"The neat separation of powers and responsibilities between policymakers has evaporated" in the arena of monetary policy, according to departing deputy Governor of the Bank of England, Sir John Gieve.
In a speech to the London School of Economics yesterday, Sir John highlighted the sea change from the first 18 months of his deputyship during a period of growth, compared to the last 18 months when he saw a wholly different economic climate emerge.
In order to have helped avert the current economic crisis and prevent future ones, Sir John recommends that the Bank of England "introduce restraints" on banks' mortgage
He noted that the "loan to income and loan to value ratios tend to rise in any credit boom as lending standards become lax and asset prices inflate." Therefore, he said, "in theory, a ceiling on these ratios could have provided an effective brake on the excesses of the last boom."
Outlining the major failures of economic policy throughout the credit crunch, he said that the lines have blurred between the roles of the tripartite system and the Bank of England, which he is not opposed to, unlike the bank's Governor Mervyn King, but it needs to reform its ideas if it is to learn from the current economic crisis, he said.
He also dismissed the idea that, as some analysts have speculated, had interest rates "been a little higher at the tail-end of the boom in late 2006 and early 2007 the crash could have been averted" is a mere "flight of fancy."
Of the Bank of England's perceived distraction with keeping interest rates high last year to pander to soaring inflation, Sir John said that while targeting inflation was "necessary" it was "not sufficient" for stabilising the economy.
The recent situation which has unfolded in the economy "casts doubt on macroeconomic modeling", he said, which is the Bank of England's primary economic model, and while the Bank did not rely wholly on its main model, it did influence decision making.
Of the Bank's management of interest rates, Sir John said that "The large and coordinated cut in interest rates at the start of this decade almost certainly contributed to the build-up of an ever larger bubble", as a result of the Bank's policy of mopping up the bubble once it's burst rather than limiting its growth.
"I hardly need to add", he added, "that mopping up the fall-out from the latest crisis is stretching the world’s policymakers to the limit. It is evidently not safe to rely on being able to mop up after the crash."
In praise of the Bank of England
's efforts, he said that "Intelligent inflation targeting on these lines run by independent central banks still seems to me the best foundation for macroeconomic policy." But added that "that does not mean the current framework or the way we explain it is perfect."
Sir John concluded that "As Alan Greenspan recently observed, rather than assuming that the system is capable of self-regulating itself, our default position should be one of cautious scepticism. The burden of proof for the authorities should be the balance of probabilities."
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