Vince Cable has lost his way

Following the statements of Vince Cable isn't as popular a pastime with the general public as it is with the inhabitants of Comment Central Towers.

So I feel it my duty to bring you up to date with the statements of the great man.

Since he is always getting credit for being a sage, it is worth noting that he has dived off the high board over the last couple of days.

Three weeks ago he told the Liberal Democrat conference that:

The Government must not compromise the independence of the Bank of England by telling it to slash interest rates and generate another dangerous inflationary ‘bubble'.

In the same speech he contrasted Tory emptiness with the Lib Dem's:

more deeply rooted, more principled, alternative, a clearer analysis of why Britain faces a growing crisis; and a more honest statement of what the Government can and cannot do.

Then on Sunday this principled, deeply rooted, more clearly analytical man said this:

What is required is for the chancellor to write to the governor saying that on a temporary emergency basis the committee should assume a central role in countering the crisis with a large cut in interest rate.

At least when Tony Blair did u-turns he generally moved from the wrong position to the right one. Cable's new position does not have this merit.

Comments

[David Boothroyd]

There is a running theme in this. Lib Dem speakers tend to be treated as though they are independent seers rather than partisan campaigners, and their u-turns are ignored.

When foreign affairs spokesman Ming Campbell was typically regarded as an expert on international affairs despite having no training or experience in the field. In September 2002 he said that Iraq definitely had WMDs and the dossier contained "confirmation of information that we knew or most certainly should have been willing to assume". After the war he went round telling everyone who would listen that the government's case was "a flawed prospectus".

Liberal Democrat party speakers are party politicians and nothing more.

[Stephen]

Vince transformed from Palin to Mr Has Been?

[J Pesach]

I don't know why Vince Cable is being held up as the Economic Sage du moment, he's entirely unprincipled having backed high taxes just a year ago and low personal taxes now; made little criticism of our debt economy in the early noughties before climbing on to the bandwagon in 2006, and has shown opportunism over Northern Rock. Just because he looks un-spun with his slow pronunciation, doesn't mean he is - rather he's a damn good political operator and self-publicist.

[Niall Rowantree]

Three weeks ago the FTSE was at 5200. Three weks ago RBS's market capitalisation was double what it is now. Three weeks ago Ireland and Germany hadn't unilaterally made moves to guarantee saver's deposits. Three weeks ago Iceland hadn't enacted legislation to prevent the country from going bankrupt. Three weeks ago HBOS hadn't announced merger talks with Lloyds. Three weeks ago ... well Danny you get my point. I'm a regular reader of your blog but the pro-Tory, anti everyone else sniping (the Mandelson-Osborne piece - why if George Osborne can't respect privacy did you feel you should keep his identity private?) is starting to get a little wearisome.

Vince Cable has called the correct moves in this crisis almost without fail and in every case weeks or months before the Conservatives or Labour. He made the statements at the time of the conference based on the situation at that time. Events change on a daily basis and at the present moment liquidity is the problem. Lowering interest rates, even if temporarily, could encourage LIBOR to fall and banks to lend to each other. What's the alternative. Guaranteeing deposits worth 3x our GDP... sharing the proceeds of growth?

[Graham Johnston]

I agree strongly with Niall. This particular post is a weak party political point. Even Keynes was happy to change his mind due to changing events. Surely we can let Vince Cable do the same?

[ex]

politics is dirty business

[RK]

Quite agree with Niall and indeed a no less substantial figure than Keynes mentioned something about "When the facts change, I change my mind." what do you Danny?

[John Miller]

Lib Dems have the luxury of knowing they will never be in power and never have to implement their policies. QED mate.

[John Miller]

Oh, and Nial Rowntree, you are conveniently overlooking the deeply rooted, principled bit. Had he used the word expedient, this would have denoted a willingness to change with changing circumstances, but he was using those words to define a seminal difference of the Libs from the other parties.

[Just Bob]

Glad someone else has noticed that Emperor Vince has no clothes - apart from those of an opportunist flipflopper.

There's only one person talking any sense at the moment and that's US congressman Ron Paul. Catch him on youtube if you value an alternative opinion to the 'state must bailout everyone' currently being stuffed down our throats by the MSM.

[Terry Collmann]

Niall - "Lowering interest rates, even if temporarily, could encourage LIBOR to fall and banks to lend to each other"

How would banks be more likely to lend to each other if interest rates were lower? Quite the opposite - interest rates are (or should be) a reflection of risk. Banks won't lend to each other unless the interest rate equals or exceeds the risk, so if interest rates fall artificially they'll be even less inclined to lend to each other.

[Dan Hassett]

What is the use of calling the correct moves when you are also calling the incorrect ones? It would't have been much use if he was Chancellor of the Exchequer. That involves making tough decisions, not just telling us what all the options are.

[Tom]

Daniel, as you started off Labour, became SDP, then Alliance, then continuing Owenite SDP, then Conservative, now Cameronite, I hardly think you ought to accuse anyone off having lost their way or doing U-turns.

[David Farmer]

The Lib-Dems are a wasted vote they always have been since my earliest memories of Jeramy Thorpe etc. The party should disband and pin their allegences to the nearest allie in the Tory or Labour camp that way we might have a more decisive policy machine rather like Lord Tebbit and Dennis Skinner(where ever Bolsover is?)having a debate! We need a more defined political landscape with stronger leadership there is little point having 3 parties all fighting the same middle ground which only encourages complacency as in the case of David Davis not having a Labour rival to contest, thats not democracy!Nick Clegg offers us nothing Brown or Cameron have already offered. The only Lib dem member I have much regard for is John Hemming MP for Birmingham Yardley and his considerable work on the refomation of the family court system!

[Patrick]

"When the facts change, I change my mind. What do you do, sir?"

The most obvious fact that has changed is the LIBOR spread, which was around 87bps on the 15th when he made his conference speech, and has gone up to nearly 300bps at the time of his second quote. So an economy teetering on recession has just been given a 2% rise in real-world interest rates between the two quotes you singled out.

While I'd broadly support the idea that the underlying economy doesn't want base rates "slashing" (although even there a downwards ratchet of 25 or 50bps probably wouldn't hurt) - and note that even at the conference Vince didn't rule out a downward bias to rates - I think you could justify something dramatic like Australia have just done in an attempt to keep real-world interest rates from rising as much as they have done recently. Needn't be forever, just for as long as the LIBOR spread is over 100bps say.

Danny - what would you do in response to the current interbank market?

[Patrick]

Terry Collmann (20:43:22)

You fundamentally misunderstand how lending works. Interest rates themselves do not reflect the risk of lending. The Bank of England base rates in effect set the riskfree rate of return. It's the difference between the interest on a particular loan and that riskfree rate of return that is related to the riskiness of the loan. Changing base rates doesn't change the riskiness of any loan.

Where Niall is wrong is that lowering base rates probably wouldn't affect banks much - they're pretty much indifferent to the level of base rates (to a first approximation). What it would do is make it easier for commercial companies to afford debt payments that have become 2% more expensive in the last month (without any intervention from central banks), but have to be paid out of the same real-world cashflow. That's where this stuff affects the real world, there will be companies out there going bust for no other reason than this expansion of the LIBOR spread. It doesn't seem unreasonable for central banks to try and mitigate that pain.

[Patrick]

Hmmm - having now read the original article, I see the Fink missed out the context of the second quote, the one he contrasts with "The Government must not compromise the independence of the Bank of England" :

"Central bank independence must be maintained - not least because, after the crisis has passed, intervention by governments could have big inflationary consequences. What is required is for the chancellor to write to the governor saying that on a temporary emergency basis the committee should assume a central role in countering the crisis with a large cut in interest rates. A big cut - conceivably as much as two percentage points..."

Also worth mentioning that the MPC remit allows for this : "The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output....The monetary policy objectives of the Bank of England are to maintain price stability and subject to that, to support the Government's economic policy, including its objectives for growth and employment."

So Cable appears to be saying :
"BoE independence must be maintained - but we've some flexibility on a temporary emergency basis to use base rates to reduce the impact of the bank crisis on the real economy".

Finkelstein says :
"Increasing real-world interest rates by 2% in a month is just what the economy needs as it teeters on the verge of recession."

I know which sounds more sensible to me....

[Jo]

Those of us who comment on blogs, of course, have the advantage of hindsight.

Vince Cable has the disadvantage of having to think whilst hitting the ground running. So, for someone hitting the ground running in a fast changing world I think there's not much wrong with Vince Cable's reasoning. He did say a ‘temporary increase’ which means his long term interest rate strategy remains unchanged.
Vince has a cool head; which is just what's needed at a time like this. I also think Gordon Brown has a cool head and that he uses it. However, cool heads on older shoulders do not make for exciting politics.

The trouble with the world is it wants excitement - the very thing that got the world and its financial system into this mess. Neither the banks who paid huge bonuses for taking risks nor the borrowers who took huge risks to fuel a high life have demonstrated very cool heads.
Let's not forget a free market and a self-regulated city were hailed as wonderful things by the Thatcher government all those years ago.
As for the FSA, it is now bleating about a global system rather than admitting it did not do its work; i.e. actually monitor the UK banks and then call them to account.

I’m tired of getting glib sound bites from the very people who are either responsible or who should have been in control in the hope of obscuring what we, the public, either know now or should be remembering.
Now that members of the public are all 'bankers' - this one would like to see bank heads roll, the FSA put into the hands of people who will insist it performs properly, and what I consider to be highly dubious practices, such as 125% mortgages, sub-prime mortgages and short selling, outlawed.