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?