When I was at school in the 1990s we had a teacher who taught both PE and careers. The most annoying pupil (me) might have questioned whether the best career advice could be had from a man who so clearly hated teaching PE, but he did have one lesson for us. One day, he wheeled out a TV, on which he played a documentary about a man whose job it was to help pigs reproduce. Suffice to say, it ended to stunned silence, during which the teacher returned to the front of the room wearing a wolfish grin and announced: “Pass your exams, or you might have to do that for a living.”
These days, the job I’d least like to have is in the Bank of England’s PR department. In times of high inflation the central bank always becomes the bad guy: in the early 1980s the US Federal Reserve chair Paul Volcker was so despised for his rate hikes (which reached 20 per cent) that the Secret Service was asked to guard him. The governor of the Bank of England, Andrew Bailey, has already incurred the public’s wrath by asking people to “show restraint” when negotiating pay rises, while his chief economist, Huw Pill, had to apologise for urging us to “accept that we’re all worse off”. If the prospect of interest rates of more than 6 per cent wasn’t frightening enough for mortgage holders, Bailey observed on 28 June that once rates peaked, they were unlikely to come down again quickly.
There are good reasons to question how Bailey has run the Bank since he arrived in March 2020. In November 2021, before Russia invaded Ukraine – even as the New Statesman warned that inflation “could break Britain” – he told MPs he was confident that “we are a very long way from the 1970s” in terms of price and wage rises becoming high or persistent.
But at the same time, Bailey is dealing with the outcome of the previous decade: Mark Carney (governor from 2013 to 2020) and Mervyn King (governor from 2003 to 2013) have both been enjoying some told-you-so interviews in which they’ve commented on Britain’s new predicament as if they had nothing to do with it. But they have questions to answer as well.
After all, the reason public sector workers are striking and private sector workers are hunting for new jobs is that real incomes have not risen, at all, since 2008. We are still living in the shadow of that crash. King has been accused of failing to see the asset bubble that preceded it as a problem, or to realise that a credit crunch in the US financial sector would spread to the UK, or to regulate the banking activity that led to extreme losses and bailouts. In Bankruptcy, Bubbles and Bailouts, Aeron Davis’s history of the Treasury, one official calls King “the Keyser Söze of the financial crisis” – a reference to the crime lord from the 1995 film The Usual Suspects who is somehow able to operate unseen and unpunished.
[See also: Is anybody running the Bank of England?]
But it was not only that central banks failed to anticipate or prevent the crash. Amazed by the power of quantitative easing (QE), the huge money-printing programmes they used to stabilise the financial system (to “save the world”, as Gordon Brown put it in a Commons debate), central banks began using it to stimulate the economy. To politicians on both sides of the Atlantic who were keen to demonstrate a firm grip on the purse-strings, this was most welcome.
In 2010 King’s American counterpart, the Federal Reserve chair Ben Bernanke, gave a speech in which he committed to “maintaining an extraordinarily accommodative monetary policy” – continuing to hose money into financial markets. The aim was not to meet the central bank’s targets for financial stability or inflation, but to create economic growth. This should have been the government’s job, but as Democrats and Republicans fought over the budget, the Fed used its new magic.
In Britain, the Bank followed the same policy, keeping debt unrealistically cheap with near-zero interest rates and QE. As he welcomed a new governor – Carney – to the Bank of England in his Mansion House speech in 2013, George Osborne declared that the first and most important thing that would stimulate Britain’s flagging economy was not the government, but “active monetary policy”. For the Conservatives, this meant the asset-owning classes (especially homeowners) didn’t feel the pain of austerity; their wages may not have improved much, but the value of their houses dramatically increased. Before Carney arrived, the Bank’s own research showed its QE programme had inflated the wealth of the richest 10 per cent in Britain by up to £322,000 per household.
Carney should have been the one to take away the punch-bowl, tightening monetary policy before homeowners became overextended. But after Brexit the Bank did not want to be blamed for the recession that would, without still more QE, have occurred.
The same was true, but at even greater scale, during the pandemic. For 14 years the financial sedation continued, the country became more unequal, and the dwindling numbers who could afford home ownership did so with ever more dangerous leverage. The economic pain now is the pain of sobriety, after a decade-long binge on cheap debt. We may resent Andrew Bailey for administering the necessary bucket of cold water, but we should recognise that it was his predecessors who served the cocktails.
[See also: Is the Bank of England raising interest rates too far?]
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This article appears in the 05 Jul 2023 issue of the New Statesman, Broke Britannia