When Doves Fly – lunch with David ‘Danny’ Blanchflower

Yesterday the MPC meeting was a non-event since there wasn’t a change in anything.  However a few of us on the team had a bit of a ‘coo’ after we had a much more interesting meeting with David ‘Danny’ Blanchflower, who left the MPC in May of this year with his credibility sufficiently enhanced as one of the very few people who saw chunks of the financial crisis coming.  Having served his three months of silence on Bank of England and MPC matters, he is now very busy revealing all.  Some of the topics discussed appeared in his sensational article in the New Statesman, which is well worth a read. On top of this we got the following impressions from our alternative monetary policy meeting.

The economic recovery will be anaemic, and a big reason why is that the MPC is struggling to create demand for credit in the economy.  Quantitative Easing should (in his view) be increased since the monetary policy mechanism is broken. The man who got it right over the last few years is still very dovish, and if he was still on the MPC, he’d clearly be pushing for an extension of QE.  From what he was saying, interest rates could remain low for ages.

An under-appreciated reason why we’re in for a period of sustained weak growth is that unemployment is spiking, particularly among the highest propensity to consume sector, the young, just as a demographic time bomb is going off (I talked a bit about this on our blog in June here).  It’s today’s jobless youth who are going to have to pay for us when we eventually retire, and we need to address this issue or we could expect significant social unrest. We need to err on the dovish side for the good of society, and governments may need to err on the dovish side for the good of popularity.

It was very interesting discussing the workings and influencing of a committee-based process. The New Statesman article linked above got a lot of press coverage, and the main sensationalist focus was on what appeared to focus on the workings of the committee, and the rift between Danny and Mervyn King.  Yes, the article is scathing in places, but the coverage seems to have missed the point – Danny clearly has a lot of respect for Mervyn, and having been a hawk, Mervyn is in fact now dovish like Danny.   Mervyn seems to take a very pragmatic approach to understanding economic signals, and is prepared to be sceptical of the Bank of England’s economic models (which is similar to Danny, who calls himself an empiricist and firmly believes in the economics of walking about).  This is quite different to some other members of the MPC – the ‘plodders’ – who seem to focus more significantly on the models.  And that’s a very big problem right now – the Bank of England’s models could not have been perfectly programmed for the seismic shock we have had to the financial system, and have been primarily tailored to work via examining changes in the price of money (bank rate) rather than the quantity of money. Yet monetary policy is currently been conducted in the realm of quantity, not price, via quantitative easing. The outcome from this quantitative easing is a big unknown for everyone, which is something that we have referred to in a previous blog here.

Not only is it difficult to reach a consensual view on policy in a committee, it is also hard to put the message across, so in the recent press conference following the release of the inflation report, Danny believed Mervyn was  deeply uncomfortable since he was representing the MPC’s consensual view not his own. When interpreting the messages coming out of the Bank of England, it’s very important to realise that sometimes even when Mervyn King speaks it’s sometimes Mervyn’s own view, and other times he’s representing the MPC’s view (I commented on some of the recent confusing messages here).

Our lunchtime meeting with the man who got it right on the committee was very interesting, intellectual, and challenging.  Let us hope the spirit of that is not lost now he has left the committee.  Thank you to John Wraith and the guys at RBC for organising and hosting the meeting.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Mike Riddell

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