Should the Bank of England be abolished?

[bascule]

I asked this question in another, rather US-centric thread, and it didn't receive any responses, so I figured I'd give the question its own thread to see what the responses are.

 

There's a school of thought in America which suggests "every economic downturn suffered by this country over the past century" can be traced to our central banking system, and furthermore that America's central banking system has lead us to be "victimized by a boom-and-bust monetary policy".

 

Is there similar sentiment about the Bank of England? What is the general opinion on it? A good thing? A bad thing? An unnecessary thing?

[iNow]

I don't know enough about the BoE to comment, and hope that some of our friends in the community here who DO know more about it will offer their perspective before I vote.

 

Also... Maybe whichever staff member who added YT as the last option in the poll would be willing to remove that... Basically, I'd be curious to see how the poll turns out, and right now it's doomed to be completely and absolutely irrelevant from the start with such an option present. Thanks.

[Phi for All]

Also... Maybe whichever staff member who added YT as the last option in the poll would be willing to remove that...

I'm not showing any Staff edits at all in this thread. Bascule must have put him in to begin with.

[iNow]

Okay. Thanks. I just don't remember that being there when the thread was first posted last night, yet it's there this morning. Maybe I was tired, or something.

[blike]

Unfortunately I don't know enough about the matter to have an opinion.

[ParanoiA]

There's a school of thought in America which suggests "every economic downturn suffered by this country over the past century" can be traced to our central banking system, and furthermore that America's central banking system has lead us to be "victimized by a boom-and-bust monetary policy".

 

Well, it's not the same though since the BoE exists in a socialist economy and culture. Central management almost goes without saying. I don't imagine much affinity for market forces by socialists since it's arguably an inherent conflict of ends. Socialism seeks to equalize by applying some subjective method of "fairness". Capitalism removes the subjectivity and allows the objective nature of the system to determine who gets what.

 

If the US were to move toward some new definition of "fairness" that relies on humans to judge each other to allocate who gets what, then the federal reserve is a more natural fit. Central management over other heavily managed subsets - since that's the result of restricting market forces (which is necessary if you're going to redistribute wealth).

 

Part of the problem with the federal reserve is central management over an otherwise essentially self regulated systematic design. That's why it's prone to error to manage a system you can't entirely control or predict, particularly when it's largely unnecessary to do so to begin with.

[Royston]

I live in the UK, but I really don't know enough about economics to know whether it would be a good idea or not. One proposal that Gordon Brown is under pressure to make, is for the Bank of England to print more money, to get us out of this lull (that may have changed, I'm not sure). Now, correct me if I'm wrong...isn't that incredibly stupid, what am I missing here ?

 

EDIT: ok, right, apparently it's to give banks more money, so they can lend more, to increase public spending. Really should of looked this up before giving an opinion. However, that still sounds a bit daft...the value of the pound will fall, and we get into even more debt...am I still missing something ?

 

However, I'm going to say abolish it, based on the Dr Pepper philosophy.

Edited March 6, 2009 by Snail

[YT2095]

the OP must have put it there, but anyone that does vote there must be an idiot since I`m not a Bank, despite what my Wife would have you believe!

[ecoli]

I live in the UK, but I really don't know enough about economics to know whether it would be a good idea or not. One proposal that Gordon Brown is under pressure to make, is for the Bank of England to print more money, to get us out of this lull (that may have changed, I'm not sure). Now, correct me if I'm wrong...isn't that incredibly stupid, what am I missing here ?

 

You're missing the Keynesian theory that printing money provides liquidity to credit markets to boost aggregate demand. Its a balancing act between printing money, but not to create hyperinflation. Printing money has the added bonus of dealing with 'paradox of thrift' because inflation discourages savings. If the rate of inflation is, say 10%, would you keep your money in the bank to collect 1% interest? Of course not. Because as adding money to circulation pushes up prices, life becomes more unaffordable (especially if you don't have an adjustable salary and are living on savings).

 

That's how aggregate consumption/demand is lifted, which helped keep labor markets operating to maximum capacity.

 

 

*disclaimer* the above theory ignores the importance of the time-capital structure of production. That not all stages of production are created equally. Consumption does indeed supply capital to businesses, but this has the effect of sustaining late term consumption practices, while savings (which provides capital for investments by lowering interest rates) supplies capital for loans, which are used for early stage capital investments.

 

resolving the paradox of thrift during a recession has the unfortunate consequence of sustaining sectors which have failed in the first place and which there is little demand for.

 

Obviously consumers cannot sustain the market for subprime loans (its all based on debt that's impossible to realize) but the only way to stabilize a financial sector based around mortgage-backed derivatives is to stabilize home prices and add more consumers. How do you do this when consumers don't have any more?

 

You can use fiscal stimulus and loose monetary policy to consumers and businesses, but ultimately, homeowners (who still can't afford to pay) will foreclose. Also, it is possible to inflate new bubbles as investors (with a renewed faith in the government to take care of risk) to made more dangerous investments, which has payoffs due purely to speculation (and not longterm consumer demand)

[iNow]

I live in the UK, but I really don't know enough about economics to know whether it would be a good idea or not. One proposal that Gordon Brown is under pressure to make, is for the Bank of England to print more money, to get us out of this lull (that may have changed, I'm not sure). Now, correct me if I'm wrong...isn't that incredibly stupid, what am I missing here ?

 

EDIT: ok, right, apparently it's to give banks more money, so they can lend more, to increase public spending. Really should of looked this up before giving an opinion. However, that still sounds a bit daft...the value of the pound will fall, and we get into even more debt...am I still missing something ?

When taken in context, however, inflation is less of an issue since (right now) we are experiences such tremendous deflation. Obviously, as a general rule, inflation is to be avoided. However, since our currency is presently so under valued, the risk is less significant.

 

I didn't necessarily address your key questions, but hopefully I gave a bit of context. I think Bascule has managed to ask a really insightful question with this, as it manages to touch on the ideological battles occuring in the US right now, without the entrenched local positions factoring in. We can discuss the ideology on the merits since the Bank of England is relatively displaced from the US activities permeating the news right now.

 

 

 

 

the OP must have put it there, but anyone that does vote there must be an idiot since I`m not a Bank, despite what my Wife would have you believe!

And you, sir, are one funny bastard. If nothing else, it will be easier to decline her requests in this environment. "Oh, I'm sorry, dear. I'd LOVE to buy you that cog, but what, with the economy, and all... well, you know."

 

 

 

Btw - Ecoli, nice post there, above. I don't have any specific comments or issues, just wanted to mention that this was one of your better articulated positions on the subject, and I appreciate the time you took with it. Cheers, mate.

[bascule]

Also... Maybe whichever staff member who added YT as the last option in the poll would be willing to remove that... Basically, I'd be curious to see how the poll turns out, and right now it's doomed to be completely and absolutely irrelevant from the start with such an option present. Thanks.

 

That'd be my bad.

[iNow]

Wow... I guess I was A LOT more tired last night than I realized. Sorry for the confusion, all. Mea culpa.

 

I'd still be curious to hear some insights from our British friends on the board, but it would seem they don't get "roped in" to all of politics like we in the States.

[DrDNA]

Fantastic.

Absolutely.

Good idea.

I'm all for it.

YT2095 all the way.

[Klaynos]

The BoE is a good thing, in general, although it has been changed significantly in the last 10 or so years.

 

It used to be a more regulatory body, but this has been completely removed and given to the FSA, a new body that was set-up and has had issues which are now being shown... The BoE also now sets the interest rate, this is another change. It is restricted in the things the commetti which decides the changes are allowed to consider, this restricts them considerably in the actions that they can justifiably take (and they do have to justify themselves to the government in letters if certain criteria are not met, such as inflation targets). It seems to me as if the changes made to the BoE have given them apparently more responsibility but restricting the actions they can actually take, allowing the government to attempt to use them as a scape goat. Which frankly isn't working.

 

On whether it should be abolished that would be rather difficult as they do things like issue currency and hold the British gold reserve, etc...

[ecoli]

When taken in context, however, inflation is less of an issue since (right now) we are experiences such tremendous deflation. Obviously, as a general rule, inflation is to be avoided. However, since our currency is presently so under valued, the risk is less significant.

I would tend to disagree with this statement and here's why:

 

edit - i just remembered that this is a british thread, but the principles are the same and will certainly affect the whole wooorld.

 

The definition of deflation you're using is probably based on the CPI, which is not completely accurate. The real definition of inflation/deflation is how large the money supply is. CPI changes based on the money supply.

 

One of the reasons for deflating prices is, right now, is that oil speculation was driving up prices (which have since come down) and retail sectors are trimming the fat to chase after (thinning pool) of consumer dollars.

 

Meanwhile, bankholdings have skyrocketed due mostly to Fed money (although I believe deposits are up as well).

 

Assuming the banks start lending again (which they will - I believe bank reserves currently exceed liquid deposits (the M0>M1)) inflation is going to kick in hardcore... Just look how much printed money is currently waiting the system - how could it not?

 

Btw - Ecoli, nice post there, above. I don't have any specific comments or issues, just wanted to mention that this was one of your better articulated positions on the subject, and I appreciate the time you took with it. Cheers, mate.

Thanks bud! I'm taking the time to study different types of economic theories - so everyone be careful before calling me a free market whore!

Edited March 8, 2009 by ecoli

[bascule]

Obviously consumers cannot sustain the market for subprime loans (its all based on debt that's impossible to realize) but the only way to stabilize a financial sector based around mortgage-backed derivatives is to stabilize home prices and add more consumers.

 

I disagree. I think the simplest way to stabilize the sector is to prevent foreclosures. This will not stabilize prices (mortgagors will be left with loans in excess of their home's valuation) nor will it attract new customers, however it will sustain the value of mortgage backed bonds which will remain a source of revenue, as opposed to the liability a foreclosed home represents.

[ecoli]

I disagree. I think the simplest way to stabilize the sector is to prevent foreclosures. This will not stabilize prices (mortgagors will be left with loans in excess of their home's valuation) nor will it attract new customers, however it will sustain the value of mortgage backed bonds which will remain a source of revenue, as opposed to the liability a foreclosed home represents.

 

I don't disagree with you, but remember, you're going to be trying to stabilize a bloated sector. You can stop home foreclosures, but you can't wave a magic wand and make personal debt disappear. Especially since assuming private debt isn't going to get people to change their lifestyles.

 

The housing bubble formed from creating lots of debt. You can't pay that back now unless you create real wealth. That can't be done with central planning (the coordination problem leads to unsustainable bubbles)

[bascule]

That can't be done with central planning (the coordination problem leads to unsustainable bubbles)

 

So your contention is if we got rid of central planning, the bubbles would magically go away? Or would we just see different unsustainable bubbles in different markets?

 

You don't think "irrational exuberance" in a free market can lead to bubbles? How did central planning cause the tech bubble? You don't think that people can become unduly excited about the business potential of a new market even though the reality is the proposed business models are untenable?

[ecoli]

So your contention is if we got rid of central planning, the bubbles would magically go away? Or would we just see different unsustainable bubbles in different markets?

 

You don't think "irrational exuberance" in a free market can lead to bubbles?

 

Nice strawman, Bascule. I've never actually said that. In fact, I've explicitly stated the opposite several times.

 

 

How did central planning cause the tech bubble?

Here's one theory: http://www.springerlink.com/index/A27QW7JAA3UYF064.pdf

 

You don't think that people can become unduly excited about the business potential of a new market even though the reality is the proposed business models are untenable?

once again, I've never said that you're putting words in my mouth.

 

What I have said, is that government intervention affects how people accept risk (to become more accepting of risk they would otherwise avoid).

[bascule]

Nice strawman, Bascule. I've never actually said that. In fact, I've explicitly stated the opposite several times.

 

Well, I'm having a lot of trouble understanding exactly what it is you're trying to argue... going back to your original statement:

 

The housing bubble formed from creating lots of debt. You can't pay that back now unless you create real wealth. That can't be done with central planning (the coordination problem leads to unsustainable bubbles)

 

I can't help but read that as "real wealth creation is impossible with central planning" because "the coordination problem leads to unsustainable bubbles"

 

How else am I supposed to interpret that besides if we get rid of central planning the bubbles go away?

 

What I have said, is that government intervention affects how people accept risk (to become more accepting of risk they would otherwise avoid).

 

...but at the same time doesn't it also prevent certain classes of risks?

[ecoli]

I can't help but read that as "real wealth creation is impossible with central planning" because "the coordination problem leads to unsustainable bubbles"

 

I don't claim that its impossible, just unlikely, due to how hard it is to predict markets (or even things like people's ability to pay their debts).

 

 

How else am I supposed to interpret that besides if we get rid of central planning the bubbles go away?

I'm not trying to make that claim either, although it IS what Austrian economics predicts.

 

I'm more inclined to believe that bubbles would increase in frequency but, in general, would be less virulent. this is just a hunch, however, that I can't prove just yet.

 

...but at the same time doesn't it also prevent certain classes of risks?

could you expand on this point?

[bascule]

I'm more inclined to believe that bubbles would increase in frequency but, in general, would be less virulent. this is just a hunch, however, that I can't prove just yet.

 

What is your basis for that, a model in your head?

 

Isn't the entire basis of your economic philosophy that it's impossible to model economies?

 

could you expand on this point?

 

In the case of the Fed, if nothing else they can seek to prevent bank runs by acting as a lender of the last resort.

[The Bear's Key]

.....if we get rid of central planning the bubbles go away?

 

 

 

...but at the same time doesn't it also prevent certain classes of risks?

I understand where you're going.

 

Like ecoli mentioned, central planning is fairly limited when it comes to predicting generally unpredictable market forces/tendencies/corrections.

 

However, looking at the overall framework, I'd wager central planning is better suited (than markets) to repair deep/escalating injuries within -- or to apply preventatives. Business can be great in finding the most successful way to operate profitably, but it generally sucks at teamwork with other businesses in developing the infrastructure and optimal variables necessary for the entire market to benefit/flourish.

 

Why? Their mission is to profit, gain advantage over their competitors. You will seldom find a business laboring to ensure that others are given a fair competitive opportunity. If laws weren't in place, the main tendency would be to establish a monopoly.

 

That is the self-destructive nature of a free market which seeks to establish a free-for-all grab bag of incompatibility for its players.