The lecture offered little to excite but the answers he gave to questions from the audience and from listeners afforded encouragement and despair in equal measure to this audience member.
The full programme, including the audience questions, can be heard here
Asked by an activist from Occupy the London Stock Exchange whether the £325bn of quantitative easing could not have been more usefully directed towards building social housing, Mervyn King replied:
The way you describe it makes it very clear that this is a political judgement. I don’t take a view either way on how money should be spent. That has to be a matter for the elected government. What our job to do is to ensure that there is enough money in the economy to help the wheels of the economy turn. How that money is spent should be determined either by the private sector or by the government. It should not be for the Bank of England. We weren’t elected to do that job.
This, of course, is exactly the position taken by Positive Money; that the Bank of England should be responsible for issuing the nation’s money supply, but that the decision over how that newly-created money should be spent should be taken democratically, either by government, parliament or some decentralised means.
But then consider this question sent in by a listener:
Do you feel any remorse about inducing the house-price bubble by way of loose monetary policy you upheld for ten years before the crash?
We debated this long and hard on the Monetary Policy Committee, as to whether house prices were at an unsustainable level, and we concluded they weren’t, that the fact that interest rates around the world had become so low meant that it was quite natural for house prices to be higher and the extra borrowing that was being taken on by the younger generations, who were taking on mortgages, was actually balanced by the extra financial assets that the older generation, selling houses, had saved. So if you looked at the household sector as a whole, it didn’t look as if there was any excessive borrowing.
Doesn’t it make you want to scream?
And on the final question concerning interest rates, his view was:
Two years ago, the interest rate at which the government could borrow was the same as that which Spain and Italy were paying. That’s just two years ago. That was about 4%. Now the interest rate at which the UK government can borrow, ten year government bond yields, is down to about 2%, and that in Spain and Italy has gone up towards five and a half, six percent. That shows, first that it’s important to have a really credible plan that markets believe in, that you will deal with these deficits, not too quickly, not to destroy growth, that you will deal with it, and secondly, that unlike Spain and Italy, we have our own currency.
No mention of the contribution due to a central bank paying over the odds to persuade pension funds to part with government bonds in exchange for £325bn, driving up the price and reducing yields, which the pension funds promptly spent buying new government bonds, driving up the price and reducing yields, because, actually, pension funds are required by law to hold a certain proportion of government bonds.
It’s still possible that King ‘gets it’, but finds that rule number one of central banking – “Don’t spook the market!” – muzzles him while he’s in office. Or maybe it is less encouraging; what if his apparently hostile criticisms of the banks in the past, which have seemed to support the Positive Money position, have just been random noise?
With his term as Governor ending in June next year, it will be interesting to see what happens once he can speak freely.