As of the 1st June, the Bank of England has a new statutory obligation to “contribute to protecting and enhancing the stability of the financial systems of the UK.”
What’s odd about this, from my point of view, is that financial systems and markets can never be stabilised. They are inheriently chaotic. We swing wildly from growth to recession and back again.
True stability would be 0% growth, forever. Everyone keeps making exactly what they’re making, everyone consumes exactly what they’re consuming. Except even that wouldn’t be stable, because we live on a whole planet of different economies, all interacting with ours. Get them to buy and sell the same stuff to us that they’re buying and selling now? It’s never going to happen.
If the Bank of England were to interpret this instruction literally, one would expect them to use any means necessary to keep growth at 0%. Keep the economy under control. Keep it predictable. This is impossible.
Of course they’d never interpret it literally, but this does prompt the question: What is Brown really asking the Bank of England to do? Stability is, and always has been, a Brownian buzz word. A reassuring, friendly catch-all for ‘do good things to the economy’ without actually meaning anything at all.
I want growth not stability. When did growth become a dirty word? When did growth need regulating against?
John said...
23 May 09 at 10:49 am
When growth meant in the long term `no growth`.
Wayne Lawrence said...
23 May 09 at 1:54 pm
“Stability” is an impossibility. Cycles of Boom and bust are the natural state, though there are theoretical means of minimizing the peaks and troughs (eg proper Keynesiansm, not the abomination this government has tagged with the K word). Whether that is the best thing to do or not is another debate.
I’ve posted a great series of videos which explains on my blog @ http://optionscoop.com/lessons-on-the-business-cycle/ from an economically liberal professor.
They’re very easily understood for dummies and show very clearly why the expansion/contraction of economies is natural and actually shouldn’t be messed with by governments.
patently said...
23 May 09 at 6:26 pm
Brown’s consistent and stable policy over the years has been take firm action in respect of each and every stable door, and to act decisively just as soon as he sees a horse bolting from one.
Jonathan said...
23 May 09 at 9:45 pm
“If the Bank of England were to interpret this instruction literally, one would expect them to use any means necessary to keep growth at 0%”
I would do no such thing. Financial systems, the overall economy, its specific growth rate at a moment in time, and the long term growth rate are all different things. If the Bank became so confused as to forget that a primary goal of having a stable financial industry is positive long term economic growth it would be a scandal.
A stable system is one that does not go wildly out of control when subjected to external forces, and indeed subject to minor forces tends to return to its initial state (in the case of an economy, that would be a state of long term growth). So for instance, it is important that we are not vulnerable to economic warfare (or indeed just other countries running themselves badly). A fluid, growing market economy is the best defense.
Historically, market economies do not demonstrate “wild swings” – these do happen regularly but less frequently than the business cycle itself. Bear in mind that chaos is not the enemy of stability you might think. It is when the chaos is reduced, for instance through interconnections between large entities, or asset bubbles growing out of herd behaviour, or executives falling victim to agent principal issues, that problems happen. We find that the apparent chaos is in fact a fragile rigidity that reveals itself in an utterly predictable fashion.
As long as the Bank keeps to the dictionary definitions of stability, as compared to a simplistic or ideological one as you suggest, it is not a bad goal. Good things happen when banking is boring, dull, and predictable. It is when it tries to get overly innovative that the business cycle turns into a financial crisis.
Leave the big risk taking to the entrepreneur.
Trevox said...
24 May 09 at 1:35 am
One word I’d introduce into this thread is “sustainable”. Given that negative growth is bad and zero growth impossible, high growth is demonstrably unsustainable. We will only see equity and equanimity amongst populations when all are enjoying similar modest rates of economic growth. There will always be losers when growth rates vary between countries. Sustainable growth is what is needed – that is probably around the 2% level.
DavidNcl said...
24 May 09 at 2:59 pm
(I realise this is futile)
I see why negative growth is bad. It has been demonstrated repeatedly that you have to use the most brutal means to achieve negative growth in the long term (see for example Collectivist Dung Heap Number Six).
Zero growth is impossible since it implies accurate (or any) control of the economy and this is impossible because because of fundamental epistemological problems (as Hayek explained at length).
But why is high growth demonstrably unsustainable? When and where was that demonstration?
Trevox said...
24 May 09 at 4:25 pm
The best treatise I have ever read on the unsustainability of high economic growth rates is in the book “Enough Is Enough” by John V. Taylor. Alright, it is written from a Cleric’s perspective, but rings true nonetheless.
More recently, I consider Gordon Brown to have given plenty of practical demonstration.
See also John Madely’s article in The Guardian at http://www.guardian.co.uk/commentisfree/2009/jan/31/face-to-faith-john-madeley
DavidNcl said...
24 May 09 at 5:33 pm
Can’t you just say what you *think* rather than refering? What are *your* thoughts? What do *you* belive?
Stu said...
24 May 09 at 6:24 pm
Woah there, David. This is the internet! We don’t do that here…
As for the reasons why we don’t, perhaps I should refer you to a recent piece on The Register on the subject, which linked to Engadget’s piece concerning a Guardian article which followed up on a survey conducted by Alexa…
DavidNcl said...
24 May 09 at 6:35 pm
Joe Otten said...
25 May 09 at 12:38 am
Hmmm, no I don’t think that is what is meant by stability. Surely it is more the sort of thing that if you expect interest rates, exchange rates, etc, to stay pretty much where they are in the medium term, you will be a lot more confident in making investments than if you thought they would go all over the place.
What I thought you might be alluding to – and this would be interesting – is the tension between creative destruction, as according to von Mises, and plain old destructive destruction. My hunch is that most of the time we can’t tell the two apart, and that therefore people take a more positive or more negative view of instability generally, depending on their attitude towards von Mises. Rather than going to the effort of looking at the empirical facts of the actual destruction in question, which is hard.
measured said...
25 May 09 at 5:45 pm
I like this post, Charlotte.
Does this suggest the B of E has not already being doing this? Does it suggest that although independent, the B of E has not been following instructions?? I think it is not wise to codify this sort of thing as all the other players in the market, some of whom have far more weight to throw around than the B of E, will just see the B of E coming. Oh, and does it mean we should buy back all the gold reserves that were scandalously sold at the lowest gold price to achieve stability?
It will be very interesting if the B of E does refuse ‘to print’ the money the government requires; stability has different meanings to different players.
Niklas Smith said...
25 May 09 at 10:14 pm
Slightly off topic, but I found this wonderfully uplifting clip from The Simpsons through Johan Norberg’s blog.
Howard Roark certainly didn’t take stability (or more precisely conformism) literally!