George Osborne, the Chancellor, has also spoken in defence of the central bank’s aggressive response to the financial crisis. He has argued that a combination of “tight fiscal policy and loose monetary policy is the right macroeconomic mix” to help rebalance the economy.The “right macroeconomic mix” depends on what the question was. Suppose you were an economist working for Reagan’s Council of Economic Advisers in early 1983 when a toxic mix of expansionary fiscal policy offset by incredibly tight monetary policies had sent interest rates soaring and the currency through an incredible real appreciation. Back then the Volcker FED was begging policy to change the macroeconomic mix. Wouldn’t you advise the President to take up the offer? But the UK has been in a very different situation as Paul Krugman explains:
The interesting line, however, is Yates’s note that Britain had relatively high inflation in 2010-2011, which might have meant that the economy faced supply-side rather than demand-side problems, so contractionary policy might have been appropriate. My question is this: even if you accepted that argument, wasn’t that an argument for monetary rather than fiscal contraction? And if the BoE didn’t consider the evidence of overheating sufficient to justify pulling back on its quantitative easing, which had already tripled the size of its balance sheet, why should the Treasury have decided to tighten on its own? After all, the basic logic of the situation is that you should wait until monetary tightening — until the central bank is starting to move off the zero lower bound — before fiscal consolidation. That way you can trade off fiscal tightening for a slower pace of monetary tightening, and avoid deepening the slump. But in 2010-2011 the British central bank wasn’t ready to tighten in any case, so fiscal policy should have waited.But it gets worse when you consider what Peter Spence was writing about:
After a full parliament of near zero interest rates and quantitative easing, some are beginning to wonder whether the nation’s savers have been forgotten. The Bank of England has taken the brunt of the protests, accused of forgetting the interests of the thrifty at best, and at worst of stealing from them by generating inflation.It may be true that low real interest rates have led to lower portfolio income for certain savers but this is not the doing of the Bank of England as it was the stupid decision to pursue fiscal austerity that kept UK economic growth low, which induced the Bank of England to do the right thing – lower interest rates. Had the Cameron government not engaged in this fiscal austerity, the UK economy would be closer to full employment which would likely mean higher real interest rate might be a reasonable monetary policy.