Great Recession: Coppola's In Betweeners And Central Banks

Frances Coppola is a blogger and economist in the UK. She has some great insights. She has made comments that monetary policy has not been really successful. In fact, she takes UK central banker, Mark Carney, to task over the defense of monetary policy in the United Kingdom. 

While Carney and the UK government made mistakes compared to other central banks it did better. Carney  defends the Bank of England by saying:

"Simulations using the Bank’s main forecasting model suggest that the Bank’s monetary policy measures raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak. Without this action, real wages would have been 8% lower, or around £2,000 per worker per year, and 1.5 million more people would have been out of work."

It is pretty clear that the Bank of England, limited unemployment due to an expansionary monetary policy. One thing that could be said is that house prices did not decline like in the USA. It appears that UK monetary policy may have helped lessen the decline in house prices in the UK. The Bank of England acted with dispatch and the Fed did not. 

The UK guaranteed loans to small and medium businesses. The US government and Federal Reserve did no such thing. That was a huge mistake and led to mass layoffs in the USA. 

We know monetary policy between the subprime crash of 2007 and the HELOC crash in 2008, the USA did not have the Fed intervention in buying subprime paper. We know that subprime paper in the USA was forced back onto the balance sheets of the banks and then not supported by the Fed. It appears that the Bank of England did support continued lending in a way that the Fed did not. 

Carney said:

"Fiscal policy quickly came under severe strain as tax revenues plunged, the costs of social benefits rose sharply, and the huge bills for too-big-to-fail banks came due. Since then sustained austerity has reduced the fiscal deficit from around 10% of GDP in 2010 to around 3 ½ % today. While necessary, this has, on average, subtracted around 1 percentage point from demand each year. Over that time, structural policies have boosted participation in the labour market but have been unable to return productivity growth to anything resembling its historic average. For seven years, in the face of severe headwinds to growth, monetary policy has been the only game in town." 

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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