We have a governor of the Bank of England who understands the issues. That was not guaranteedby Oliver Kamm / June 26, 2020 / Leave a comment
“Britain nearly went bust in March, says Bank of England,” ran a headline in the Guardian this week. “UK finances were close to collapse, says Governor,” ran the equivalent splash in the Daily Telegraph. This was all wrong. Britain was not close to going “bust,” and the governor didn’t say it was.
The stories derive from a Sky News interview with Andrew Bailey, who took up his post as Governor of the Bank of England just as the coronavirus crisis erupted. It’s a mere truism that a country with its own central bank issuing debt in its own currency can’t go bankrupt. What happened in March was a temporary liquidity shortage because markets panicked. Hence, as investors were unwilling to buy the debt the government wished to issue, the Bank stepped in as lender of last resort. That’s what it’s supposed to do.
As the economics writer Frances Coppola put it in a forceful blog post: “The Government was not shut out of markets long-term, as an insolvent sovereign would be. It had short-term cash flow problems solely because markets were malfunctioning.” And, indeed, Bailey was explicit in the interview that the issue was one of market instability, not a solvency crisis for the government.
Why was this interview misreported (as it certainly was)? I’m guessing here, but I doubt that it’s solely because my profession has a thirst for an overdramatised story. It perhaps also reflects the preference in British public life over recent years for dogmatism over ability. Mastering the mechanics of being a liquidity provider of last resort requires technical expertise. And, as is well known, some prominent figures in public life believe that the British people have had enough of experts.
I disclose an interest and a bias, as Bailey has been one of my closest friends for well over 30 years. But the government was absolutely right to appoint him as governor, and I suspect that the prime minister (whose decision it was) and the chancellor daily reflect on their narrow escape, for the appointment of such a candidate might not have happened.
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