Confessions of a central bank official (two in fact and one to come)

City A.M. reports today Dovish Carney stuns markets:

EQUITY markets jumped yesterday after the Bank of England shocked investors by indicating that rates would stay at historic lows in the near future, despite recent signs that the British economy is starting to strengthen.

That investors are shocked by the news that Mark Carney plans a further extended period of easy money is more surprising than the news itself. But it turns out markets are good at responding to superficial data over the clearly stated intent of big players in the market, like central bank officials.

Consider the evidence of Lord George, former Bank of England Governor, to the Treasury Select Committee in 2007, in which he confesses his role in seeding economic disruption in an attempt to avoid recession:

Tuesday 20 March 2007 – Treasury – Minutes of Evidence

Q117 Ms Keeble: What makes it worse is that the one tool that the MPC has is interest rates and that filters through to our constituents in the form of higher mortgages. That makes them complain even more; it becomes cyclical.

Lord George: Yes, if house prices are going up. But one has to step back and recognise—I referred to it earlier—that when we were in an environment of global economic weakness at the beginning of the decade it meant that external demand was declining. Related to that, business investment was declining. One had only two alternatives in sustaining demand and keeping the economy moving forward: one was public spending and the other was consumption. It is true that taxation and public spending can influence the demand climate and consumer spending, but confronted with what we saw we knew that we had to stimulate consumer spending. We knew that we had pushed it up to levels that could not possibly be sustained in the medium and longer term, but for the time being if we had not done that the UK economy would have gone into recession, just like the economies of the United States, Germany and other major industrial countries. That pushed up house prices and increased household debt. That problem has been a legacy to my successors; they have to sort it out, but we really did not have much of a choice about what we did unless we accepted that we would yank it back or give up stability altogether. That is the point I am trying to make in answer to Mr Newmark. There are some people—maybe lots—who say that house prices is the biggest problem, that the mortgage rate is going up, housing is not affordable and so on.

And a few weeks ago, the Bank’s Andy Haldane confessed that they “have intentionally blown the biggest government bond bubble in history” (I abridge a little):

Wednesday 12 June 2013 – TRANSCRIPT OF ORAL EVIDENCE

Q41 Mark Garnier: … If you thought that QE was creating financial instability, would you try to warn the MPC and, if so, how would you do it?

Andrew Haldane: I absolutely see it as my one of jobs as an FPC member to alert not just the MPC but this Committee and the wider world if I thought that QE, or monetary policy actions more broadly, was posing significant risks to UK financial system stability. …

To the substance, this is a risk that I feel very acutely right now. If I were to single out what for me would be the biggest risk to global financial stability right now it would be a disorderly reversion in the yields of government bonds globally, for any one of a variety of reasons. We have seen shades of that over the last two or three weeks. Let’s be clear, we have intentionally blown the biggest government bond bubble in history. That is where we are, so we need to be vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted. That is a risk. It is one we as FPC need to be very vigilant to.

So, by officials’ own admission, the Bank under Eddie George created levels of debt-fuelled consumption which they knew could not last in the hope of avoiding recession and, following that bubble bursting, they have now deliberately inflated the biggest bond market bubble in history. When I see markets herding in response to the pronouncements of these big players, I think “What could possibly go wrong?”

As I set out in my speech on the Budget (video), Mark Carney has clearly explained his intention to use the Bank of England to manipulate economic expectations to manufacture recovery. This will not work.

It is certainly true that the central banks can alter economic expectations but the idea that they can do so helpfully is fanciful. It is founded on the same errors as socialism and like socialism, it cannot work because the information necessary is not available and because it relies on aggregating away much that makes us human.

We’ve had two confessions from central bank officials. I feel I can predict confidently that Mark Carney will one day confess, more or less, “We thought we could manage the economy by steering the expectations of tens of millions of people using monetary policy to blow various bubbles while making pronouncements about policy. We were wrong.”

One of the great tragedies of our circumstances is that so many people will label this central planning “capitalism”. Eventually, the state will have to get out of money and banking. Mark Carney’s coming failure should accelerate the day.


Speech on the Financial Services Bill

Under the heading, Osborne looks to limit damage of ‘credit busts’, the FT gives a neat summary of the Chancellor’s plans. In particular:

He said the FPC would also look out for dangerous linkages in the financial system and identify exotic new instruments that might undermine stability. It would be charged with containing credit booms as well as limiting the damage of “credit busts”.

Which this morning caused me to regret that I was not given time in the Commons at the second reading of the Financial Services Bill to quote from the 1932 preface Hayek’s Monetary Theory and the Trade Cycle:

There can, of course, be little doubt that, at the present time, a deflationary process is going on and that an indefinite continuation of that deflation would do inestimable harm. But this does not, by any means, necessarily mean that the deflation is the original cause of our difficulties or that we could overcome these difficulties by compensating for the deflationary tendencies, at present operative in our economic system, by forcing more money into circulation. There is no reason to assume that the crisis was started by a deliberate deflationary action on the part of the monetary authorities, or that the deflation itself is anything but a secondary phenomenon, a process induced by the maladjustments of industry left over from the boom. If, however, the deflation is not a cause but an effect of the unprofitableness of industry, then it is surely vain to hope that by reversing the deflationary process, we can regain lasting prosperity. Far from following a deflationary policy, central banks, particularly in the efforts than have ever been undertaken before to combat the depression by a policy of credit expansion—with the result that the depression has lasted longer and has become more severe than any preceding one.

After a number of interventions about the futile search for stability and the breach of the rule of law inherent in the proposals, I said,

I very much welcome the Bill, which I hope and believe will prove to be the zenith of contemporary thought on bank reform. With due deference to my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), I wish to talk about three potential elephants in the room. First, I wish to make some remarks about accounting, then I wish to discuss the conduct of individuals and liability, and finally I wish to talk about financial stability.

I know that the Minister has heard my views on the international financial reporting standard, but I draw his attention to a letter in yesterday’s Financial Times by Lord Lawson, under the headline “Forget Fred and focus on the real banking scandal”. He stated:

“The auditing of banks’ accounts, however, is fundamentally flawed in itself. The IFRS accounting system itself has proved to be damagingly pro-cyclical, and the ability to pay genuine (and genuinely large) bonuses out of purely paper profits, which are never subsequently realised, is at the heart of both the bonuses that cause such public and political outrage, and the reason why bank management consistently does so well when bank shareholders do so badly.”

Andy Haldane, the executive director for financial stability at the Bank of England, gave a speech in December. I shall not read out all the remarks that I meant to cover, but he concluded by saying that

“if we are to restore investor faith in banking sector balance sheets, nothing less than a radical rethink may be required.”

He was referring, entirely, to accounting standards. I therefore refer the Government to my private Member’s Bill introduced on 13 May 2011, which seeks to introduce parallel prudent accounting for banks. It is a couple of pages long and I hope that it can be added to this Bill.

I also refer the Government to “The Law of Opposites”, a paper produced by the Adam Smith Institute and written by my colleague Gordon Kerr, who has spent 25 years “gaming accounting rules”, as he would perhaps say, in order to make a profit. The banking system is in a far worse state than is generally believed. I do not see how either the Financial Policy Committee or the prudential regulation authority can operate without a true and fair view of the state of financial institutions, and I do not believe for a moment that the international financial reporting standards give that to us.

On the conduct of individuals, we fail too often to think about the pattern of regulation in which we have engaged. It seems that the first thing that legislation does is to damage the incentives and disciplines of the market. Having thereby created moral hazard, regulators come along to try to mitigate the consequences of that moral hazard. A banking licence today is a licence to lend money into existence, at interest, with the risk socialised. When we look at central banking, deposit insurance and limited liability, we find that moral hazard is absolutely rife in the banking industry, even before we consider investment banking. I suggest to the Government that it is time to increase the liability of banks’ directors. There should be strict liability for them, and bonuses should be held in a pool and treated as capital for at least five years. I will introduce a private Member’s Bill to that effect on 29 February.

We have talked about financial stability and the difficulty of defining it. There has been a sense that there is some kind of equilibrium economy—an evenly rotating one—in which there could be a sustainable and stable quantity of credit. Indeed, on pages 14 to 16 of the Joint Committee’s report there is an interesting discussion about the need to regulate credit.

To leave time for my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg), I will just say that if we were talking about any other commodity and were discussing adding to a failed regime of price control a regime of quantity control, we would certainly reject the idea out of hand. In Lord George’s testimony to the Treasury Committee before the crisis, he made it absolutely clear that the Bank of England had created a credit bubble to avoid falling into recession, yet we are going to give the Bank even more powers, more tools, [resulting in] more risk of ruin and more big-player effects and distortions of economic expectations.

I congratulate the Government on introducing the Bill, and I sincerely hope that it represents the absolute zenith of contemporary thinking on interventionist bank reform.

In the following video, my remarks begin at 21:31:

I should think society will learn, in the next few years, some important lessons about the use of arbitrary power by monetary and financial authorities. Hold tight.

This article was previously published at


ConservativeHome: It’s time for currency choice – and Douglas Carswell’s 10 minute rule Bill on currency reform

Over at ConservativeHome, I have promoted Douglas Carswell’s ten minute rule Bill on legal tender laws and currency choice:

People today have unprecedented choice.  They can shop around online.  They can tune into numerous television and radio channels.  They can even decide between different hospitals for medical treatment.

But why are people not allowed to decide for themselves in which currency to transact their business and store their own wealth?

Today, Douglas Carswell introduces a Bill designed to make a range of different currencies legal tender in the UK.  It would mean that, with the click of a mouse, people would be able to store wealth and pay taxes in a range of different currencies of their choice.

The BBC are covering it here. Read the full article.


A campaign for one day of peace

Steve Baker MP discussing Peace One Day with Jude Law

TCC Director Steve Baker with Peace One Day Ambassador Jude Law

The Cobden Centre exists to promote social progress through honest money, free trade and peace. As you can see from those links, we have touched on each issue from our founding but, events being what they are, we have concentrated on honest money over the last year.

Our CEO, Dr Tim Evans, intends to deliver a step change in our activities as we move through 2011. In addition to deepening our work on money and banking, we will also develop our work on free trade and peace, making appointments to our team of Senior Fellows and our Advisory Board.

In that context, I was delighted to attend an event this week in Parliament held by Peace One Day and hosted by my colleague Nadhim Zahawi MP.

As Member of Parliament for Wycombe, I am acutely aware of the widespread consequences of armed conflict on individuals across the world. For example, many of my constituents hail from Kashmir and Pakistan and their extended families and friends continue to be directly affected by the conflicts in the region and their fallout. Many are of Sri Lankan descent and have lived through conflict there, often having lost loved ones.

The tragedies of violence around the world come home to my constituents day after day. For anyone serious about promoting human flourishing, peace must be a prerequisite and the initiation of violence anathema.

It was an incredible privilege to meet Peace One Day founder and Chairman Jeremy Gilley, as well as their Ambassador, Jude Law. From their website:

In 1999, preoccupied with questions about the fundamental nature of humanity and the most pressing issues of our time, filmmaker Jeremy Gilley launched Peace One Day and set out to find a starting point for peace. He had a mission: to document his efforts to establish the first ever annual day of global ceasefire and non-violence with a fixed calendar date.

Remarkably, two years on, he achieved his primary objective when the 192 member states of the United Nations unanimously adopted 21 September as an annual day of global ceasefire and non-violence on the UN International Day of Peace. We call that day Peace Day.

Astonishingly, for three consecutive years, Peace Day has been observed in Afghanistan on a national scale.

To learn more, please watch Peace One Day’s introductory film:

I was humbled to learn of the achievements of Jeremy Gilley and Peace One Day. As The Cobden Centre sets out to grow in new ways, I hope we may deliver even a fraction of that contribution made by this inspiring man and organisation towards human flourishing.


Panel discussion held in Parliament on Britain’s Trillion Pound Horror Story

Over on my own website, I introduce the research showing the true scale of Britain’s liabilities and report:

As Chairman of the APPG on Economics, Money and Banking, I hosted a panel discussion on the documentary featuring film maker Martin Durkin, the Adam Smith Institute’s Dr Eamonn Butler, IEA Director General Mark Littlewood and CityAM’s Editor Allister Heath.

The discussion was dramatic:

  • Martin insisted only lower taxes would get us out of our present hole.
  • Allister described the growth of the state, the flaws in monetary policy and the regulator regime which caused the crisis, calling for lower public spending.
  • Mark said we should be “hysterical” and “apoplectic” about the state’s true liabilities before making some spectacular remarks about our democracy and the election (see from min 13 in the video below).
  • Eamonn felt things were even worse and was not sure our grandchildren would wish to pay the benefits we are awarding ourselves.

Here’s a video of the introductory remarks and the responses to the first question. Martin gets the last word on the likely public reaction to doing the right thing:

Panel discussion on Britain’s Trillion Pound Horror Story held in Parliament from Steve Baker on Vimeo.

This event was co-sponsored by the IEA, the Adam Smith Institute and The Cobden Centre.


Carswell and Baker on bank reform

Yesterday, Douglas Carswell and I spoke in the Chamber during the backbench banking debate.

From Douglas’ speech:

Banking is undoubtedly corporatist. To put it another way, if one were to read Ayn Rand’s “Atlas Shrugged” and to replace the words “railroad” and “rail company” with the words “credit” and “bank”, one would get a pretty good description of what has been going on in recent years. We have had a failure of the free market in the allocation of credit in this country. It is extraordinary that we compound that failure by talking ourselves into seriously suggesting that politicians and technocrats should ration credit. The absence of a pricing mechanism at the heart of the banking system is ultimately what caused the credit boom and the banking failure. In a normal market, when demand for a product increases, the price for that product goes up. That, in turn, stimulates supply.

In banking, unfortunately, things are a little different. When demand for credit increases, the price-the interest rate-is kept low or constant. Pricing does not therefore stimulate increased supply. On the contrary, a supply of additional credit is not met through higher savings. It is met by the creation of candyfloss credit-by banks being able to conjure up credit out of thin air. Banks do not meet the additional supply of credit by encouraging more people to save; on the contrary, they continue to lend IOUs on the basis of IOUs on the basis of IOUs. At the height of the credit crunch, for every pound deposited in a bank, IOUs had been written out some 44 times through the miracle of fractional reserve banking.

Banks have a legal privilege to conjure up credit out of nothing that ultimately stems from their ability-this is an extraordinary fact-to call a depositor’s deposit their own, to treat it legally as if it were their own, and to lend against it many times. It is that practice that has resulted in a credit pyramid and runaway credit booms, unrestrained by the pricing mechanism that would normally apply and would normally restrain demand and supply. The demand is unrestrained, the supply is unrestrained, and the price is low. The result is Ponzi credit bubbles. An incredibly distortive and disruptive effect is created every 20 or 30 years in supposedly free-market economies that have corporatist banking at their heart, and it leads to sugar-rush booms.

From my own:

To challenge the terrain of this debate, I should like to take the House back to a landmark in the development of British monetary and banking orthodoxy-the Bank Charter Act 1844, also known as Peel’s Act. It represented the victory of the currency school over the banking school. The former had realised that systemic crises and banking collapses were largely attributable to the excess creation of fiduciary media-that is, claims on money not backed by a fund of actual money. The Act, introduced by Peel, therefore eliminated the practice of banks issuing their own notes. Unfortunately, the currency school had not realised the economic equivalence of notes and demand deposits, so the Act left the banks virtually unmolested in their ability to issue fiduciary media.

My hon. Friend the Member for Bromsgrove (Sajid Javid) mentioned the wall of money that hit the markets, and we might reasonably ask where that wall of money came from. It has become common practice to say that interest rates were too low for so long, and therein lies the insight. When that happens, people are encouraged to borrow and the banks are encouraged to extend fiduciary media well in excess of real savings. Low interest rates ought to indicate prior production and real savings, but when central banks deliberately suppress interest rates and issuing banks pour fuel on the fire by issuing fiduciary media, what we find is that wall of money hitting the market. In our case, that money principally headed off into the housing market.

At the heart of our difficulties is the fact that there was an omission in the 1844 Act. The deposit-taking banking system is built upon that Act and a body of case law, which have left the banks with the legal privilege of treating demand deposits as their own property. That allows the system as a whole to create a wall of fiduciary media. That is the heart of our crisis, but it is not part of the mainstream contemporary debate, and I believe that it should be.

We both said much more: please follow the links above for the full text of our speeches.


The terrain of the banking debate today

Via Parliament’s Order of Business for Monday 29 November 2010, we see the terrain of the the banking debate today.

Michael Meacher’s motion comes first, followed by Government and Opposition amendments. No doubt we shall be whipped to vote through the motion as amended by the Government.

1 BACKBENCH BUSINESS (10th allotted day)                                                   [Until 10.00 pm]


Mr Michael Meacher

That this House, concerned that no action has so far been taken which would prevent a recurrence of the financial crash, calls upon the Government to establish a clearing house for approval of all financial derivatives and to set in place alternative mechanisms to remove the implicit taxpayer guarantee, other than to purely deposit-taking banks, in the event of any future banking collapse.

As Amendments to Mr Michael Meacher’s proposed Motion (Banking Reform):

Mr Chancellor of the Exchequer
Vince Cable
Danny Alexander
Mr Patrick McLoughlin
Mark Hoban
David Gauke

Justine Greening                            (b)

Line 1, leave out from ‘House’ to end and add ‘alarmed by the failure of the tripartite system during the financial crisis, welcomes the Government’s policy of reforming the regulatory architecture and applauds the swift action it has taken, alongside the Financial Services Authority and international partners, to strengthen both domestic and international prudential regulation.’.

Alan Johnson
Chris Leslie
Mr David Hanson
Kerry McCarthy


Line 2, leave out from ‘to’ to ‘and’ in line 3 and insert ‘show stronger leadership in efforts to reform the supervision of derivatives in order to deliver improved transparency and risk disclosure’.

I shall try to speak, but since a debate of no more than three hours has been recommended by the Backbench Business Committee and since both Government and Opposition are all over it, who knows whether I shall get in?

In the meantime, I have prepared some remarks which are thoroughly Cobdenite.


CentreRight: Douglas Carswell leads the way on bank reform

On CentreRight, I explain that Douglas Carswell leads the way on bank reform:

There is a doctrine which creates wealth and spreads it around. It is just and moral. It works. It is called capitalism and, today, in practice, there is very obviously something wrong with it.

If one were to summarise the doctrine of capitalism in one word, it would be “property”. It is property which enables human social cooperation through production, exchange and consumption. The voluntary exchange of property has rules and these are known as contract.

These two concepts, property and contract, are fundamental to capitalism and yet, in relation to money held on demand in bank accounts, they are applied at best inadequately.

On Wednesday, immediately after Prime Minister’s Questions, Douglas Carswell MP will be introducing a moderate and conservative ten-minute rule bill which would introduce sound property rights and contract to monetary deposits. It is potentially of profound importance and I am delighted to support him.

Read the rest of the article, including a range of relevant links, here.


Kevin Dowd blogs Steve’s speech in the budget debate

Professor Kevin Dowd blogs my speech in the budget debate for the IEA:

By far the best contribution to the parliamentary debate on the Emergency Budget was by the MP for Wycombe, Steve Baker. Using impeccable analysis and respected (ONS and Bank for International Settlements) data sources, Mr. Baker painted a frightening scenario in which the fiscal policies of western governments are unsustainable, and were even before the recent crisis erupted.

It’s even worse than I thought. If you dare, read more here.


An honest money maiden speech

Advisory Board Member Steve Baker, MP for Wycombe, yesterday made his maiden speech in the House of Commons. The full text may be found here. The articles which most closely inspired the speech are here and here.

The following section of the speech — which we have annotated with links to relevant articles — made some key points about honest money:

As a trustee of a charity for economic education, I would like to give what is perhaps an alternative perspective on the cause of the banking crisis; I hope that Members will indulge me. I should like to put to them a proposition that is uncontroversial: around the world, the system of money is a product of the state. Our monetary system is characterised by private banking, with a fractional reserve controlled by a central bank, which determines monetary policy and has a monopoly on the issue of legal tender. A Monetary Policy Committee sets interest rates.

The banks have the legal privilege of treating depositors’ money as their own. In the words of Irving Fisher,

“our national circulating medium is now at the mercy of loan transactions of banks”.

In the other place, in the Banking Bill debate of 5 February 2009, the Earl of Caithness explained eloquently the base of 19th-century judicial decisions-and yes, our system of money has evolved since then-that enabled that situation to take place. He called it

“the fault which has led to every major banking and currency crisis during the past 200 years, including this one.”-[ Official Report, House of Lords, 5 February 2009; Vol. 707, c. 774.]

The Bank Charter Act 1844 ended the practice of banks over-issuing notes, but it left them virtually unmolested in their ability to issue deposit currency to be drawn by cheque. That loophole haunts us today. Unlike the situation in respect of any other commodity, in the case of money, price controls do not drive the product off the market. Artificially lowered interest rates increase the demand for credit, and decrease the supply of savings, but the legal privilege granted to banks means that they can meet demand by extending credit that is unbacked by real savings. There is a good argument to say that that causes the boom-and-bust cycle, the misdirection of resources in the capital structure of production, and over-consumption by consumers. That is the biggest problem that we face today.

We could talk about the moral hazard of having a state-backed lender of last resort and state deposit guarantees, and of the socialisation of the cost of failure; I only wish that I had time to touch on the accounting rules on derivatives. Perhaps that is for another day. My political hero, Richard Cobden, spoke on the subject. He held

“all idea of regulating the currency to be an absurdity”,

but I see that time is short; I shall have to save the rest of the quote for another day.

Today, money is a product of the state. The Bank of England controls the price, quantity and quality of money. Perhaps if we were talking about any other commodity, there would be far less confusion over and questioning of the cause of the crisis. If money is a product of the state, we should ask ourselves, “Is this a good idea?”

In the coalition, we have a Government ideally suited to be conservative to preserve what is good, but radical to change all that is bad. If we are to have a once-in-a-generation, fundamental review of the role of government, let us also examine government’s role in the system of money and bank credit.