That's Grainne Gilmore in The Times, echoing most media platforms today. Below is the conventionally used measure of the amount of money that the Bank of England has been printing over the last few years. The printing press is on. That's why we had an inflationary bubble. That's why we've had a bust.
Addendum (19/2/09): Stephanie Flanders enlightens us on the issue:
... When the Bank of England buys up gilts, one arm of the government is buying up debt owed by another arm of the government in exchange for money created by the central bank. Whether the gilt is brand new, or issued the day before, is quite simply irrelevant.
The bottom line here as far as I'm concerned is that this is more a rhetorical issue than a matter of policy. As someone who reads lots of textbooks and takes statements literally, I am at a loss. My concern is that this cloud of doublespeak fuels misunderstanding of the underlying issues here. The "boom" was actually a "crisis". The "crisis" is actually a recovery. Flanders again:
That said, there are big practical differences between this policy and Zimbabwe-style money financing. The most important is that the Bank is choosing to buy gilts as a means to an end. It is not being forced to buy them because the government has nowhere else to go.
It doesn't "have nowhere else to go"? Where else could it go? And it has "every intention" - is that enough to convince? What about time inconsistency? What about judging outcomes, not intentions? In my first post about Quantitative Easing I declared my ignorance. My concern is that I understand it more than I think.
This is an area I'm fairly ignorant of, so these are genuine enquiries:
(a) Why did the inflationary bubble show up in asset prices rather than consumer/retail inflation?
(b) Did Bank of England monetary policy cause the US housing bubble-and-bust? Because it seems to me that's got a major claim to 'causing' the global bust.
Posted by: Jim | February 19, 2009 at 09:45 AM
I'm pretty ignorant myself, and don't want to pretend otherwise, but to take a stab at your questions:
(a) Because consumer/retail inflation are imperfect measures of inflation, however they were the policy target and thus monetary policy was conducted so that inflation did not show up there. Also, if you look back to recent CPI figures we have seen "high" consumer/retail inflation [http://www.statistics.gov.uk/cci/nugget.asp?id=19] suggesting that we were seeing the inflationary bubble in Consumer Prices. I'd also say that the prices producers pay have been running very high, but for various reasons we don't look there either when measuring inflation. The key thing is the distinction between monetary inflation/deflation and price inflation/deflation.
(b) No. But my target is not so much to blame the Bank of England, but the dominant ideas that they share with the Fed. [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1319549 (email me for a non-gated version)] In addition to sharing this philosophy we have seen a direct impact on the UK economy because it's meant that whilst British banks didn't have massive subprime mortgages, they were exposed to the US because they'd bought them. And why would we be so concerned with keeping interest lows unless we also thought that British borrowers were - in fact - "subprime"? It's true that Gordon Brown didn't "cause" the global credit crunch, but (as he keeps reminding us) he is part of the global community that *did* cause it.
Posted by: aje | February 19, 2009 at 11:54 AM