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Crisis, yes crisis - Blanchflower calls for big rate cut

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Paul Mason | 17:20 UK time, Thursday, 28 August 2008

It was his namesake, footballer Danny Blanchflower who famously said "we need to get our retaliation in first". Today, rebel MPC member Professor David Blanchflower has broken with Bank of England protocol to do exactly that. He has called for a big, fast rate cut, a fiscal stimulus to the economy and in general indicated that both the government and the Bank need to get their fingers out.

The move came in an interview with the Reuters news agency, in which the US-based academic predicted:

"We are going to see much more dramatic drops in output. The way to get out of it is to act, by interest rate cuts and fiscal stimulus and other things to try help people who are hurt through this."

"The fears that I have expressed over the last six months have started to come to fruition...I've obviously voted on quite a number of occasions now for small cuts but we need to act and we probably need to act in larger amounts than that. We need to actually get ahead of the game and it appears that we are now behind."

"Sitting by doing nothing is not going to get us out of this."

Professor Blanchflower, a labour force economist by specialism, predicts there could be 2m people unemployed in the UK by Christmas and that, once inflation peaks in the next two months it could "plummet like a rock".

I understand the Professor's view is so pessimistic that he sees inflation at below 1% within 18 months and possibly below zero - that is, deflation.

The move, on the eve of MPC members going into self-imposed purdah before the next interest rate decision, is unprecedented. By implication it is a stinging criticism of the rest of the MPC - and of the way the Bank has interpreted its remit. Despite recent calls to rewrite the remit, Professor Blanchflower is on record as saying the remit is sound: but he believes the interpretation of it is over-rigid.

I understand the Professor will advocate and vote for a speed and rate of cut unprecedented since the dotcom crash: certainly above 25 basis points at the next decision and possibly above 50 basis points. He points to the example of the Federal Reserve which has shaved 300 basis points off rates in its cutting cycle.

One notable aspect of the Professor's intervention today is that it goes beyond monetary policy to fiscal policy: his open call for a fiscal stimulus will add momentum to the push within the government for a timely economic relaunch package. Since, one one interpretation, any major fiscal stimulus (ie a tax giveaway) would have to prompt a monetary tightening by the bank (ie a delay to the rate cut or an actual rise), the move raises difficult questions for Bank governor Mervyn King and Chancellor Alistair Darling.

Basically he is saying there is a crisis, we need rapid action now before unemployment rockets and growth collapses. He has said it before but never this strongly:

"What we have now is a turning point in many ways -- certainly you might think of it as a paradigm shift. We have a global financial crisis, an oil shock coming, people with little experience of what is really going on."

Clearly, in the interests of balance, I need to point out that eight other members of the MPC disagree with him; one to the point of advocating rate rises in the last rates decision.

The MPC always meets beneath the gaze of a portrait of Sir Montagu Norman, who saw the paradigm of economic policy shift not once but twice during the 1920s and 30s, when Britain came off the Gold Standard and then opted for Keynesian economic planning.

"We didn't know you could do that" was the plaintive cry of one hapless Labour politician on the day in 1931 when the coalition government ditched sterling's link to gold. That's what happens during paradigm shifts and, if you see the Bank suddenly go into "reverse ferret" mode and start cutting rates frantically, at least the Prof can say he did know you could do that.


  • Comment number 1.

    yes unemployment is key.

    it does feel like watching a slow motion train wreck.

    ''Who is in charge of the clattering train?
    The axles creak and the couplings strain,
    and the pace is hot and the points are near,
    and sleep hath deadened the driver's ear,
    and the signals flash through the night in vain,
    for death is in charge of the clattering train''

    ["Death and his brother sleep" by Edwin J Milliken]

    the best stimulus package would be a two way grid as it kills several birds with one stone. It creates huge number of jobs, massive revenue and weens the uk off the fossil mindset which has to come sooner or later so why not now?

  • Comment number 2.

    Cutting rates now is almost the worst possible thing to do. The dramatically low rates were a major contributor to the credit boom - the crash of which we are now just beginning to experience.

    Professor David Blanchflower seems to have made his professional career in the early Thatcher Economics era of the eighties and like most people once an idea is learned it takes a long time to see its error, sometimes never. I would ask him to consider the real world results of ultra cheap (worthless) money of the last decade.

    The financial institutions found more and more exotic, and insane, ways to create money as they had little of no risk - as they thought at the time. The bankers' fiddles created the money from their synthetic financial instruments, but this money did not give much of a return as the rates were so low, so they needed more and they 'created' more and this is how and why we got to where we are today.

    Cheap money (low interest rates) gave us mass worldwide insolvent banks - how on earth can he justify doing the same this again!

    Capital needs to have a fair value, as does labour/labor, doing insane things like lowering interest rates now is wrong so please thing again! Rates should go up!


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