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Blanchflower calls for the MPC to be axed

Former Monetary Policy Committee member David Blanchflower has called for the MPC to be disbanded as he believes it is “not fit for purpose”.

Writing in the New Statesman, Blanchflower says the recession has been much deeper than it needed to be because the committee was “asleep at the wheel” by failing to act early enough in cutting interest rates.

Blanchflower, who was an MPC member from 2006 to 2009, consistently argued for sharp cuts in interest rates as concerns about the economic crisis grew but was voted down by other members.

He says: “The MPC missed the recession entirely. Rates were cut too late and even in early September 2008, just days before the collapse of Lehman Brothers and the secret loans to RBS and HBOS, most of my MPC colleagues were concerned only about inflation and wage-price spirals.”

Blanchflower says it is wrong for the MPC to focus on the consumer price index, as this excludes house prices, suggesting the US Federal Reserve remit “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates” as a better alternative.

He says: “The last thing we need is for interest rates to rise any time soon. Inflation is going to jump in the short term because of the VAT increase, but will then fall back sharply.

“This MPC is not fit for purpose and should be disbanded. The big question is what it should be replaced with. That is a subject to which I will be returning.”

Blanchflower also warned against Conservative Shadow Chancellor George Osborne’s plans for immediate spending cuts if the Tories come to power.

He says: “He seems hell-bent on creating the Osborne Dip. In a speech on  January 14 he announced that he would cut spending within 50 days of any election, well before any Budget. It strikes me as equivalent to a doctor determining a treatment without ever seeing the patient or knowing what was wrong with him or her.

“I gather Osborne fully expects to be the most unpopular chancellor ever, within six months of being appointed. I don’t doubt it. I am still waiting to hear which distinguished economists think that his plan to cut public spending in the depths of recession is a good idea.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. I disagree that the MPC’s admittedly crass error in failing to cut interest rates to mitigate the effects of the impending recession are evidence that it should be disbanded, though I believe its remit and possibly composition should change. The systemic errors are not only an overemphasis on inflation but also an overephasis on current key ratios rather than projected ones.

  2. I wish I could understand Blanchflower’s utterings. What does he think caused the recession?
    I would say the recession was the inevitable result of a 10 year boom in house prices fuelled by consumer lending where the money lent was magiced into existence by banks who decided that ever more inventive ways of creating money could go on forever.
    The recession was caused by a ludicrous expansion of credit coming, as it inevitably had to, to an end.
    But Blanchflower seems to think if only they had dropped interest rates sooner, so people could borrow more, the recession would have been averted.
    It’s not just that he’s so wrong, you have to answer if he is barking mad.
    The MPC were/are useless, that much I would agree with. They should have raised interest rates much earlier to reduce demand for debt and, thereby, avoid the credit crunch. The credit crunch would never have happened if banks hadn’t suddenly stopped trusting each other because they were thinking …. ‘Hmm, they’ve been up to what we’ve been up to … their security is worthless’. It should have been stopped long before that.
    If interest rates had not been dropped in August 2005 the slow down in the house price boom would have continued and, after a while, stability would have emerged without a credit crunch.
    But, no, Blanchflower’s solution to everything is lower interest rates. Can’t go much lower now can they? And we’re still in a mess.

  3. Mike Wilson’s comment above is excellent. I agree with every word. Keep shooting up the junkie economy!….

  4. Mike said my view already. I call for Branchflower to be literally axed.

  5. Mike Wilson hits the nail on the head. The patient is in cold turkey – give the patient another hit to make it feel better.

  6. You are correct Mark, Blanchflower doesnt understand this fact. House prices are what caused this economic depletion, no this is not a recession, or a depression, its a depletion. Depletions happen when you borrow too mcuh, have no industry to support an asset price sprial and you encourage more borrowing thinking that these activities are what cuases employement. A depletion happens when you lose all of the value in your economy to a competitor. Its similiar to burning your furniture, roof, floorboards, and anything else made of wood in your house to keep warm during winter. The economists call this deleveraging. I call it suicide. The they also help this by tanking up inflation, thinking they can inflate the debt away. That wont help either, because we dont keep warm and we dont eat. Then they try to go to war, and they pick on an enemy who isnt worth didly squat. They are alot more stupid than you think.

  7. Blanchflower is very, very dangerous (or would be if he still had any power). The solution to the biggest debt bubble in history is NOT more debt.

    Truth is we NEED another dip. We need to deleverage and we need for house prices to fall another 30% or so in real terms. Yes it needs to happen slowly but it needs to happen and it needs to start soon.

    The gilt market simply won’t put up with the deficit at current levels and government spending is very inefficient. We have enjoyed the good years we have no choice but endure some that are a little more slim. Government’s role should be limited to making sure the pain is not too concentrated on the poorest in society.

    The risk of a debt compound spiral is real and gilt yields will spike if inflation is not kept under control.

  8. The real mess up it made was failing to RAISE interest rates years ago and prevent the bubble of massive debt and over inflated houae prices.

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