An interesting little titbit in the FT today. The paper reported that the incoming deputy governor of the Bank of England, Sir John Cunliffe, has “dismissed fears” of a new housing bubble in the UK.
On what grounds, you might wonder? The answer is that the Bank of England – and in particular the Financial Policy Committee (FPC) – “has powerful tools to damp down exuberance”.
If you thought that the Bank of England was all about interest rates you won’t know what these tools are. But a quick look through the powers held by the FPC will give you a few clues.
The FPC is responsible for macro-prudential regulation, and has a set of instruments it can use along the way: the counter-cyclical capital buffer; sectoral capital requirements; and bank leverage ratios.
This sounds complicated, but, as Russell Napier put it when I saw him at a debate at Heriot Watt University in Edinburgh earlier this month, all it means it that we have opened up a “whole new world of credit control”.
These instruments effectively allow the FPC to control the supply of credit to different sectors at different times – regardless of the level or direction of interest rates. This, says Russell, is dangerous. It is “capitalism with Chinese characteristics”, and while it isn’t a link many have yet made, it takes us right back to the credit controls of the early 1970s under Ted Heath.
There is a tiny bit of good news in this. If the FPC “has the guts” to use the tools it has, says Napier, it could prevent the powder keg that is all the new money created by quantitative easing (QE) from exploding into inflation – all it has to do is to clamp down sharpish when lending starts to pick up again*. The problem with this bit of good news? It “probably won’t.”
*A few readers have asked me to explain how it is that bank lending increases the supply of money in the economy. There is a good explanation here in one of our videos but I’ll come back to it.