Economics Not His Strong Point

We’ve recently learnt from the Wikileaks cables that the Governor of the Bank of England Mervyn King doesn’t have a terribly high opinion of Cameron and Osborne. According to the BBC news website he told the US ambassador that the Tory leadership lack ‘depth’ and ‘seemed resistant to reaching out beyond their small inner circle’. He also said that they ‘had a tendency to think about issues only in terms of politics, and how they might affect Tory electorability’.

So it isn’t perhaps surprising that, when the Conservative leader offered a defence of the Coalition’s plans for higher education, his economic analysis lacked a certain amount of ‘depth’. Hoping to strike a worldly and responsible note he told the readers of the Evening Standard that, unlike its predecessors, his government ‘won’t patronise the public by pretending there’s a bottomless pit of money we can dig into. There isn’t, and that means difficult choices need to be made’.

If Cameron had a little more depth – if he in fact had the faintest idea what he was talking about – he would have known that there is indeed ‘a bottomless pit of money that we can dig into’. Funnily enough, given the reported views of its governor, it is the money-creating power of the Bank of England. In what is euphemistically called quantitative easing, Mervyn King has now magicked up £200 billion and spent it buying government bonds in the open market. This has kept bond prices up and the interest rates on state borrrowing correspondingly low. It has also – happy coincidence! – delivered vast profits to the banks, just in time for this year’s bonus round.

As Dan Atkinson and others have pointed out there is nothing to stop the Bank from passing this money to the government, to fund useful investment in the social and physical infrastructure of the country. The Prime Minister tells us sagely that the government is paying £5 billion a year on teaching costs in higher education a year. This is 2.5% of the money the Bank of England has spirited up and used to prop up an inept and steroidal financial sector.

Let’s stop pretending that the crisis in the British economy was caused by public spending on health and education. It was caused by a banking system that has escaped effective political control and needs to be reined in. If Cameron can’t see that, perhaps he should call an election, and find out whether the rest of the country agree with him and his small inner circle.

(By the way, I’ve explained how the financial system works here. It is only about a thousand words long but it covers the basics.)

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