Cameron Debt Fix Called ‘Bizarre’ by Ex-BOE Officials
Conservative leader David Cameron’s suggestion that the Bank of England end its asset purchases soon was criticized by two former central bank officials, a setback to the opposition’s effort to build credibility on the economy.
David Blanchflower, who left the bank’s Monetary Policy Committee in May, said Cameron’s speech yesterday was “bizarre” and if put into practice may tip the U.K. into a “depression.” Shamik Dhar, a former Bank of England economist, said “at best this is wrong and at worst downright dangerous.”
Without mentioning the central bank, Cameron told his party’s conference in Manchester that he opposed creating money, saying “sometime soon that will have to stop, because in the end, printing money leads to inflation.”
Prime Minister Gordon Brown’s government has authorized the Bank of England to purchase 175 billion pounds ($278 billion) in securities to help pull the economy out of its deepest slump since World War II. While the program will be wound down as the economy recovers, most economists say it has been necessary.
“I’ve been quite a critic of the Bank of England’s tactics in printing money, but the principle is a very good one,” said Steven Bell, chief economist at London-based hedge fund GLC Ltd. and a former U.K. Treasury official. “It has lowered bond yields and improved prospects for economic recovery.”
The yield on the 10-year U.K. government bond was 3.35 percent yesterday, compared with 3.64 percent on March 4, the day before the effort started.
Suggesting Reversal
Bell said Cameron’s remarks suggested that the Conservatives may reverse the policy if they win the election, due by June 2010, and that the comments were “unhelpful and surprising.”
After 12 years in opposition, the Conservatives are attempting to gain credibility as an alternative to Brown’s Labour government, which has trailed in polls since January 2008. At the party gathering, Cameron and his aides set out what they called a “painful” austerity plan to curb record debt, built up to revive growth.
Aides to Cameron and George Osborne, the Conservative lawmaker who speaks on finance, said the leader didn’t shift the party’s policy. The Conservatives have previously supported the central bank asset purchases.
They also proposed increasing the retirement age, freezing the wages of 4 million government workers and cutting spending by 7 billion pounds to shrink “big government.” There is “a steep climb ahead, but I tell you this: the view from the summit will be worth it,” Cameron said.
Blanchflower’s Concern
Blanchflower said it’s wrong to cut spending and shrink the size of the state before economic recovery is firmly rooted.
“Talk of repaying the debt, if you like, is fine in a boom, but not in the depths of the greatest recession we’ve seen in our lifetime,” Blanchflower said in a separate interview with Bloomberg Television yesterday. “It’s all about timing. Clearly you need to control the debt, but now? I don’t really think so.”
The British economy will contract 4.4 percent this year before expanding 0.9 percent in 2010, the International Monetary Fund predicts. The central bank forecast in August that inflation, which is now at the lowest level since 2005, will struggle to return to the 2 percent target in two years on line pay day loans.
Cameron’s remarks about the central bank are unlikely to register with voters, though attacks on his economic credibility might, said Andrew Hawkins from ComRes Ltd., a polling company.
‘Weakest Flank’
“I don’t think people have understood Cameron’s economics and it is his weakest flank,” Hawkins said.
Rick Nye, a pollster at Populus Ltd., said Cameron’s message about the economy is more likely to seep through.
“What Cameron wanted to do was reinforce the message that it’s time for a change and lay down a marker for the kind of government the Conservatives would be and the kind of prime minister he would be,” Nye said. “He did that pretty well.”
Brown’s Chancellor of the Exchequer Alistair Darling reiterated his critique of the Conservative economic plan, saying the economy remains fragile enough that his stimulus program is necessary.
“If we stopped supporting the economy now it would crash,” Darling said. “Every country in the world and just about every informed commentator is saying the same thing. The job is not finished. The Tories have been wrong at every turn.”
Blanchflower said Cameron’s program was “the most wildly dangerous thing I have seen in a hundred years of economic policy in Britain.”
‘No Understanding’
The economist from Dartmouth College in Hanover, New Hampshire, who was among the first to urge the central bank to stimulate the economy, said the Conservatives showed “no understanding of economics. It could drive the economy into depression.”
Dhar, now an economist at Fathom Financial Consulting in London, said that the central bank’s asset-purchase program, known as quantitative easing, should continue as long as institutions hoard cash and ration loans.
“Obviously, you have to stop QE at some stage, but this sounds like he’s ideologically opposed to it,” Dhar said. “It’s only ideologues that want to cut it off.”
Cameron didn’t mention the Bank of England’s program by name or make an explicit remark about what the Treasury’s policy toward asset purchases would be if he took office. Instead, he talked generally about the risks of the government running a deficit and “printing money” to bolster debt markets.
The central bank said yesterday it would spend to the limit of its program and evaluate whether to seek authority to make more purchases in November. While Governor Mervyn King has said the program will be wound down as the economy recovers policy makers will decide next month whether to extend it.
“Printing money will lead to inflation when you’ve got an economy running with no spare capacity, but that’s not the case now,” said Peter Dixon, an economist at Commerzbank AG in London. “We could print money without inflation for some time to come. Now is not the time to take back unconventional stimulus measures, that’s a long way down the road.”