I have always considered the form of monetary control suggested by Positive Money – currently a sort of beefed up Monetary Policy Committee which would decide how much money the whole economy needed per year – is both undemocratic and places, in effect even more power with bankers. If the government wanted to spend more money than the Bank of England deigned to create, then it would have either to tax or borrow and thus lose its original power to create money. Yet it also seems to me that just as most governments have bicameral systems, so an element of similar dual control gives some stabilising influence for the government of the day. It should help improve confidence and thus economic stability. (Though I have to say I do wonder, when looking at our current government pursuing a blind Brexit, how much improving confidence actually matters.)
I realise that this is a difficult area, having recently encountered a Bank of England (BoE) representative for the South West who was adamant that the BoE can do nothing outside its remit – which rather gives the lie to the ‘independence’ of the BoE! But as control of a sovereign currency is an essential for any government then how you do that control is important.
I was encouraged to explore possibilities after reading a Simon Wren Lewis article from February, where he says:
To maximise the pressure on fiscal policy makers to stimulate the economy when rates are at their lower bound, I would take up the suggestion from Ed Balls and colleagues and require the Bank to send quarterly letters to the Chancellor indicating the stimulus they think is needed when rates are at their lower bound.
I’d put it in rather more mundane terms and also insist that the letter was made public. I wouldn’t worry about rates being ‘at their lower bound’. I think they should write their letter each and every quarter and in the same document they should also suggest if they considered more taxes should be levied or more or less saving be encouraged. This would have a side effect of ensuring a public conversation on the economy by the people tasked with controlling it. And it would make more difficult an austerity agenda based on deceit such as is currently promoted. For more reasonable left leaning Chancellors they are likely to have to justify their spending but I don’t think this is any great handicap.
So that’s my first BoE target.
Second: All sterling loan contracts to be legally unenforceable unless insured by the Bank of England. This would make shadow banking very much more difficult or/and expensive and lending for financial speculation, unless the BoE ever managed to consider it unrisky, much more expensive. Both would be likely eventually to disappear.
Third: Loans to be ‘directed’ by the BoE so as to target investment in the productive economy and also to maximise employment at a living wage or greater.
Fourth: Differential interest rates to be charged by commercial banks for different purposes (reflecting both the ‘direction’ of the Bank of England and probably the insurance premium for the type of loan involved).
Fifth: Target Median incomes to keep pace with current inflation figures.
Sixth: Inflation target to be, say, 2% over a five year period so as to require less short-termism and much more flexibility. It is more important for wages to keep up with inflation than the actual inflation target itself.
In conclusion we all know that the Bank of England doesn’t actually have the tools to do all this!
Indeed its current interest rate tool, which is the only one it possesses, doesn’t work.
But I’d suggest a very important part of these targets is in fact to encourage co-operation and discussion with the Treasury. And that means it is of less importance if there are other targets I haven’t thought of!
And as the BoE seems unsurprisingly, to have the resources to employ lots of hot shot economists and staff in general I think that knowing that their conversations would be in public every quarter could encourage a little more public engagement by the Treasury, as it is currently only the BoE, which is easily the most radical of the two, has even thought about this.