In February 2020, a few weeks before Britain was thrown into lockdown, Sajid Javid resigned as chancellor of the exchequer over a bust-up with the prime minister\u2019s chief adviser, Dominic Cummings. The fight was thought to be over Cummings\u2019s attempts to dictate who could and could not work in No. 11. In fact, it was just one skirmish in a long-running and bitter power struggle between the two men. Two months before his resignation, Javid had claimed victory in a different battle against Cummings \u2013 one over who would occupy the governor\u2019s office at the Bank of England.<\/p>\n
Cummings wanted Andy Haldane, then the Bank\u2019s chief economist, who he believed was intellectually curious, allergic to groupthink and might give the Bank the shake-up it needed. Javid put his foot down: it had to be Andrew Bailey, then chief executive of the Financial Conduct Authority.<\/p>\n
Five years on, the British economy is teetering on the brink. Beneath it lies a deep fiscal hole, created by billions of pounds of unfunded spending \u2013 never-ending health promises, a spiralling welfare bill and a triple lock on the state pension which will cost three times as much as originally estimated. Then there is the crushing burden of debt interest, which costs twice the defence budget, pulling the nation closer to financial collapse.<\/p>\n
The Bank and its Governor have one job that matters above all: keeping inflation under control. Bailey and the other eight members of the Bank\u2019s Monetary Policy Committee (MPC) are legally required to keep inflation at 2 per cent. For 46 of the 64 months that Bailey has been Governor, inflation has been above that target. At worst, it was in double digits.<\/p>\n
Politicians deserve much of the blame for the country\u2019s economic state. But behind four prime ministers over the past five years has been Bailey \u2013 the banker who has enabled their recklessness and whose decisions will determine the extent to which we can recover.<\/p>\n
Britain is addicted to cheap money and Bailey has been happy to deal it out. In the aftermath of the 2008 financial crisis, central banks across the world slashed interest rates and flooded markets with cash. Bailey was chief cashier of the Bank during this period. His signature appeared on the notes being printed. He was a symbol of this new age of cheap money, as well as an architect.<\/p>\n
Later, to finance pandemic spending during the Covid lockdowns, including the \u00a370 billion furlough scheme, he let the money printers go into overdrive. Initially, the Bank created \u00a3200 billion. This was followed by another \u00a3100 billion and then a further \u00a3150 billion, just in time for Christmas. At the peak of his quantitative easing (QE) programme, nearly half a trillion pounds of new money had been pumped into the economy \u2013 suspiciously close to the amount the government ended up borrowing.<\/p>\n
During the 2008 crash, QE at least stayed largely confined within the banking system. In the Covid era, with the government\u2019s furlough scheme as the conduit, billions of pounds entered households and businesses directly. Inflation shot up. \u2018It\u2019s QE that\u2019s really put us up the shitter,\u2019 says one bank staffer.<\/p>\n
\nBehind four prime ministers over five years has been one banker who has enabled their recklessness<\/p>\n<\/blockquote>\n
Every developed country printed money during the pandemic. But as prices started rising, Bailey appeared unconcerned. Even as inflation was reaching double the Bank\u2019s 2 per cent limit, he kept describing it as \u2018transitory\u2019. Haldane, by comparison, spent the summer of 2021 warning that an inflation spiral was coming and the only way to counter it was to raise interest rates urgently. Bailey shrugged off the suggestion. \u2018Raising interest rates won\u2019t produce more gas,\u2019 he said in the autumn of that year. \u2018It won\u2019t produce more semiconductor chips.\u2019<\/p>\n
Bailey\u2019s allies also treated warnings of a lasting inflationary risk with derision. One close confidant was seen rolling their eyes during a lecture on Friedrich Hayek \u2013 the free-market economist who warned that once inflation starts to spiral, it\u2019s nearly impossible to stop it.<\/p>\n
Now, after runaway inflation and a cost-of-living crisis, the Bank is desperately trying to play catch-up through quantitative tightening (QT) \u2013 essentially shredding the money it printed. But the cost of its mistakes is evident. According to the Financial Times, the process of buying and selling gilts to fund money-printing has led to a spectacular loss: four times what the US Federal Reserve lost.<\/p>\n
There is perhaps no one angrier at Bailey than Liz Truss. The former prime minister and her allies believe the Bank destroyed her premiership \u2013 and there are those in the world of finance who agree. \u2018Bailey is an absolute weapon and completely out of his depth,\u2019 says one investment banker. \u2018He\u2019s largely responsible for the fall of Truss.\u2019<\/p>\n
Truss\u2019s defenders argue that the pension crisis, which came about in the days after her September 2022 mini-Budget and threatened to crash the entire bond market, is evidence of the Bank\u2019s fatal complacency, rather than her recklessness. Liability Driven Investments (LDIs), used by pension funds, were far more vulnerable to changes in interest rates then the Bank ever predicted. And it was Bailey\u2019s interest rate policy \u2013 ultra-low borrowing costs followed by sharp hikes \u2013 that made the system so volatile. The Bank announced gilt-selling just days before the mini-Budget, further pushing yields up. When the sell-off began, Bailey intervened \u2013 but gave pension funds only three days to \u2018get this done\u2019, which insiders say worsened the panic.<\/p>\n
\nBailey\u2019s willingness to indulge the fantasy of \u2018free money\u2019 has had consequences beyond inflation<\/p>\n<\/blockquote>\n
The Bank later admitted the system was unstable before Truss\u2019s Budget. Regulators \u2013 overseen by Bailey \u2013 overlooked the risks. The Bank\u2019s own figures suggest nearly two-thirds of the spike in yields was not because of the mini-Budget but the LDI sell-off. The bomb had been armed long before 2022; Truss just happened to strike the match.<\/p>\n
One of the Bank\u2019s big problems is its failure to produce accurate forecasting. A review led by Ben Bernanke, former chairman of the US Federal Reserve, found that its forecasting process was riddled with outdated models \u2013 its main one, \u2018Compass\u2019, was deemed unfit for purpose. Bernanke concluded that the Bank\u2019s performance was merely \u2018middle of the pack\u2019 \u2013 a blow to the credibility of the world\u2019s sixth-largest economy.<\/p>\n
In November 2021, after more than \u00a3500 billion was printed in just under two years, the Bank forecast inflation would peak at 4.8 per cent. In fact, it hit 11 per cent. During the pandemic, Threadneedle Street\u2019s GDP projections were the worst among major central banks. Britain was flying blind, refusing to acknowledge the disastrous state it was in.<\/p>\n
The result of all this, according to one former City chief executive, has been a generational delusion. \u2018If you think you can borrow close to zero, you are out of your mind,\u2019 he says. \u2018A large part of the population [suffered] when cheap debt suddenly became expensive debt. Bailey was asleep at the wheel.\u2019<\/p>\n
The willingness of Bailey and his MPC to indulge the fantasy of \u2018free money\u2019 has had consequences beyond persistent inflation. It has created a drag on growth which is likely to continue for years. It has distorted the mortgage market even further, as a third of mortgage-holders still haven\u2019t had to grapple with refinancing since interest rates spiked. Perhaps most importantly, it has rewired how a generation of politicians and the public think about government spending and emergency support. Even as inflation rises again \u2013 the current rate is 3.6 per cent, almost double the Bank\u2019s supposed limit \u2013 Bailey talks about the prospect of interest rate cuts. Experts can\u2019t believe what they\u2019re hearing: the job of driving down inflation is not yet done, and yet the MPC has become, in the words of one former member, \u2018gung-ho\u2019.<\/p>\n
Bailey\u2019s term as Governor isn\u2019t over until 2028. The only way governors leave office is by resigning or by going personally bankrupt. Mostly, it\u2019s a job you keep as long as you want it. But some in the City say it shouldn\u2019t be. \u2018If you were out by five times in normal businesses, you\u2019d be sacked,\u2019 one former CEO tells me, referring to the Bank\u2019s missed inflation target.<\/p>\n
Still, Bailey has his defenders. They shift the blame for the concept of \u2018free money\u2019 on his predecessor Mark Carney, who normalised money printing after the financial crash. Others point out that Bailey is just one vote of nine on the MPC. The Governor can have great influence on the direction of monetary policy, but he is not an all-ruling king.<\/p>\n
Where Bailey\u2019s critics and friends agree is that he\u2019s \u2018steady and dull\u2019. Perhaps, though, these times demand someone braver. One of Bailey\u2019s greatest sins has been to let groupthink take over the Bank. \u2018We need an operator, not a technocrat,\u2019 one senior industry figure says. Mervyn King, the former governor, has privately questioned Bailey\u2019s management and communication ability.<\/p>\n
Reform UK, who are at around 30 per cent in the polls, want to overhaul the Bank\u2019s independence and take particular issue with the interest paid on printed money given to banks and the losses experienced under QT. But one senior trader warns that any change to Bank independence risks a \u2018Reform premium\u2019 of two to four points on the cost of borrowing \u2013 tens of billions of pounds.<\/p>\n
Either way, many economists believe we\u2019re hurtling towards a crisis. Last year Britain\u2019s fiscal watchdog, the Office for Budget Responsibility (OBR), warned debt could pass 600 per cent of GDP in 50 years. Yet it\u2019s hard to get a definitive idea from anyone of what that future crisis looks like.<\/p>\n
That\u2019s because it may not take the form of a sudden collapse, but more a constant state of anxiety. It\u2019s why the Treasury now operates like a liquidity manager, with departments scrambling just to keep up with inflation. It\u2019s why the government lives in fear of how the bond market will react to its announcements. It\u2019s why Peter Mandelson spent the run-up to last year\u2019s general election warning Keir Starmer that he could not afford to govern like a new Tony Blair. It\u2019s why one MP recently asked why \u2018just a few billion\u2019 from the government\u2019s welfare U-turn requires tax rises. It\u2019s why, as the OBR puts it, public expectations of the state \u2018seem to be rising\u2019 and yet many voters seem to believe that their expectations can be met without higher taxes.<\/p>\n
They can\u2019t be. But this is what monetary complacency looks like. This is what Bailey has enabled. Perhaps no one can say what a crisis will look like because we\u2019re not hurtling towards one \u2013 we\u2019re already living through it.<\/p>\n","protected":false},"excerpt":{"rendered":"In February 2020, a few weeks before Britain was thrown into lockdown, Sajid Javid resigned as chancellor of…\n","protected":false},"author":2,"featured_media":268512,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5018,3,4],"tags":[25548,936,748,1700,393,4884,1144,712,16,15,1764],"class_list":{"0":"post-268511","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-britain","8":"category-uk","9":"category-united-kingdom","10":"tag-andrew-bailey","11":"tag-bank-of-england","12":"tag-britain","13":"tag-economy","14":"tag-england","15":"tag-great-britain","16":"tag-northern-ireland","17":"tag-scotland","18":"tag-uk","19":"tag-united-kingdom","20":"tag-wales"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/114866934581982131","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/268511","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=268511"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/268511\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/268512"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=268511"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=268511"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=268511"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}