Bank of England: We Don’t Understand the Markets
September 25th, 2007Via: Telegraph:
The Bank of England is looking at improving the way it monitors UK credit conditions after admitting that the growing sophistication of the financial markets has made it more difficult to manage monetary policy.
Bank of England governor Mervyn King speaking to the Commons Treasury Committee
Mervyn King has come under increasing pressure over his handling of the Northern Rock crisis
Amid accusations that it failed to respond quickly enough to the crisis at Northern Rock, the Bank has admitted that it is struggling to determine the impact of the credit meltdown on the economy.
Charles Bean, chief economist, said assessing conditions in the economy is “subject to considerable uncertainty”.
Writing in the Bank’s quarterly bulletin, Mr Bean said: “One important step in analysing monetary demand and supply shocks involves improving the Bank’s information about credit conditions.”
The Bank’s admission that it needs to improve its understanding of the credit markets comes as John McFall, chairman of the Treasury Select Committee, voiced his frustration following the appearance of Bank of England staff before the government watchdog.
In an interview with The Daily Telegraph, Mr McFall said: “The responses that people gave were unconvincing as a whole. I’m looking at the system and asking the question: Is it working? And it’s not working.”
In its bulletin the Bank said that to achieve its core purposes of maintaining confidence in the economy and identifying and reducing threats to the financial system, it needs to better understand “developments in the markets for money and credit”.
Roger Bootle, managing director of Capital Economics, said: “The Bank’s job is getting much tougher. [In the face of more sophisticated markets], I do not think you’ve seen a corresponding increase in technology and monitoring on the Bank’s part. It is a one-sided thing.”
Mervyn King, Governor of the Bank of England, has come under increasing pressure over his handling of the Northern Rock crisis amid accusations the Bank failed to react quickly enough to reduce problems in the money markets.
Gordon Brown yesterday defended Mr King, telling the BBC that he had done a “brilliant” job, but stopped short of backing him for another five-year term as Governor.
The Bank has set out several initiatives to better monitor the credit markets and their impact on inflation and the economy. The Bank said it was examining the effect of institutions such as pension and insurance funds on the supply of money into the UK economy and their impact on inflation. The Bank said: “Improving the understanding of money growth… is a key challenge.”
Mr Bean… makes sense…
It takes confidence to confess ignorance. It’s the first step to mastery of the challenge. But this particular subject brings up an interesting question. To what extent does increasing complexity impact a community’s ability to maintain stability? Say no unmanageable economic or ecological crisis results from current conditions. Then it would seem that technological complexity will continue to increase, plus the multi-tiered complexities inherent in increasing population will also increase. Will this increasing complexity in itself foment crisis? If so, to what extent? Maybe the humans of a thousand years from now will all have to know calculus to get by from day to day, and those incapable of adapting will have gone the way of the dinosaur.