Comments on: Alistair Darling backs away from legislative reform to save banks http://www.johnredwoodsdiary.com/2007/09/22/alastair-darling-backs-away-from-legislative-reform-to-save-banks/ Conservative Party Member of Parliament for Wokingham Sat, 05 Jul 2008 19:27:49 +0000 http://wordpress.org/?v=2.5.1 By: Jonathan http://www.johnredwoodsdiary.com/2007/09/22/alastair-darling-backs-away-from-legislative-reform-to-save-banks/#comment-6462 Jonathan Sat, 22 Sep 2007 14:25:45 +0000 http://www.johnredwoodsdiary.com/2007/09/22/alastair-darling-backs-away-from-legislative-reform-to-save-banks/#comment-6462 I agree the BoE kept rates too low for too long, leading to excessive inflation, but the answer is greater independence or a different mandate, such as a price level target or constant money growth rule. Having the Chancellor intervene would only make matters worse, resulting in longer periods in which monetary policy was too lax (the government being unwilling to risk the unpopularity which results from higher interest rates, thus continually rationalizing low rates, by saying inflation was due to excessive wage demands, the price of oil, etc.) followed by even more excessive tightening as the public gets fed up with the inflation and demands a tougher policy, which in turn will be harder to achieve (i.e., will require higher interest rates) the less credibility (i.e., the less independence) the policy maker has. There is a danger that monetary policy currently is too tight, but there is also a danger of resurgent inflation central banks overreact to the current credit crunch http://www.aei.org/publications/filter.all,pubID.26811/pub_detail.asp To balance these risks you need a great central banker like Alan Greenspan, not a mediocre politician like Alistair Darling. Reply: I agree - my policy recommendations are for a truly independent monetary policy committee. It's just that at this moment when Darling has effectively taken over and shows no signs of wanting to set up an independent Bank, I am urging him to do something useful! I agree the BoE kept rates too low for too long, leading to excessive inflation, but the answer is greater independence or a different mandate, such as a price level target or constant money growth rule.

Having the Chancellor intervene would only make matters worse, resulting in longer periods in which monetary policy was too lax (the government being unwilling to risk the unpopularity which results from higher interest rates, thus continually rationalizing low rates, by saying inflation was due to excessive wage demands, the price of oil, etc.) followed by even more excessive tightening as the public gets fed up with the inflation and demands a tougher policy, which in turn will be harder to achieve (i.e., will require higher interest rates) the less credibility (i.e., the less independence) the policy maker has.

There is a danger that monetary policy currently is too tight, but there is also a danger of resurgent inflation central banks overreact to the current credit crunch http://www.aei.org/publications/filter.all,pubID.26811/pub_detail.asp

To balance these risks you need a great central banker like Alan Greenspan, not a mediocre politician like Alistair Darling.

Reply: I agree - my policy recommendations are for a truly independent monetary policy committee. It’s just that at this moment when Darling has effectively taken over and shows no signs of wanting to set up an independent Bank, I am urging him to do something useful!

]]> By: Jonathan http://www.johnredwoodsdiary.com/2007/09/22/alastair-darling-backs-away-from-legislative-reform-to-save-banks/#comment-6456 Jonathan Sat, 22 Sep 2007 10:42:18 +0000 http://www.johnredwoodsdiary.com/2007/09/22/alastair-darling-backs-away-from-legislative-reform-to-save-banks/#comment-6456 <i>He should look at how the actions of the Fed have started to ease the problems in the USA, because the Fed has supplied more funds to a market starved of cash, and has started cutting interest rates.</i> I can't agree with that. You rightly criticize Darling for undermining the BoE's independence, and then suggest he go further in this direction by overruling the Bank's authority to set interest rates. The government should not intervene in monetary policy, but should give the BoE more freedom to act as it sees fit--by removing the M.A.D., for example. Time will tell whether the BoE has been too cautious in cutting interest rates, but I trust their judgement much more than the Chancellor's (or even a Tory Chancellor's). It's well established that the greater the degree of central bank independence, the lower the rate of inflation. Politicians always have the incentive to relax monetary policy come election time, leading to greater instability and higher average inflation. Reply: The so called independent Bank kept interest rates too low for too long. Now there is the danger they are doing the opposite to over correct. He should look at how the actions of the Fed have started to ease the problems in the USA, because the Fed has supplied more funds to a market starved of cash, and has started cutting interest rates.
I can’t agree with that. You rightly criticize Darling for undermining the BoE’s independence, and then suggest he go further in this direction by overruling the Bank’s authority to set interest rates.

The government should not intervene in monetary policy, but should give the BoE more freedom to act as it sees fit–by removing the M.A.D., for example.

Time will tell whether the BoE has been too cautious in cutting interest rates, but I trust their judgement much more than the Chancellor’s (or even a Tory Chancellor’s). It’s well established that the greater the degree of central bank independence, the lower the rate of inflation. Politicians always have the incentive to relax monetary policy come election time, leading to greater instability and higher average inflation.

Reply: The so called independent Bank kept interest rates too low for too long. Now there is the danger they are doing the opposite to over correct.

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