Wednesday, December 02, 2009
Two Bank speeches and a new job
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

Two interesting speeches from MPC members. Spencer Dale, its chief economist, voted against the extension of quantitative easing last month. He thinks the economy has turned the corner into growth and acknowledges the possibility that Mervyn King might have to write a letter explaining why inflation has risen abover 3% in January.

In the speech, he explains why he did not vote for a QE extension: "My main concern reflected the considerable uncertainty about the degree of spare capacity in the economy and the behaviour of inflation when output is growing at above trend rates. These uncertainties are always present, but come to the fore in situations like the current environment in which there is a very substantial degree of economic slack. In order to keep inflation on track to hit the inflation target this slack needs to be eliminated. However, given the uncertainties about the precise margin of spare capacity and the behaviour of inflation as this spare capacity is being closed, my preference was to aim to grow the economy a little less rapidly.

"I was also concerned that further substantial injections of liquidity might result in unwarranted increases in some asset prices. I should stress that I do not think there is any strong evidence to suggest that any of the increases in asset prices seen to date are out of line with the improving economic outlook and the desired impact of our asset purchase programme. Rather, I was conscious that the current stance of monetary policy – in which Bank Rate is very low and substantial amounts of liquidity are being injected into the economy – increases the likelihood that asset prices may move out of line with their fundamental values and that this could be costly to rectify were it to occur. It is a risk that we need to be alert to." His speech is here.

Adam Posen, another MPC member, set out some ideas about controlling bubbles other than through monetary policy, which he said would always be problematical. One way might be to vary housing taxes over the cycle to control booms "It would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly," he suggested. An interesting approach. The speech is here.

Also of interest this week was that Willem Buiter, an ex member of the MPC, has been appointed chief economist of Citi. Sadly it means that Buiter, for whom the word maverick could have been invented, will have to be a little constrained. As he writes on his soon-to-be-closed Maverecon blog:

"When I served on the Monetary Policy Committee of the Bank of England (between 1997 and 2000) and during my years as Chief Economist and Special Counsellor to the President of the European Bank for Reconstruction and Development (2000 till 2005), I was constrained in what I could say and write in public by institutional loyalty and the moral and professional obligation not to damage the organisation I served. Unlike my Maverecon blog, my writings and public statements of those years therefore don’t contain words like ‘complete bollocks’.

"The joys of academic freedom and irresponsibility include the ability to participate in public debate using expressive, forceful language, strong metaphors, analogues and similes, to go over the top from time to time, to overstate the case and over-egg the pudding and not to worry about giving offense to the high and mighty. Because of their sheltered existence, academics can be reckless with impunity in their excursions into the forum of public opinion.

"Inevitably, during my years with the MPC and the EBRD, both the form and substance of my public statements were more constrained than during my academic episodes before and after. The same will be true during the years to come with Citi."