FORGET about speeches to the Tory party conference, or even the forthcoming Autumn Statement. George Osborne’s biggest decision of his entire chancellorship will be who he appoints to be the next governor of the Bank of England. No other unelected job in the UK comes with so much power: the governor is not just in charge of inflation but also, under the new system, of a large chunk of financial regulation. The newly re-empowered Bank will yield massive influence over thousands of nominally private financial institutions and will be able to make or break careers in a manner unthinkable in any other industry. It is increasingly looking likely that the race to be the next governor will be between Paul Tucker, the long standing deputy governor, and Lord (Adair) Turner, the former boss of the CBI and chairman of the FSA. It seems that the government has decided against revolutionary change; it won’t be appointing an outsider or somebody with heterodox views on how to manage the economy or finance, despite the now undeniable fact that mainstream economists failed to understand what was really going on in the noughties.
There is therefore no contest. Tucker would make a far superior candidate than Turner, despite the Libor row. Tucker has spent years talking to market participants. He knows intimately and is comfortable with the City, with markets and with real-life institutions and people. He is no detached academic. That doesn’t mean that he would be a soft touch – he is an old style British central banker, of the sort that wielded immense powers in the past. Osborne needs to stop wasting time and announce his appointment at the earliest possible opportunity.
MISSING THE BUBBLE
The tale of the IMF’s ever changing views shows how dangerous it is to rely on supposedly credible international bodies when trying to obtain useful guidance on the economy. These organisations are no more likely – and probably less likely – to get it right than the average, less illustrious private sector forecaster. They are also horribly prone to fashion. As part of its latest U-turn, the IMF is now flirting with an ultra-Keynesian view, arguing that every pound cut from public spending would reduce GDP by between £0.90 and £1.70 – up from £0.50 previously.
But why should we believe it? It has also now finally worked out that the level of UK GDP was significantly above its sustainable potential starting in 1999, arguably the year in which the bubble therefore began, and continuing every year until 2008.
Excessive output peaked at 3.65 per cent of GDP in 2007 – by far the biggest overheating in the G7 and even exceeding the 3.1 per cent in excessive production in 1989, at the peak of the “Lawson boom”, the previous major bubble to have befallen the UK economy. Could it just be that unwinding bubbles is always painful, and that fiscal policy is ultimately pretty powerless at preventing this?
As an excellent paper from Michael Saunders of Citigroup points out, the IMF’s estimate of excessive output this time last year for 2007 was just one per cent of GDP. This was already a revision of its dangerously deluded view in 2007 that GDP that year was in line with potential and therefore that there was no bubble and that all was well. It was an astonishing failure. Remember: most economists get it wrong most of the time – especially if they work for international bureaucracies.
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