in numerous different ways, have increased in recent years. It is certainly a striking picture but it is important to remember the fundamental point that correlation is not causation. Debt levels certainly increased dramatically in the run-up to the crisis but it does not follow that they caused the economic downturn.
Turner’s approach precludes the possibility that high debt levels were a symptom, rather than a cause, of the economic problems many countries have suffered in recent years. There is no significant discussion of how they relate to the real world of production. The closest Turner gets is to talk about economic imbalances between the main economic powers.
The Start the Week programme also illustrated how pervasive the fetishisation of debt has become. All the guests on the programme accepted without question the idea that high debt levels can explain the economic problems plaguing the West.
The time is ripe for a more rigorous examination of these challenges.
This blog post first appeared today on Fundweb.
This column first appeared in the March edition of Fund Strategy. The accompanying graph is available to see here.
This column may be a little more personal for readers than normal. It concerns the likely trajectory of wages in the near future. In particular whether there are any signs of an upward trend after the pain of recent years.
Of course you may be one of the lucky few who have enjoyed a rising real income since 2008. But for most people in Britain it has been a miserable time for living standards.
The accompanying graph from the Office for National Statistics (ONS) helps illustrate how bad things have been. Real wages shrunk in every period from the second quarter of 2010 to the third quarter of 2013. This is the most long drawn-out decline on record.
Nor does the situation look any better when examined from a broader perspective. According to the Institute for Fiscal Studies, a respected think tank, real median household incomes in 2013-14 were 6% below their pre-crisis peak. That covers a longer time span than the ONS study (since economic output peaked in the first quarter of 2008) and more than wages alone (since household incomes also include welfare benefits, returns on investment and the like). Nevertheless the IFS itself says the fall in average incomes was mainly driven by earnings.
At last, however, things appear to be looking up with GDP rising by 0.7% in the final quarter of 2013 according to the provisional estimate by the ONS. This means that GDP was 1.9% higher in 2013 than the year before.
This news is certainly welcome but it needs to be put in perspective. GDP has risen since 2009 but it is still 1.3% below its peak in the first quarter of 2008. At that rate it will take a year or two for output to return to its level of seven years earlier. It GDP had instead risen at 2% year, a relatively modest rate, over that period then total output would be about 15% higher than with the pain of the downturn.
However, if the figures are adjusted for the increase in employment since late 2009 the sums come out a little differently. Although output has increased since then the number of people employed and the number of hours worked has risen faster. In other words output per hour – a key measure of productivity – has continued to trend downwards.
This matters because, everything else being equal, productivity is the key determinant of earnings. In a more productive company the employer can afford to pay more to his employees.
That explains why the idea that companies always try to minimise their employees’ wages is wrong. In a highly productive company – say a factory with lots of advanced machinery – it is possible to pay high wages to the relatively small number of employees. In contrast, a factory with little automation is likely to have many employees but pay them each relatively little.
In other words the main consideration for employers is not to pay its employees the lowest wages possible. It is, rather, to make healthy profits. In theory this can happen with a well-paid workforce and lots of automation.
Wages tend to be cut, at least in real terms, either when companies are facing tough times or the overall economic climate is harsh. In such situations wage cuts are often seen as a temporary means of shoring up profits.
From this perspective the prospects for wage growth do not look good in the coming years. Even assuming economic recovery continues – which is far from certain – it could still take years for productivity to return to its previous peak.
Perhaps the recent pronouncements by politicians on the minimum wage provide a sign of hope. Not that Fund Strategy readers are on such low incomes – at least hopefully not. But if politicians are willing to increase the minimum wage then perhaps they will take a more relaxed attitude towards others increasing their incomes. The recent call by George Osborne, the Chancellor, for an above inflation increase in the minimum wage could certainly be read that way. Labour has gone a little further with Ed Miliband, the party leader, calling on firms to voluntarily introduce a living wage at a slightly higher rate than the minimum.
Interestingly other countries are also talking about minimum wages. Barack Obama reiterated his call for a higher federal minimum wage in his recent State of the Union address. In Germany the new grand coalition government has adopted the minimum wage under pressure from the Social Democrats.
But look at the rhetoric more closely and it seems politicians are more interested in keeping wages down rather than raising them. The talk is of everyone being willing to take sacrifices together. From this perspective everyone else should be willing to limit their ambitions to make the minimum wage possible for the least well off.
I take no pleasure in making such a gloomy prognosis for wages in the coming years. On the contrary, I would like to see a sharp rise in incomes. However, the precondition for such an increase is a strong improvement in corporate investment and productivity. Unfortunately, few seem to be taking such a perspective at present.
All the talk about how the Bank of England should best pursue forward guidance has missed the bigger picture. The ever-greater powers assumed by the Bank in recent years represent an abnegation of democracy. This trend is objectionable in principle and damaging in practice.
The rot had already started to become apparent back in 1997 when the newly elected Labour government announced that the Bank would be made operationally independent. In practice this meant that the Bank’s Monetary Policy Committee would set interest rates albeit unde framework drawn up by politicians.
Back then the move was widely welcomed as insulating the Bank from political pressures. But that was precisely the problem with it. The link between the electorate and the pursuit of monetary policy had been severed. Relatively few observers probably even remember the days when the Treasury, under the direct control of an elected minister, set rates.
However, in recent years the Bank has taken on yet more powers. With the advent of the economic crisis the Bank took on a new range of monetary tools including quantitative easing, funding for lending and, most recently, forward guidance. It has also taken on responsibility for financial stability as well as monetary policy. Vast swathes of economic policy that were once the preserve of politicians are now under the control of technocrats.
Ironically the growing remit of the Bank is not the result of any conspiracy on its part. On the contrary, Bank officials have sometimes seemed reluctant to enter new areas. It is rather the result of the abdication of responsibility by politicians. Elected leaders no longer feel confident in their ability to manage important areas of economic policy. As a result they have handed ever more powers to the Bank.
It should be clear why this trend is undesirable in principle. In a democracy the electorate should have as much control as possible over policy. The role of technocrats, such as officials at the Bank, should simply be to give expert advice.
The fact that the growing power of the Bank has encountered little resistance points to a disturbing development. Even elected politicians tend to take a dim view of the electorate. They assume that the public will always take a narrow and short-termist view on key matters.
But the growing power of the Bank is undesirable in practice as well as principle. That is because truly democratic institutions should provide a transmission mechanism through which politicians glean knowledge of what is happening in the wider world.
Elected politicians can also be held to account by the public. If they are perceived to have made serious mistakes they can be voted out at the next election. That keeps politicians on their toes and ensures the electorate has a stake in participating in the political process.
Better that the most venal politician makes economic policy than the smartest technocrat.
This comment was first published today on Fundweb.
Given the Federal Reserve’s role in keeping the American economy afloat in recent years its 100th anniversary has attracted remarkably little attention. The centennial of the central bank provides a good vantage point to examine the increasingly powerful institution.
Anyone who doubts the Fed’s part in bolstering the economy in recent years need only look at its burgeoning balance sheet. Total assets have increased from about $860 billion in August 2007 to over $4 trillion today. The surge reflects the Fed’s quantitative easing – or what it prefers to call credit easing – programme. Even with the advent of tapering, a slowdown in the rate of growth of asset purchases, the balance sheet is likely to continue its rapid expansion for some time.
But perhaps it is unnecessary to harness such figures to persuade those who follow the financial markets or the economy of the Fed’s importance. Ben Bernanke, the Fed’s chairman until recently, has become a household name among investors and financial professionals. His successor, Janet Yellen, is already in the process of becoming one too.
Given the ubiquitous role the Fed has come to play it might surprise some to learn it is relatively new in historical terms. The Federal Reserve Act, the law that brought the Fed into being, was enacted on December 23, 1913. There was no mention of the Fed in the US constitution, which came into operation in 1789, let alone in the War of Independence against Britain.
The Fed was a product of what in America is referred to as the Progressive Era. Its exact dates are debatable but it is usually seen as spanning the first two decades of the twentieth century. The high point was from about 1910 to 1917.
Essentially the Progressive Era marked a shift in America from a more agrarian, decentralised and free market society to a more industrial, centralised and interventionist one. The Federal government became relatively more important and the individuals states less so.
Advocates of progressivism, who included both Democrats and Republicans, supported such measures as the introduction of a federal income tax, enacted in 1913 under the 16th amendment to the constitution. They were also generally in favour of the federal regulation of food production, strict immigration controls and the prohibition of alcohol.
Progressivism is generally seen as a radical movement as its supporters often used the rhetoric of fairness and justice. It also railed against corruption, opposed cartels and supported the regulation of inter-state commerce.
However, this is a misleading way to understand it. As some historians have argued it would be more accurate to see it as a cooperative drive involving both government functionaries and large corporations. Both sides were keen on developing the strong institutions they saw as more appropriate to a modern America.
The Fed clearly fits into this pattern. Its creation was supported both by the leaders of many powerful financial institutions as well as influential technocrats.
This history helps illuminate many contemporary fallacies about the Fed, the economy more generally and the financial markets. For a start it is a myth that America has a free market economy – if that is taken to mean an economy in which the state plays a minimal role. Both supporters and critics of the free market should acknowledge this reality.
On the contrary, the economy, including the financial markets, is subject to extensive state intervention. The Fed is only of many government institutions which plays a substantial economic role. It has also actively shored up asset prices at times.
From this perspective it should be clear that the Fed’s recent activist role marks a change of degree in the organisation’s activity rather than a fundamental shift. The Fed has certainly stepped up a gear since the advent of the financial crisis of 2007-8 but it is not doing anything fundamentally new.
Indeed the Fed’s recent activism can be seen as a sequel to the previous bout of activism. In the aftermath of the stockmarket slump of 2000, and the September 11 terrorist attacks of 2001, the Fed kept interest rates artificially low for several years. The goal was to help stabilise asset prices but it also helped pave the way for the housing bubble in the first part of the decade. Cushioning the stockmarket had the unintended consequences of helping to inflate a bubble elsewhere.
The broader context for these developments is the way in which the American authorities have evaded tackling fundamental economic problems for three decades. Rather than promote economic restructuring as a way of achieving investment and innovation the government has generally opted for short-term solutions. In particular it has pumped money into the economy, both from the Fed and through state spending, as a way of keeping things ticking over.
Under these circumstances it would be inappropriate to wish the Fed a happy 100th birthday. It poses more problems for the economy than it offers solutions. It is time to consider new institutional arrangements that are better suited to tackling contemporary challenges.
This column first appeared in the February issue of Fund Strategy magazine.
What is the likely impact of policies to redress wide economic inequalities? Many support this goal and some abhor it but few take the trouble to spell out exactly what they mean by equality in this context.
Barack Obama’s 2014 State of the Union speech provided a good opportunity to unpick the concept. The president is both a frequent critic of inequality and the head of what is still the world’s most powerful state. Admittedly his recent speech was relatively dull but it was still a good vantage point from which to examine his notion of equality.
For the purposes of this post let’s leave aside some of the non-economic conceptions of equality the president raised. There was moral equality in his nod to the United States Declaration of Independence of 1776. “We believe in the inherent dignity and equality of every human being”, said the president. There was also gender equality (“a woman deserves equal pay for equal work”), legal equality and what he called “marriage equality” (presumably a reference to gay marriage). All of these are important ideas to examine but they need not detain us here.
Once these other notions are put to one side it becomes clear that in the economic sphere the president was not advocating equality but criticising what he regards as excessive inequality. Like most contemporary egalitarians he argues that economic inequality has gone too far. But he made no demands for any significant redistribution of wealth let alone for equality of incomes.
Like many others he also muddled the stagnation of average incomes with widening inequality. Although these two phenomena can coincide they are not the same thing. Obama name checked the Earned Income Tax Credit, introduced in 1975, as a way of helping families who work hard. Whatever the merits of this measure it is not likely to have much impact on the gap between rich and poor.
Look more closely and it becomes apparent that the president was more focused on opportunity than inequality. “Opportunity is who we are,” he said. “And the defining project of our generation is to restore that promise.”
The problem with this concept is precisely that is so elastic. Virtually anyone, whatever their political views, can claim to support opportunity. Obama’s association of opportunity with access to a good job, honest work and strong communities was also hard to dispute. He uses such phrases as platitudes rather than meaningful demands.
Two broad conclusions can be drawn from Obama’s use of equality in his recent speech. First, its practical content from an economic perspective is virtually nil. Obama was essentially saying it is unfair for inequality to reach excessive levels – itself a highly subjective call. At most he was making the uncontentious claim that America should not be allowed to develop a caste system: there should be the opportunity to move up (and implicitly down) “ladders of opportunity”.
More telling is what all the talk of inequality obscures. Focusing so much on relative differences of income inevitably downplays the importance of absolute increases in living standards. All the talk of inequality betrays a dearth of ideas on how to promote economic growth.
The president’s polished inequality rhetoric disguises his incredibly low horizons about the potential to achieve prosperity for all.
This comment was first published today on Fundweb.
This review was first published on spiked today.
The unsubtle message of Martin Scorsese’s new film, The Wolf of Wall Street, is that there is a thin line between investment bankers and gangsters. Admittedly, investment banking is not itself illegal and its practitioners are not generally prone to extreme violence. Nevertheless, the film portrays Wall Street traders as fanatically driven men who are willing to do virtually anything to achieve their overriding ambition: to become fabulously wealthy.
This compulsion means the traders in the film are more than willing to break the law when it stands in their way. Their macho world is one in which the extensive use of drugs and prostitutes is routine, as is the ostentatious display of fast cars, large yachts, costly suits, expensive watches, and the like.
Given such excessive lifestyles, it is not surprising that the personal lives of those involved tend to suffer. Typically, male infidelity is tolerated up to the point the long-suffering wife decides it cannot go on. Domestic violence normally comes as part of the break-up as well.
Superficially, the film resembles Goodfellas, Scorsese’s 1990 masterpiece about the rise and fall of an Italian-American crime family from 1955 to 1980. The Wolf of Wall Street traces the rise and fall of a dodgy investment bank through much of the 1990s. Both movies are centred on New Yorkers from relatively humble backgrounds who are willing to do virtually anything to get rich. Both are also ostensibly based on true stories, although, no doubt, there is a lot of artistic licence involved in each.
Leonardo DiCaprio plays the title role of ‘the wolf’, Jordan Belfort. He starts his Wall Street career at an established institution in the late 1980s before setting up his own brokerage firm, Stratton Oakmont. The new outfit is not averse to high-pressure sales tactics or to swindling its customers. For several years, Belfort and his colleagues manage to evade civil and criminal sanctions. Yet it is only a matter of time before the law catches up with them.
However, as the film wears on the differences between The Wolf of Wall Street andGoodfellas begin to outweigh the similarities.
Although the characters in Goodfellas do terrible things, including murder, the film retains a detached empathy for their plight. Essentially, they are outsiders who are trying to improve their lot in a world where the odds are stacked against them; the ostensible Land of Opportunity does not allow them to achieve the fortunes and the respect they crave through legitimate means.
In contrast, The Wolf of Wall Street bears an almost aristocratic disdain for the investment bankers of Stratton Oakmont. The snobbish tone is that of established wealth, someone who is ‘to the manor born’, seething with contempt for the vulgar ostentation of the self-made man. There is no attempt to understand why the protagonists act in the way they do. They are simply caricatures who are driven by testosterone-fuelled greed.
The Wolf of Wall Street marks a sad point in Scorsese’s illustrious career. He has made some excellent films, despite an uneven output. His latest movie, in contrast, seems to be just going through the motions. It is an uninspired film that takes predictable cracks at obvious targets.
It is entirely appropriate that the film was released in Britain in the same week that Ed Miliband, the UK Labour Party leader, launched yet another limp attack on the banks. Labour would likely feel comfortable with the film’s crass portrayal of investment bankers and its transparent disdain for the drive to become prosperous.
So, in the end, Scorsese has made a film fit for Ed Miliband. It is hard to imagine a worse indictment of the once-great director.
Episode three of the Benefits Street documentary was relatively dull. To the extent there was a theme it was the relationship between parents and young children. Unfortunately the topic was not properly developed. The programme touched on state intervention in family life including a visit by a health visitor and by someone from Sure Start . A detailed exploration could have made fascinating television.
A couple of other more general points on the documentary series:
* An interesting comment by Simon Jenkins in the Guardian arguing that the whole of Britih society is in a sense on benefits.
* The claim that television is exhibitiong gross double standards by covering people on benefits but not “wealthy tax dodgers” and bankers is entirely unconvincing (see Owen Jones for an example of such an argument here ). There are numerous examples of television programmes attacking bankers and tax dodging even if it does not usually follow the reality format. Both rich and poor are often demonised by the self-appointed guardians of middle Britain.
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