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from Lawrence Summers:

Britain and the limits of austerity

The Bank of England is seen in the City of London

The British economy has experienced the most rapid growth in the G7 over the last few months. It increased at an annual rate of more than 3 percent in the last quarter -- even as the U.S. economy barely grew, continental Europe remained in the doldrums and Japan struggled to maintain momentum in the face of a major new valued added tax increase.

Many have seized on Britain’s strong performance as vindication of the austerity policy that Britain has followed since 2010, and evidence against the secular stagnation idea that lack of demand is a medium-term constraint on growth in the industrial world.

Interpreting the British strategy correctly is crucial because of the political stakes in Britain, the question of future British economic policy and, most important, because the British experience influences economic policy debates around the globe. Unfortunately, when properly interpreted, the British experience refutes the austerity advocates and confirms John Maynard Keynes’s warning about the dangers of indiscriminate budget cutting during an economic downturn.

A protester holds a placard during a rally in Trafalgar Square in central LondonStart with the British economy’s current situation. While growth has been rapid recently, this is only because of the depth of the hole that Britain dug for itself. While the U.S. gross domestic product is now well above its pre-crisis peak, in Britain GDP remains below previous peak levels and even short of levels predicted when austerity policies were implemented. Not surprisingly given this dismal record, the debt to GDP ratio is now nearly 10 percentage points higher than forecast, and the date when budget balance is predicted has been pushed back to the end of the decade.

from Anatole Kaletsky:

British economic governance encounters turbulence

Students of British history will recall the story of Thomas a’Becket, the 12th century prelate who was handpicked by Henry II to become Archbishop of Canterbury because of his loyalty to the Crown. Within months of his appointment, a’Becket turned against the King in the numerous conflicts between church and state. As a result, a’Becket was murdered at the altar of Canterbury Cathedral in 1170, after four of Henry’s henchmen heard their royal master mutter in irritation: “Will no one rid me of this turbulent priest?” Archbishops do not have much political clout these days, but comparable spiritual importance now attaches to central bankers. And a central banker who suddenly seems reminiscent of Thomas a’Becket is Mark Carney, the recently appointed governor of the Bank of England.

When George Osborne, the British chancellor of the Exchequer (finance minister), delivered his Autumn Statement on Britain’s economic and fiscal prospects this week, he intended it as a “soft launch” for the Tory-Liberal government’s campaign for re-election in May 2015. The big set-piece speech offered Osborne an ideal opportunity to boast about the British economy’s sudden improvement this year and to announce some populist measures, such as a “voluntary” price-control regime for energy utilities, that were carefully designed to wrong-foot the Labour opposition. Osborne’s speech marked the start of a long political campaign designed to create a Pavlovian association in voters’ minds between government policies, rising house prices and the economic recovery. If this campaign is successful it will virtually guarantee election victory for the Tory-Liberal coalition -- and it could even make an outright majority for the Tories conceivable in 2015.

from Breakingviews:

BoE’s small-firm stimulus is blueprint for Draghi

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The euro zone is no longer collapsing, but credit is. The European Central Bank is reportedly considering giving banks cheap loans to stimulate lending. The Bank of England’s so-called Funding for Lending scheme shows that’s tricky, but the euro zone shouldn’t hold back.

from Breakingviews:

Blueprint for new BoE could start with rebrand

By Dominic Elliott and Christopher Hughes
The authors are Reuters Breakingviews columnists. The opinions expressed are his own.


Bank of England Governor Mark Carney has hired McKinsey and Deloitte to advise on strategy. Breakingviews imagines what the consultancies might recommend.

from Anatole Kaletsky:

Mark Carney abandons Thatcher-era supply-side policy

The era of laissez-faire monetarism is over, as the world moves by small but inexorable steps towards a new kind of Keynesian demand management. One after another, governments and central banks in the leading economies are accepting a responsibility for managing unemployment that they abandoned in the 1970s, during the monetarist counter-revolution against Keynesian economics. On Wednesday it was Britain's turn, as Mark Carney, the new governor of the Bank of England, joined Ben Bernanke in making the reduction of unemployment his main monetary policy goal.

Carney was until recently Canada’s top central banker and was headhunted by the British government specifically to inaugurate a new era of “monetary activism.” On Wednesday, at his first official press conference, he lived up to this billing.

from Anatole Kaletsky:

Who will get credit for Britain’s economic turnaround?

Mark Carney, the former head of the Bank of Canada who has just taken over as governor of the Bank of England, presided Thursday over his first monthly meeting of Britain’s Monetary Policy Committee (MPC). The meeting produced no change in monetary policy, yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the greatest compliment that any middle-aged white male could wish for, when it compared his appearance and hairstyle to George Clooney’s. Carney may continue basking in this adulation because he is lucky enough to be in the right place at the right time.

He has arrived at the BoE at the precise moment when the economic figures have started to suggest that the British economy is pulling out of its longest and deepest recession on record. One of the main reasons for this turnaround has been a sudden pickup in housing prices and mortgage lending, the traditional driving forces of the British economy. This improvement, in turn, has reflected a bold new government-backed borrowing program, whereby the British Treasury is guaranteeing up to £600,000 of new mortgage debt for anyone who can put up 5 percent of equity into buying a home. While this audacious policy attracted surprisingly little attention in the media when George Osborne announced it in his March budget, British homeowners and bankers were quick to catch on. As a result, house prices are rising rapidly across Britain, mortgage lending has rebounded to its highest level since the Lehman crisis and homebuilders’ shares have almost doubled. And all this is before the government incentives are expanded from newly-built houses to secondhand properties and remortgages in January 2014. For the moment, house prices are being bid up by cash-rich buyers who are front-running the government subsidies, in the confident expectation that a full-scale property boom will begin in 2014.

from The Great Debate UK:

Expect no immediate fireworks from Mark Carney

--Darren Williams is European Economist at AllianceBernstein. The opinions expressed are his own.--

On July 1, former Bank of Canada Governor Mark Carney will replace Sir Mervyn King as Governor of the Bank of England. For many observers, this will herald a new dawn in the conduct of British monetary policy. The process, however, will be more evolutionary than revolutionary.

from Breakingviews:

Carney in doesn’t mean pound down as QE heads out

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Is Mark Carney really Mr. Easy Money, about to devalue the pound in a bid for growth? The incoming head of the Bank of England has spoken of the need to attain “escape velocity”. But the logical deduction - that he will open the monetary floodgates and send the pound down to $1.40 - ignores the latest economic news and the new international mood on monetary policy.

from Anatole Kaletsky:

Britain’s two cheers for Carney

When Mark Carney, the respected head of Canada’s central bank, was appointed on Monday to the even more august position of governor of the Bank of England, Britain’s reaction was a characteristic blend of self-deprecation and smugness.

The self-deprecation was publicly expressed by an Opposition MP, Barry Sheerman: “Isn’t it a little surprising that the leading banking nation on earth could not find a British candidate for the job?” This feeling of mild embarrassment seemed to be quietly shared by many Britons in addition to the distinguished domestic candidates who were passed over.

from MacroScope:

There be feudin’ at the BoE

The once-good relationship between Bank of England Governor Mervyn King and his most likely successor, Deputy Governor Paul Tucker, is coming  under increasing strain, according to a new book by former Daily Telegraph journalist Dan Conaghan.  It  alleges   King’s management style and and alleged disdain for the financial markets is to blame.

While the Bank of England’s Monetary Policy Committee remains reasonably collegiate, on other matters King more than lives up to the description from former chancellor Alistair Darling that he is ‘incredibly stubborn’, says Conaghan, who now worksas an asset manager.

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