Mismanaging Money

Unionists are fond of playing on the uncertainties of the future, imagining all the possible things that might go wrong in the economy of an independent Scotland . This distracts attention from the certainty of what actually has gone wrong in the UK economy as a result of the longstanding incompetence of British Governments, both Conservative and Labour. Whether we look at monetary policy, fiscal policy, energy , transport, or any other branch of economic policy, the story is always the same: a complete shambles, presented as a successful struggle. A Scottish Government would have to try really hard to surpass the record of continuous failure in economic policy-making by successive UK Governments. Let’s start with monetary policy.

In his book Muddling Through that supreme authority on the workings of British Government, Peter Hennessy, reports a conversation between two Treasury knights in a London Club in the mid-nineties. One expressed his admiration for the others ability to remain outwardly calm as one financial crisis succeeded another. Sir X thanked Sir Y for his compliment, but confided ‘It was always one great continuous f***-up, but we pretended it wasn’t.’

Twenty years later they’re still at it.

When the most recent financial crisis struck in the summer of 2007, the Bank of England was caught on the hop because events were outside the then Governor’s view of what was possible or even remotely likely. On the night that Northern Rock went into bankruptcy a dinner was being held at the Bank of England. It was part of a Conference that had been called to celebrate the success of the Bank’s policies of monetary management.

Before the crisis, the Governor had run down the Bank’s Financial Stability Department, averted his eyes from the growing housing and other asset price bubbles, the rapid expansion of the balance sheets of the banks and the explosion of opaque financial instruments. Like his colleagues, Sir Mervyn King didn’t see the crisis coming, even though its origins are to be found in part in the Bank’s own lax monetary policies.

But in the great tradition of his Whitehall predecessors, Sir Mervyn has since pretended otherwise. So far from expressing contrition for the failure of the Bank of England to discharge its duty of maintaining the stability of the banking system, he has seldom missed a chance to promote the myth that the Bank was a lone voice of sanity in the pre-crisis years. In his final appearance before the Treasury Select Committee last month he maintained “our own reports were full of warnings”.

The truth is rather different. Here is the first sentence of the Bank’s Financial Stability Report from April 2007: “The UK financial system remains highly resilient.” The Report went on to say that the operating environment for UK banks and global financial firms had been stable, and predicted that “conditions are likely to remain favourable.” Five months later came the run on Northern Rock.

No-one has had the bad manners to suggest that King and his colleagues might share some responsibility for the shambles over which they presided. While tens of thousands of other people in the UK lost their jobs as a result of the Bank’s blunders, no-one in the Bank lost theirs. On the contrary, they have been showered with praise in Whitehall and the City. The myth of British Government competence must be maintained at all costs.

Once the Bank discovered that a financial crisis had arrived, its first reaction was to try to distinguish between those banks that were irretrievably bust and those that just had liquidity problems. It soon abandoned this sensible distinction and embarked on a programme of printing money on an industrial scale. This has had the predictable effect of driving interest rates down to near zero, thus destroying the savings of pensioners and would-be pensioners, giving a temporary boost to the stock market, making a reduction of the budget deficit politically more difficult and sowing the seeds of future inflation. In short, aggravating financial instability.

The Bank has now painted itself and the economy into a corner. As soon as it stops printing money, or even hints at stopping it, those traders, including the banks, who have made fortunes out of the false market in government bonds , will desert the market, leaving the price of government debt to fall and interest rates to rise. And rising interest rates will trigger the next recession.

Of course, the new Governor, Mr Carney, will try to postpone such an unpleasantness until after 2015, when the Independence Referendum and the Westminster General Election are safely over. In doing so, he will be following in the great British tradition of starting a boom in the run-up to an election, and hoping the voters will have forgotten when the inevitable bust follows afterwards. What was it Gordon Brown used to say? No Return to Boom and Bust?