Charles Bean on a drama in 3 Acts

The Financial Times carries an interesting interview with Charles Bean from the Bank of England. He Deputy Governor reveals how on regional visits to businesses in the UK he has been hit by the severity of the likely labour shedding in the jobs market as businesses small and large look to make immediate redundancies to reduce some of their overheads. Robert Peston reinforces this point in a recent blog post in which he argues that many businesses are turning down new orders because they cannot be confident of securing the short-term loan finance needed to buy the raw materials and components needed to fulfill customer orders.

The transcript of the interview is great value for A2 economists who wish to understand a little more the views of one of the senior figures in the Bank of England on the evolving macroeconomic crisis.

And be under no illusions – this is an economic crisis that happens perhaps once a century.

A drama in three acts

“Act one was from August 2007 through to beginning of September and Act 2 was the mutation into a global systemic financial crisis. Act three is now having to work that through the real economy.”

Charles Bean on the paradox of thrift

“On the spending side, [it is] perfectly rational for an individual household, looking to increase their saving. Of course, household savings rates are at very low levels, and in the long term we do want those savings rates to rise. That’s part of the necessary rebalancing of the economy. Of course, if everybody does it quickly, today, you make the downturn far worse. What we need is Augustinian consumers who will be economically responsible in the medium term, but don’t rush to become virtuous overnight.”

Charles Bean on the importance of having a positive inflation target (2%)

“I think that having a positive inflation target is a positive virtue if you do get into a situation of deflation. Because, of course, the thing that is problematic in deflation is not if you have a quarter or two of falling prices; it’s when expectations become firmly anchored, as people expect in falling prices, and that goes on for some years: there’s a redistribution away from debtors to creditors as a result of falling prices; households hold off spending because they expect prices to fall further and so forth, and having a positive inflation target helps to anchor those expectations in positive territory.”

A lot of the interview covers some pretty technical stuff – but it does raise the question of how monetary policy might be conducted if and when the Bank of England has cut policy ‘base rates’ down to the floor of zero or just above.