Earning My Money

Next week, the Bank of England's movers and shakers will fan out across the north-west, visiting scores of businesses from Cumbria to Merseyside and popping up in the local media. Charlie Bean, the deputy governor, is expecting to hear plenty of hard luck stories.
As the Bank cranks up "QE2", the second round of quantitative easing worth £75bn, in an attempt to revive the flat-lining economy, Bean tells the Guardian they are doing everything they can to respond to a sharp deterioration in the economic climate. "There has been a noticeable deceleration in activity indicators, not just in this country but across the globe as well," he says. "On top of that is layered all the concerns about the twin euro area sovereign debt and banking sector crises.
"Businesses in these circumstances tend to put investment projects on hold; consumers tend to hold back from spending; it just makes people much more wary."
Bean never joined the vocal minority on the Bank's decision-making monetary policy committee calling for an interest rate rise to choke off inflation earlier this year; but he admits the MPC's position has changed dramatically since the start of the summer.
"There has been a shift of opinion on the committee, and that reflects a shift in the facts," he says, reflecting Keynes's riposte to someone who accused him of changing his mind: "When the facts change, I change my mind. What do you do, sir?" Bean says the MPC could well decide to expand the size of its quantitative easing programme again if the outlook deteriorates further. "If we need to undertake further purchases then we will do so."
Bean sits on the Bank's Financial Policy Committee, which monitors the stability of the financial system. He says the euro crisis is casting a long shadow. City lenders have relatively small direct exposures to the debt of peripheral countries such as Greece, but they are intimately connected with continental banks. "This inter-linkage between financial institutions, which was very important in the early stage of the financial crisis, has the potential to lead to a seizing up of the financial system."
Because of this threat, he is strongly in favour of the idea of recapitalising Europe's banks, which has gained ground as an essential part of any solution to the crisis – and he admits that Britain could end up joining in. "That's up to the authorities to decide. It may be that given how the plan is designed, that the chancellor may decide it is appropriate for the UK to be part of this too."
Bean won't have any pat answers for frustrated businessmen from Manchester or Liverpool next week who want to know what the Bank can do for them. A former academic, he is an economist through and through: asked how he would reassure an ordinary punter who is worried that QE would just push up inflation, he quickly resorts to talking about the "proximate drivers" of inflation. But he does believe the latest round of QE should offer some comfort. "The benefit of the additional asset purchases that we are undertaking now is that it will help to sustain demand; it will help to contain the rise in unemployment. There will be more room for companies to pay some wage increases next year."
Some commentators, including independent MPC member Adam Posen, have urged the Bank to do more, by stepping in to boost lending to small businesses, for example. But Bean insists that the Old Lady of Threadneedle Street has made a decision to stick to her knitting. "It's inappropriate for the Bank to stray into the territory of deciding where credit should go: that is moving into territory that is the domain of government."
George Osborne used his conference speech last week to announce that the Treasury will embark on "credit easing," to boost credit to growing firms.
In the US, the Federal Reserve has taken a different approach. Fed chairman Ben Bernanke coined the term "credit easing" to describe his decision to intervene in a range of different markets: the Fed has bought $1.25tn-worth of mortgage-backed securities. "The Fed has been very seriously criticised by politicians for exceeding its mandate," Bean says. He adds that it's "precisely to avoid that sort of creep," that the Bank has taken a purist approach, using the money created through QE to buy government bonds, or gilts, in the hope that it will flow out to the rest of the economy.
Politicians' dealings with the Bank have been fraught since it was handed its independence by Gordon Brown in 1997. At a parliamentary hearing on Tuesday, former chancellor Alistair Darling described Bean's boss, Sir Mervyn King, as a "sun king", with absolute power. But Bean shrugs this off. "The chancellor is all-powerful in the Treasury: this is normally the case, that the person at the top of the organisation is a central figure."
The Bank is due to take on a battery of extra powers as part of the Coalition's reforms of the financial sector, and Bean sits on the new Financial Policy Committee, which brings together officials from the Bank and the Financial Services Authority. He admits that they have had some teething problems: financial markets were left confused by the statement from its meeting last month, which appeared to suggest both that banks should, and shouldn't, raise more capital to shore up their defences against the euro-crisis.
"It is a fair criticism that the statement that we produced was not as clear on this as it could have been. We're still learning about what is the best way to do the communication," he says.
When he is face to face with the north-west public, Bean will be counselling patience. For households, things should start to get better in 2012: "The squeeze will ease," he says, as falling commodity prices bring inflation down. But it will be much longer before the good times start to roll. "I don't see a return to something like the 2006 period in a year or two. Banks, households and those who are heavily indebted are still working at getting their balance sheets into better order – and that is probably going to take years."
P.G.D.M 1^ST