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.

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.

Recommended

Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Beware: even the greatest brands can fail
UK Economy

Beware: even the greatest brands can fail

For decades, John Lewis seemed to exist in a parallel universe. Now, a grimmer reality has dawned
27 Sep 2020
What's behind Britain's coronavirus testing disaster?
UK Economy

What's behind Britain's coronavirus testing disaster?

Britain’s system of testing for the virus that causes Covid-19 collapsed just when we needed it most. What went wrong?
26 Sep 2020
Insurers may be forced to pay out to firms hit by Covid
Small business

Insurers may be forced to pay out to firms hit by Covid

Hundreds of thousands of firms who have been affected by the Covid-91 pandemic may now be able to claim on their insurance policies.
25 Sep 2020

Most Popular

How the stamp duty holiday is pushing up house prices
Stamp duty

How the stamp duty holiday is pushing up house prices

Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb…
25 Sep 2020
The electric-car bubble could get an awful lot bigger from here
Renewables

The electric-car bubble could get an awful lot bigger from here

The switch to electric cars is driving a huge investment bubble. But that’s not necessarily a bad thing, says John Stepek. Fortunes will be made and l…
24 Sep 2020
Can Rishi Sunak’s winter plan save the UK economy?
UK Economy

Can Rishi Sunak’s winter plan save the UK economy?

With his Winter Economic Plan, chancellor Rishi Sunak is hoping to support the economy through the dark months ahead as restrictions tighten again. Jo…
25 Sep 2020