Britain’s new world of credit control

The Bank of England has an arsenal of financial weapons at its disposal to control the economy. Used wisely, they could be a force for good, says Merryn Somerset Webb. But the danger is that we end up with 1970s-style credit controls.

An interesting little titbit in the FT today. The paper reported that the incoming deputy governor of the Bank of England, Sir John Cunliffe, has "dismissed fears" of a new housing bubble in the UK.

On what grounds, you might wonder? The answer is that the Bank of England - and in particular the Financial Policy Committee (FPC) - "has powerful tools to damp down exuberance".

If you thought that the Bank of England was all about interest rates you won't know what these tools are. But a quick look through the powers held by the FPC will give you a few clues.

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The FPC is responsible for macro-prudential regulation, and has a set of instruments it can use along the way: the counter-cyclical capital buffer; sectoral capital requirements; and bank leverage ratios.

This sounds complicated, but, as Russell Napier put it when I saw him at a debate at Heriot Watt University in Edinburgh earlier this month, all it means it that we have opened up a "whole new world of credit control".

These instruments effectively allow the FPC to control the supply of credit to different sectors at different times regardless of the level or direction of interest rates. This, says Russell, is dangerous. It is "capitalism with Chinese characteristics", and while it isn't a link many have yet made, it takes us right back to the credit controls of the early 1970s under Ted Heath.

There is a tiny bit of good news in this. If the FPC "has the guts" to use the tools it has, says Napier, it could prevent the powder keg that is all the new money created by quantitative easing (QE) from exploding into inflation all it has to do is to clamp down sharpish when lending starts to pick up again*. The problem with this bit of good news? It "probably won't."

*A few readers have asked me to explain how it is that bank lending increases the supply of money in the economy. There is a good explanation here in one of our videosbut I'll come back to it.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.