Credit Crunch Analysis

by Don Clark - Popular Alliance - 10:57 on 10 November 2008

This week we have seen a huge interest rate cut, the biggest for 27 years. This is a combination of the Monetary Policy Committee and the Bank of England putting up their hands and saying: “OK, we’ve made a terrible hash of things and reacted too slowly in the last year, let’s cut  rates as fast as we can in a desperate attempt to stave off the worst effects of recession.”

What a humiliation.  

It also means that one of the last remaining pillars of Gordon Brown’s rickety temple is collapsing. We have applauded for a decade the independence of the Bank of England as on balance, it is obviously better to keep rate decisions away from politicians who can use them to manipulate the economy ahead of an election.

But that’s the problem; the independence of the Bank has long been overblown by Brown. It is unthinkable that a member of the Monetary Policy Committee could survive if he or she was seriously at odds with the Brown analysis. Now the Bank exists in a kind of limbo, independent in name, its MPC appointed by the Chancellor, not very transparent and not much respected by anyone involved.

So, are we to believe that no-one in the government has leaned on the MPC this week ? British policy is a sham and the oft-hailed 1997 Brown reforms right at its centre, implemented with no consultation and drawn up on the back of Charlie Whelan’s fag packet in Geoffrey Robinson’s apartment, have collapsed. They are a smoking ruin.

Consider three aspects of this chaos:

1) The tripartite regulatory structure for banks failed its first test last year with Northern Rock and has proved inadequate in the subsequent stages of the crisis. Removing the Bank of Englands’ oversight broke the bonds of the relationship between it and the City which had been built up over generations. This arrangement needed careful evolutionary reform in the light of technological change which had made financial markets truly global. Instead, Brown wanted to smash the “old boy network”.

He replaced it with an inefficient monster regulator, the FSA, which takes a box-ticking approach and misses the big picture. Bankers just fill out their forms and treat the visits of regulators like you would a man coming to read the gas meter. But, this is Gordon Brown we’re talking about: he’ll always go for the giant piece of bureaucracy which doesn’t work. And this one really didn’t work.

2) Brown’s fiscal rules are bust. Built to apply for all time in every circumstance to ensure stability they were broken the very first time we started to enter recession.

3) Independence for the Bank of England is a hollow boast, virtually a fraud, and the Brown idea that his committee of experts would bring a higher standard of judgment to bear has not worked out. Since Northern Rock they have been out to lunch, fighting inflation fears when it was obvious that looming recession was the real issue. That suited the Brown idea of early 2007 that everything would be just about ok, and the economy would turn up at the end of this year. 

 Popular Alliance Comment

Whilst we applaud and welcome the huge cut in interest rates we are deeply sceptical as to how independent this decision has been. If we were to replay half of Gordon Brown's budget speeches over the years we would remind ourselves of how good he thought he was as Chancellor and how robust he believed all his policies were.

However at the first time of asking his policies have failed.  He still buries his head in the sand and now wants to spend his way out of the problems by borrowing more. Unfortunately by the time this policy will have been proved a complete and utter failure another government will have to pick up the pieces.

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