BANK of England governor Carney has dumped his forward guidance policy under which interest rates would rise once the UK unemployment rate had been reduced to 7%.
Yesterday the governor said the Bank would look at a much wider range of economic indicators, rather than the rate of unemployment, when deciding when to raise rates.
Further he assured that when rates are raised, they would ‘only increase gradually’.
As he changed his position, he tried to assure his listeners that the guidance policy ‘is working’, and had reduced uncertainty and encouraged businesses to hire and spend.
In fact under the new regime there is to be absolute uncertainty, amidst a mass of struggling contradictions, as to what will trigger higher interest rates. No longer will there be a single indicator.
Certainty has been replaced by make-it-up-as-you-go-along.
Carney flannelling furiously said: ‘Forward guidance is working – expected interest rates have remained low even as the economy has recovered strongly, uncertainty about interest rates has fallen, and most importantly, UK businesses have understood the message,’ the governor said.
However, the Bank’s inflation report said that the ‘Bank rate may need to remain at low levels for some time to come’.
The reason for this huge crisis amongst the forward guiders is that a rate rise or rate rises will raise mortgage rates and burst the housing bubble unleashing an even bigger collapse than the 2008 crash.
The Bank will now be producing forecasts on a range of indicators, and these will be based on market expectations of 2% interest rates by 2017 and a first rise in spring next year.
‘Households are saving less and spending more and business investment is likely to gather pace this year’, he said. However, Carney also warned that the recovery was ‘neither balanced nor sustainable’, and highlighted the fact that economic activity was still far below pre-financial crisis levels, and that productivity growth, that is the rate of exploitation of the working class, had been disappointing.
Carney’s crisis comes just after Adair Turner (the ex-chair of the Financial Services Authority) warned in a Frankfurt lecture of the dangers of another economic catastrophe.
Turner got his fingers very badly burnt in 2008 when the light touch financial regime of that time led to economic catastrophe.
In his lecture he said that strict curbs on mortgage lending and a clampdown on high-interest payday lenders were needed and that without controls on ‘debt pollution’ there would be another credit-fuelled global financial crisis.
Turner is calling for a return to 1950s-style controls on credit and argues that reliance on ultra-low interest rates, quantitative easing and mortgage subsidies are recreating the conditions that ‘got us into this mess in the first place’.
Turner blames excessive private debt, rising inequality and global imbalances between debtor and creditor nations for the financial crisis that erupted in 2008. He said that action in all three areas is needed to prevent a second meltdown.
Turner is demanding a siege economy with the tough controls on credit that existed in the post-war decades and came to an end with the 1971 Nixon decision to remove the gold backing for the dollar and resort to floating currencies.
This change produced the gigantic inflation that led to the pre-2008 notion that the lightest-touch regulation, of the see-nothing hear-nothing variety were all that was needed for rip roaring economic success, and a near permanent boom.
This led to the biggest crash ever and now Turner is warning that there is more to come, while Carney dreads a series of rises in interest rates.
For Turner the 1950s-1960s was a golden age of ‘steady growth’ without crises – in fact it was the period where the huge wartime damage was being repaired while Japan, Italy and Germany were out of the scene as competitors.
All this came to an end with the UK stop-go crises of the 1960s, then the undermining of the gold standard by nixon, and finally the huge oil price increases following the 1973 Yom Kippur war in the Middle East.
It is impossible to return to the 1950s, while Carney finds it impossible to provide credible forward guidance into the second decade of the 21st century. In fact there is no way forward for capitalism, it is in its greatest crisis ever and must be replaced by socialism and a socialist planned economy on a world scale, through the victory of the world socialist revolution.
