9th August 2017  – An article by our Chairman, Professor Tim Congdon, was published in the Daily Telegraph.  

You will need a subscription to read the full article, but a pdf of the text can be downloaded here. Professor Congdon has summarised the thinking behind the article in a few words below.

Anyone who has been following my work over the last few years will not be surprised to hear that, in my view, two serious mistakes were made by the Bank of England under its Governor, Mervyn King. First, when the global inter-bank market closed almost exactly ten years ago, the Bank – unlike its neighbour, the European Central Bank – was unhelpful to British banks. Its refusal to make large credit lines available to cash-short banks quickly led to the Northern Rock fiasco. Somewhat more than a year later King remained obstinate that the UK’s commercial banks were not to receive medium-term credit facilities from their central bank.

In his view, if they could not fund their assets from market sources, they should raise equity capital from the markets or the state. If (like Barclays) they still were being awkward and resisted the possible dilution of shareholders’ interests from such capital-raising, they might be nationalized without compensation. (This is what happened to Northern Rock and, in September 2008, to the similarly-placed, cash-weak Bradford & Bingley.) King’s hostility to the banks chimed with both public opinion and the attitudes of the leftie commentariat in, for example, the Financial Times. But its results have been catastrophic for the banks, unfavourable for their customers and bad for the British economy. (I am not saying the banks were angel, saints, geniuses, masters of the universe, or whatever. That is the not the point. The point is to find the best public policy decisions at all times, and in my view King and others – especially the hapless Gordon Brown – failed hopelessly.)

The second mistake was to press for a large increase in banks’ capital/asset ratios not just in the UK context, but also at G20 and related international meetings from October 2008. Incredibly, King received the support of Ben Bernanke, Fed chairman, for this idea. Together they seem to have persuaded top policy-makers of the virtues of an immense programme of bank recapitalisation. This inaugurated a long drive for bank capital-raising which, as I say in the Daily Telegraph article, has subsequently been “intense and unremitting”. The inevitable result in late 2008 was to cause a crash in the rate of growth of the quantity of money, with severe deflationary consequences at just the wrong stage in the business cycle.

It was only after this crazy development that the Great Recession proper started…and that interest rates had to be slashed to practically zero, that “quantitative easing” became essential to boost the quantity of money…that some deluded journalists began to forecast surging inflation because of allegedly “loose and irresponsible money-printing” compara

No, capitalism was not to blame for the Great Recession. The Great Recession was instead caused by very serious policy mistakes that stemmed, ultimately, from disregard of basic monetary economics in leading central banks and regulatory agencies.(And, to repeat, I am not saying that the banks were saints…They never are. Bankers are greedy, short-sighted, often incompetent, etc., etc. They are always every one of these things. But we don’t always suffer from Great Recessions, do we?)It’s a strange world. 

Anyhow I hope you enjoy the Daily Telegraph piece. I believe now, as I believed in early 2007 (and indeed as I believed in early 1977), that the key to securing low and stable increases in nominal GDP (without inflation/deflation and/or great fluctuations in employment/unemployment) is for the state to maintain low and stable increases in the quantity of money, broadly-defined. The state cannot manage money growth precisely from month to month. But it can deliver enough stability in money growth to avoid such disasters as the Great Recession