Ann Pettifor

Is the Old Lady really hobbled? Is credit allocation a matter for politicians?

I would welcome responses and insights on something that has troubled me since I first heard of comments made by the Governor of the Bank of England, Mervyn King on Wednesday,10th August (presenting the Inflation Report) and reported since.

Namely that the Bank of England has no role in the allocation of credit across the economy – in particular to small enterprises. Instead he argued, credit allocation is a matter for government.

Alex Brummer of the Daily Mail asked the Governor if

 “there are monetary policy steps which can be taken, or can the Bank take steps directly, to try and make sure some money gets to those parts of the economy?”

This was the Governor’s reply: 

“I’m afraid not. I think this is a problem of the structure of the banking system, and questions about the allocation of credit. And those are fiscal actions and they’re for government, not for a central bank. It’s very dangerous for a central bank to stray, as you know, into political territory, and we don’t intend to do that.

The amount of lending by the banking system to non-financial companies is falling. It’s been falling for some while, and it’s still falling. This is a natural consequence of the deleveraging of the banking system. But let’s be clear about it, it is falling; and it’s particularly problematic for small companies because at least big companies can go to the stock market to issue equity, or to the corporate bond markets to raise money through the issuance of bonds. Small companies don’t have that opportunity, and they’re suffering as a result.

But this is a question about the allocation of credit within the economy, and that’s very much a fiscal decision, and that is a matter for government.”

First, is credit allocation a fiscal matter? Surely not. Surely it is a matter for monetary policy and regulation.

In light of the Governor’s statement, one really must ask: what is the Bank of England for? And, if it is not for managing the allocation of credit across the economy, do we really wish politicians to make those decisions to, e.g. small businesses?  Given the number of businessmen represented in Parliament, and given the number of bankers elected at the last election, we have a pretty good idea of how they might use this power.

So, given that we cannot trust the private sector to allocate credit wisely either acting alone as they do now, or indeed guided by their friends in Parliament and Whitehall: given this, surely then it is the role of the “guardian of the nation’s finances” to manage, regulate and ensure the sound allocation of credit to the real economy?  And if we have a “problem with the structure of the banking system” – surely Mr King should be arguing for this problem to be remedied: urgently.

If not, what is Mr King for?





4 thoughts on “Is the Old Lady really hobbled? Is credit allocation a matter for politicians?”

  1. Mervyn King may be making the following point, though he does not express it well.

    Given grossly inadequate fiscal stimulus (more the case in the US than UK), no amount of interest rate reduction or QE will save the day: i.e. not enough credit will be allocated. In this situation, if a government wants to see more credit being allocated, it will have to implement more fiscal stimulus.

    Put another way, banks lend when they see profitable lending opportunities. Given subdued demand, they won’t lend.

  2. Well, Mr King is correct. But it is not “what is Mr King for” but rather what do we have banks for? What valuable function do they perform? And do they?

  3. Ralph….mmm that would be a plausible case for the Governor to have made, but that was not what he sai.

    And Sergei when the banking system is functioning well, it plays a vital, enabling role of ensuring economic activity takes place…. I have visited countries in Africa where the banking system does not function well…and the consequences are everywhere to be seen…

  4. The questions posed in this article can all be explained by understanding the history of the Bank of England. It is a private corporation which holds the monopoly on the issuance and control of the monetary supply. However, despite the fact that the private organisation exists to create profit for private bankers, when things go wrong, taxpayers are legislated to foot the bill.

    Now add to this the recent creation of the Prudential Regulation Authority, which will replace the FSA, and what do we get? The BoE effectively regulating itself – which at the end of the day is no regulation at all!

    Monetary policy should of course be run by the government for the people but for centuries it has not been. The government is effectively controlled by the private BoE due to the debt it owes to them. As Mayer Rothschild amptly stated in the 18th cenury: “Permit me to issue and control the money of the nation and I care not who makes its laws.” Still think we’re living in a democracy?

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.