Matthew Robertson 7.59am
Ever heard of Paul Reid? What about Sir John Parker? John Deacon?
You’ll be forgiven for not knowing who two thirds of the above are but I’m sure a lot of you know what Ben Bernanke, Jean Claude Trichet and Mervyn King do for a living.
They are the fine tuning, careful helmsman of the Western economies. The men, who before 2008, were mostly concerned with raising/decreasing interest rates a percentage point or two so that inflationary pressures would not embed themselves in the economy.
Like now, they were hardly household names and even though their roles were fundamental to the world economy, the measure of their success was determined by the consistency of their approach and the expected headlines they each produced. This was the Guardian in 2006:
‘Interest rates were left at 3.25% but the ECB president, Jean-Claude Trichet, sealed market expectations that rates will rise next month by saying that vigilance was needed on inflation pressures.’
The Economist in 2007:
‘Ben Bernanke talked about “generally favourable financial conditions” and enthused—as much as a Fed chairman is allowed to—about “fairly brisk” financing activity in bonds and business loans. Mr Bernanke also talked about the Fed’s continuing concern over inflation. Nothing new here, really.’
And the FT in 2005:
‘But with money markets now expecting at least one quarter point interest rate cut this year and another early next year, Mr King’s emphasis on the risks of higher inflation appeared designed to correct the recent notion that interest rates would soon be cut.’
Inflation was the key problem and the tool at the disposal of central bankers to tackle it was setting interest rates. Economics had enabled solving the problem of inflation whilst continuing solid growth. Central bank independence removed the threat of politicians manipulating monetary policy to coincide with electoral cycles and by having a credible committee to keep inflation around a certain target, inflationary expectations could be tamed.
This was the job of a central banker, staying behind the scenes ensuring that inflation was kept under control and the economy smoothly elevated. A similar role to that of Paul Reid, Managing Director of National Air Traffic Services (NATS), who ensures the safe and orderly movement of aircraft along our air routes. Every little decision can have a monumental effect, a small deviation can set the course of the economy/aircraft on a cataclysmic path.
Of course the financial crisis of 2008, for which we are still suffering from, dispelled any belief that economics had solved the problems that had dogged it for years. Growth across the Western world is still stagnating and inflation is well above target in most Western economies.
Throughout the conference season you will have heard a lot from Cable, Osborne and Balls on their suggested paths for the UK economy. There is no doubt that the role of fiscal policy is important in negotiating the turbulence ahead but the key to the recovery lies with the controllers, the fine tuning, careful helmsman of the economy. A fiscal stimulus will have little impact if detrimental monetary policies are pursued at the same time.
A cautionary tale comes from Europe. The crisis devouring the Eurozone has various causes, not least the failure of European politicians to tackle the underlying problems, but the rate increase from 1.25% to 1.5% by the ECB on 7th July has not helped. ‘The entire continent would benefit from maintaining price stability and confidence’ exclaimed Trichet but the exact opposite has happened. As a result of the increase, borrowing costs increased for countries such as Spain and Italy, who unlike Greece are suffering from a problem of liquidity not solvency. On the back of the ECB’s decision stock markets fell across Europe and unemployment increased 150,000 to 10% from April to July and has stayed there ever since.
As the West confronts the dilemma of credit and liquidity the central banks will have to assist in every way possible and so the old rule book of maintaining price stability through setting interest rates may have to be altered.
Interest rates must be kept low to ease the pressure on companies and individuals’ cash flows. This is the lifeblood of the economy and maintaining liquidity must be at the top of every central bank’s agenda. A job reminiscent of Sir John Parker, chairman of the National Grid, who ensures that electricity generated anywhere in Great Britain can be used to satisfy demand elsewhere at any given point.
The systems are so interconnected that any break could have devastating effects. This is the exact dilemma central bankers face today. Central banks must maintain liquidity to ensure that money can reach businesses and individuals elsewhere when needed. By keeping interest rates low, central bankers can assist with ever increasing liquidity troubles.
You will have heard a lot about Cable’s fiscal stimulus, Balls’ VAT cut and Osborne’s credit easing over the Conference season. However, as the UK hovers over a possible double dip, America endures increasing unemployment and the Eurozone faces collapse it is the air controllers and energy deliverers of the economy who will have the biggest impact on our lives.
As for John Deacon, he was the solid bass player of Queen whose great hits would not have happened without him, but you already knew that didn’t you?