George Osborne forgets Bank of England created financial crisis

| July 20, 2009 | 1 Comment
Gross mortgage lending shows seasonal surge

Today’s announcement of regulatory reform of the financial services sector by the Conservative Shadow Chancellor, George Osborne, initially seems a sensible suggestion.

However, setting up the Bank of England to regulate banks to help prevent any potential future financial crisis fails to address two key points:

1. The Bank of England specifically and intentionally created the current conditions for the financial crisis in the UK, by making the creation of a property bubble a key economic policy;

2. Neither the Bank of England, any other regulatory body, nor the banks themselves, foresaw the extent of the current financial crisis - so how could they stop what they could not see or understand?

The issue of a property bubble is especially pertinent. Despite the fact that observers at all levels could see a property bubble was forming in the UK - with repeated warnings by the IMF since 2003 - the Bank of England’s MPC committee were not interested in house prices.

Or, more specifically, the MPC had been given charge over inflation as their primary concern.

This led the ironic position that at times, in order to try and ensure inflation was balanced, that they would have to promote further inflation of the property bubble.

The rising property bubble

It would be hard not to notice the property bubble, considering that property prices effectively doubled over 5 years to 2006.

The MPC was exceptionally naive about this result, with Kate Barker in October 2007 dismissing any suggestion of a property slump.

This was despite the fact the economists polled two years earlier by the Financial Times found that a property downturn was the biggest concern.

The UK government was quite aware of the growing property bubble - according to City Minister Kitty Ussher - but declined to be interested in addressing it.

Gordon Brown even took the IMF to task over their continued warnings about Britain’s financial outlook: while Finance Markets was warning that conditions could lead to economic collapse and stagflation, Gordon Brown instead cheerfully decreed that a US downturn would have no impact on Britain.

No one had a clue

Which neatly comes into the second point - that world governments really had no clue about the existing economic risks. Or, at the very least, were more concerned with upbeat posturing than any public admission of problems in the financial system.

After all, the government showed no interest in the property bubble, nor seemed to have any realisation that consumer-led economies such as the US and UK were seeing growth primarily from debt derived from this very bubble - or an understanding of the potential consequences of that deflating.

The underlying truth is that the Bank of England created the fundamentals to encourage reckless economic growth, and Gordon Brown didn’t care - just so long as he had positive growth figures to talk about.

The irony is that David Blanchflower was the only person who seemed to have any awareness of the consequences of existing policy - but remained a lone and isolated voice left unheard.

So despite George Osborne’s interesting re-arrangement of financial regulation in the UK, really this is all about setting up which of the blind lead the blind.

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  1. finance blog says:

    There is still a long way to go before out of depression.

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