WASHINGTON, DC - SEPTEMBER 12: Former Federal Reserve Board Chairman Ben Bernanke answers questions at a conference with former U.S. Treasury Secretary Timothy Geithner and former U.S. Treasury Secretary Hank Paulson at the Brookings Institution September 12, 2018 in Washington, DC. The three participated in a conference on "Responding to the Global Financial Crisis: What We Did and Why We Did It." (Photo by Win McNamee/Getty Images)

The same old soap opera

The Bank of England will continue to ignore the real lessons of boom and bust


This article is taken from the October 2023 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Boom-bust cycles are the soap opera of macroeconomics. According to Collins Dictionary, a soap opera is “a drama series about the daily lives and problems of people who live in a particular place”. Other dictionaries emphasise their sentimentality. Another feature is that, even in the best soap operas, much the same sequence of events recurs time and again. Members of the cast come and go, their lines may alter a bit, but that does not make any real difference. 

The Bank of England may dislike being considered the “particular place” where the UK’s macroeconomic soap opera plays out, but the analogy is inescapable. All its boom-bust cycles have the same general characteristics. In the case of every boom the rate of money growth accelerates. For a few quarters too much money is chasing too few assets, and the prices of stocks and shares, and houses, rise briskly. People feel happy, spend more, output grows rapidly, and soon too much money is chasing too few goods and services. 

prices in the shops and on websites take off, and inflation rears its ugly head. The Bank of England then tightens policy with a rise in interest rates, and fear and gloom attend its media announcements. But the references to interest rates are far from being the whole story. In the case of every bust the rate of money growth decelerates and sometimes it goes negative. 

In the long run, the rate of growth of money in real terms (that is, after adjusting for changes in the price level) is close to the rate of growth of real output, as if money were neutral in its economic effects. But in the short run, the antics of the banking system and the fluctuations in money growth do a lot of harm. According to Nationwide, house prices were 5.3 per cent lower in August than a year earlier. A family who bought a house in August 2022 may not be solaced by phrases about the long-run neutrality of monetary policy. 

It took the Bank more than 18 months to realise that double-digit inflation might indeed be on the cards.

A familiar episode in the Bank of England soap opera is that its officials deny they are to blame for what has gone wrong. Indeed, a standard line — repeated with minor variations from one cycle to the next, and almost an attribute of these cycles in its own right — is that the changes in money growth have no role in the upheavals in demand and output. The Bank of England was discomfited by the monetarist influence on the economic policy of the Conservative governments between 1979 and 1997, and it remains discomfited by monetarist ideas to this day. 

Some economists (like myself) are a bit long in the tooth, and we can remember the Heath-Barber boom and bust of the early and mid-1970s, the Lawson boom of the late 1980s and the bust of the early 1990s, and also the mini-boom before the Great Recession of 2008 and 2009. 

I was appalled when in spring and summer 2020 the Bank took measures which would add hundreds of billions to the quantity of money. I said straightaway that these measures would lead to a double-digit annual rate of money growth and, very probably, to a double-digit rate of inflation. 

But it took the Bank more than 18 months to realise that double-digit inflation might indeed be on the cards. They ignored not just the money growth trends, but also house prices. Already in summer 2021 the Nationwide index for all UK houses was up by over 10 per cent. As in the previous boom-bust episodes, house prices moved before consumer prices and were another good warning signal of trouble ahead. 

Should readers be reassured that the Bank’s Court has appointed Professor Ben Bernanke to conduct a review of its forecasting procedures? On the face of it, the Bank could not have chosen a better qualified person. Bernanke was chairman of the US Federal Reserve from 2006 to 2014, and won the Nobel prize last year for work on the business cycle. Surely, Bernanke must know a lot about economic forecasting. 

I want to give a warning. Bernanke last year published a book under the smart-sounding title 21st-Century Monetary Policy. It does contain one or two references to the then obvious US inflation problem. Nevertheless, it was written in the lockdown period. Did Bernanke in that period of writing appreciate that the Fed — like the Bank of England — had blundered? 

in the year to June 2020 the quantity of money rose in the USA by 25 per cent, mainly as a result of grotesquely large Fed asset purchases in the four previous months. To any self-respecting monetarist that meant an inflation upsurge in 2021 and 2022, which duly happened. But Bernanke’s book contains not the hint of a whisper that the Fed had made a mistake. 

Like far too many top central bankers today, Bernanke thinks of monetary policy exclusively in terms of interest rates and ignores money, in the sense of the quantity of money. I will make a forecast about the Bank of England’s economic forecasting, that Bernanke’s review of it will be a platitudinous and useless whitewash.

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