Who'd want to be King?

Bank of England Governor Mervyn King spoke in Manchester this morning to the TUC conference -- or at least to most of it. Bob Crow and his colleagues from the RMT (motto: Nemo nos amat, nobis non cura est) boycotted the speech, with Crow saying that he had no wish to hear from someone he blamed for causing the current economic difficulties.

If Bob and his buddies had seen fit to show up, they would have heard the Governor plead guilty as charged. Key quotes from the speech (full text here) include:

We let it slip – we, that is, in the financial sector and as policy-makers – not your members nor the many businesses and organisations around the country which employ them.

and...

There was nothing fair about the financial crisis. It was caused not by problems in the real economy; it came out of the financial sector. But it was the real economy that suffered and the banks that were bailed out. Your members, and indeed the businesses which employ them, are entitled to be angry.

and...

In 2008, banks were bailed out not to protect them but to protect the rest of the economy from the banks. That may not seem fair – and it isn’t – when other companies, such as Jaguar, had to stand on their own feet or go to the wall.

The brothers and sisters were probably mollified by this, though as Gov. King's line on the banks still seems much harsher than than the coalition government's, they may find that not too many of these worthy sentiments get translated into policy. They were probably less happy with the Governor's insistence that fiscal tightening cannot be delayed, though TUC general secretary Brendan Barber chose to focus on his admission that there was room for debate about how the tightening should be achieved.

There were only two passing references to inflation in the speech. This may reflect an accurate assessment of the interests of this particular audience, but it is to be hoped that it does not represent the Governor's priorities. It was reported on Tuesday that the CPI rose 3.1% in the year to August, the same rate as in July and well above the 2% target. With cotton and wheat prices soaring, VAT set to rise in January and Sterling still on the weak side, there is little prospect of a return to the target level any time soon. Most media commentary on the latest data suggested the Bank would "look through" one-off factors like these. However, you sort of sensed that the commentators' hearts weren't really in it: the Bank seems to have been "looking through" supposedly one-time factors for quite a few months now.

Even if you don't go all the way with the Friedmanite proposition that "inflation is always and everywhere a monetary phenomenon", there seems to be ample cause for concern. One-time factors like rising wheat prices or VAT hikes can indeed be "looked through" as long as monetary policy is positioned to prevent them from metamorphosing into a nasty trend. Right now, however, monetary policy remains as loose as it has ever been, and apart from the regular dissenter Andrew Sentance, nobody at the Bank of England seems inclined to change that.

With the impact of the promised fiscal tightening still to be felt, putting an end to monetary accommodation would surely be premature. But in effect, the Governor must be assuming that the fiscal tightening will help to ease inflationary pressures, particularly by curbing wage demands on the part of his friends at the TUC. If that doesn't happen, he surely knows that he will have to start raising rates before too long. Now THAT would have been a brave message to take to the TUC, and it probably wouldn't only have been Bob Crow that walked out on it.