What we learned from Mark Carney’s Future Forum Q&A

In a welcome bid to increase its transparency, the Bank of England has been hosting online Q&As with some of its most senior staff over the past 10 weeks on its Future Forum.

As noted in previous blogs, Positive Money has been contributing lots of questions ourselves and following the forum closely.

On Wednesday the Bank of England’s Governor Mark Carney took part in his Q&A. Here’s some of the things he told us.

MORE QE LOOKS ON THE CARDS

As expected, Mark Carney defended QE, repeating the usual remarks about the policy’s positive impact on the UK economy, without considering how other policies (such as helicopter money or overt monetary financing) could have enabled a far more effective, equal and sustainable recovery. Unfortunately he suggests that rather than exploring alternative policy tools, the Bank of England will repeat its response to the last crisis:

“The MPC has used a range of unconventional monetary policy tools to provide support to the economy since the crisis, including purchases of gilts and corporate bonds and a Term Funding Scheme for banks to reinforce the pass-through of cuts in Bank Rate to the interest rates faced by households and businesses. There is scope to expand all these elements, should further monetary stimulus be required to meet the inflation target.”

MARK CARNEY ON MONEY CREATION

Carney reaffirmed that banks create money when they issue loans, as the Bank of England outlined in its 2014 watershed working paper ‘Money creation in the modern economy‘:

“money, broadly defined, can be created in three main ways: first, printing notes and coins; second, by creating central bank reserves, perhaps to be used to buy financial assets (Quantitative Easing, or QE); and third, through the creation of new loans (and the corresponding deposits in borrowers’ accounts) by banks and building societies.”

“Importantly although the Bank papers correctly note that banks have the power to create money, they also emphasise that power is not unlimited. Importantly the Bank of England’s policy committees can influence the incentives for banks to create money through monetary and prudential policy instruments.”

However the Governor perhaps overstated the current role of the Bank of England in controlling the money supply, which is determined foremost by commercial banks’ willingness to lend, and as Positive Money and others have explained, policies such as capital requirements and interest rates are not a chief influence in banks’ decisions to create new money:

“It’s important to recognise that banks can’t create money without limit. Ultimately, the amount of money in the economy reflects the actions of the Bank of England. We set the interest rate, which affects how much high street banks charge for lending money, and therefore how much demand for new loans there will be. And we regulate banks and building societies, requiring them to hold a certain amount of financial resources, called capital, in case people default on their loans, which affects how willing banks are to provide loans.”

THE BANK OF ENGLAND IS COMPLACENT ABOUT PRIVATE DEBT

“Recent growth in aggregate credit in the UK has been modest, growing a little faster than nominal GDP. Of course, there remain risks and the FPC in particular watches these closely. For example, the level of total credit is still high relative to historical standards, and the higher risk segment of the corporate credit market has grown rapidly over the past two years. But we do not have any reason to believe that risks from private sector debt are particularly elevated right now.”

THE BANK OF ENGLAND HAS AN “OPEN MIND” ABOUT CENTRAL BANK DIGITAL CURRENCIES

Carney outlined the advantages of a central bank digital currency (CBDC), as proposed by Positive Money:

“The main advantage is that the public would have direct access to a risk free asset. This is currently provided by a combination of banks/building societies and deposit insurance. It could also make digital payments like cash (immediately useful once transferred). A potential additional advantage is that it could facilitate more efficient distributed, real-time payments making innovations like smart contracts more effective.“

“The Bank has an open mind about the eventual development of a CBDC and has an active research and pilot programme dedicated to it. That said, given current technological shortcomings in distributed ledger a true, widely available reliable CBDC is still a long-term prospect.”

THE BANK OF ENGLAND IS “COMMITTED TO CASH”

Carney repeatedly stressed that the Bank of England is “committed to cash”. As he summarised:

“it is for the government to decide on the legislation around the use of cash. The Bank of England’s role is to ensure that, given that legislative framework, both electronic payments and cash are as efficient and resilient as possible. We are committed to cash.”

THE BANK OF ENGLAND RECOGNISES THE DRAWBACKS OF A CASHLESS SOCIETY

“The main drawback to moving to an entirely cashless society is that millions of people prefer to use cash than electronic payments, including for smaller transactions. Cash is an instant and convenient means of payment. That’s why the Bank continues to provide it.“

“We know from industry data and our own research that people from lower income households are generally more reliant on cash and that heavy cash users are less likely to proactively switch payment methods. We are working with the private sector to operate the wholesale cash distribution system – we are committed to ensuring that this system remains fit for purpose, so that cash is distributed where it is needed.”

CARNEY ADDRESSES MODERN MONETARY THEORY (MMT)

“Despite its name, MMT is really more concerned with fiscal policy which is the responsibility of the government not monetary policy which is the responsibility of the Bank of England. So I will defer to the Chancellor when he hosts his next live blog…”