Until last week the general consensus on Bank of England Governor Mark Carney was that he was working almost entirely to Chancellor George Osborne's script helping to engineer a new housing and construction boom that would give the Tories a chance of forming another government.
But then he announced that, while the Funding for Lending Scheme (FLS) will still be used to shovel cheap money into the banks, the Bank of England is to insist that they use the money to lend to small businesses, rather than would-be home owners. For good measure, Carney also said he was going to have the lenders use tougher affordability tests before they offered mortgages to buyers. It all gives us a tiny bit of hope.
The immediate practical effect is minimal: the banks still have plenty of FLS funds to use for mortgages for now, and the change obviously makes no difference to the thing really making the market happy the Help to Buy scheme. But the political effect is rather different.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
What this change should remind us all of is the extraordinary powers the Bank of England has. All too many people think that monetary policy is just about interest rates. That isn't so. Have a quick look through the list of powers held by the Bank's Financial Policy Committee (FPC). The FPC is responsible for macro-prudential' regulation. That effectively means it has the power to control credit in the UK with non-interest-rate tools. It can make banks hold counter-cyclical capital buffers. It can force upon them different capital requirements for different sectors. And it can change their leverage ratios.
This all sounds complicated, but it could perhaps help in a situation such as the one the UK finds itself in at the moment one in which most of the economy still requires super-loose credit (or so most people think), but where the housing market is getting ahead of itself. It means the Bank can adjust the flow of money into housing while leaving everything else as it is. It can, if it feels like it, stop a new bubble appearing in the housing market with a couple of computer keystrokes.
But that's not all Carney can do with his FPC powers. I listened to CLSA's Russell Napier speaking in a debate last month. The question was whether or not the huge amount of cash sitting on the Bank's balance sheet would turn into inflation when lending in Britain picks up. Most people expected inflation. Napier said we didn't have to have it.
Instead, Carney could use his "whole new world of credit control" to clamp down fast on lending as soon as the first signs of exuberance appear in the market. If he gets it right from here on in, says Napier, we will have no new housing bubble (we might even get rid of the old one), and we will also avoid the high inflation most expect quantitative easing to give us in the end. The problem? The world's central banks haven't got a particularly good record in getting this kind of thing right.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
-
Inflation may be slipping but there is still plenty of misery aheadEditor's letter Inflation may be a little lower than last month as the prices of petrol and diesel fall back, but it remains structural and long-term, says Merryn Somerset Webb. And there are no painless solutions.
-
Beat the cost of living crisis – go on holidayEditor's letter As inflation rages, energy bills soar and the pound tanks, what’s a good way to save money this winter? Go on holiday, says Merryn Somerset Webb.
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
Don't be scared by economic forecastingEditor's letter The Bank of England warned last week the UK will tip into recession this year. But predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, says Andrew Van Sickle.
-
The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
-
The wolf returns to the eurozone’s doorEditor's letter The eurozone’s intrinsic flaws have been exposed again as investors’ fears about Italy’s ability to pay its debt sends bond yields soaring.
-
Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
-
The public may have reached its limit for tax risesEditor's letter The UK tax burden is now at a 70-year high. And, while there may be some reason to hold off on cuts right now, taxes are too high because the state tries to do too much. Perhaps it should do less, says Merryn Somerset Webb.
