Crisis, yes crisis - Blanchflower calls for big rate cut
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.