Last week saw the publication of
three independent reviews that found the governance of the
Bank of England to be "defective". The man at the top of the tree,
Mervyn King, admitted earlier this year that he should have done more to prevent the financial crisis. It has been suggested he be held to account, but no one seems to know how. Perhaps they should cut off his head? The trouble is they would have to keep lopping off heads until there was no one left to run the Bank, because it is not merely Sir Mervyn or Sir Mervyn and his team at fault but the entire system.
Sir Mervyn has a secure (and very fat) pension, but ordinary people are being warned their pensions are
going to shrink. One of the reasons usually given for this is that pension funds invest heavily in gilts, and when the government lowers the interest rate, their incomes fall.
In the United States, the Federal Reserve is currently keeping interest rates
artificially low. Chairman Bernanke has come in for heavy criticism on account of this. The conventional wisdom is that high interest rates reduce inflation, and as usual in this field, the conventional wisdom is wrong. Bernanke is doing the right thing but is going about it the wrong way.
When money is cheap, businesses thrive. Both business people and companies small and large are in business to make profits. When they borrow money, to expand or whatever, they factor in the cost of borrowing. A businessman who borrows at 20% will have less leeway than one who pays 2% for his loans. Ideally of course no one should borrow from anyone, but in practice the business world runs on credit.
When governments borrow, they have likewise to facilitate the repayments of their loans by raising taxes. But, and it is a big but, governments do not need to borrow. The Federal Reserve is keeping interest rates low for the banks and speculators. If it were issuing cheap credit to facilitate the building of infrastructure and the like, the government could spend this into circulation debt-free, and the entire economy would benefit. This was the finding of a Royal Commission on Money before the Second World War. Check
out or the full version of a fascinating publication
here.
While pensioners may lose income through low interest rates, they gain by prices remaining low, or at least not rising as fast as they would if the hard pressed businessman - including the supermarket chains - have to bow to the inevitable. They would benefit even more if instead of relying on funds to invest for them, they
managed their own portfolios; in practice this is something not everyone can do, but with a will, the government, indeed all governments, could facilitate this. People could pay their money into a central fund that was not managed at all but held secure by the state, money being paid in and out on demand. This would avoid the massive charges effected by funds which include remuneration and bonuses for fund managers, advertising, and small armies of economists who are no more use than the astrologer who writes for your daily paper.
