Did the Bank of England mishandled the crisis?
In this commentary Narayana Kocherlakota argues that markets didn’t oust Truss, the Bank of England did, through poor financial regulation and highly subjective crisis management. He points out that:
- The big shock to the financial markets came when the price of 30-year UK government bonds, also known as gilts, dropped by 23%. Most of this decline, argues Kocherlakota, did not really reflect investors’ unease over the UK’s long-run debt prospects, instead it stemmed from financial regulators’ failure to limit leverage in UK pension funds.
- As a result the Bank of England was forced into an emergency intervention, buying gilts to put a floor on prices only until October 14, even though its purchases of long-term government bonds were fully indemnified by the Treasury. “It’s hard to see how that decision aligned with the central bank’s financial-stability mandate, and easy to see how it contributed to the government’s demise.”
Markets Didn’t Oust Truss. The Bank of England Did.
By: Narayana Kocherlakota – University of Rochester
It was indeed government incompetence!
Simon Wren-Lewis has a different view:
[T]he increase in uncertainty caused by September’s tax cuts was fundamentally about announcing tax cuts without making clear whether or how this would be matched by spending cuts. But it goes further than that. Whatever spending cuts might have been announced, cuts to spending right now are far from credible. A government may promise spending cuts, but with levels of public spending already so low following 2010 austerity, and further squeezed by recent inflation, these cuts may not actually happen. Equally they may be offset by the government being forced to give in to public sector workers whose real pay has steadily fallen in recent years compared to the private sector.
Why it is crucial to understand why financial markets move, rather than worry about the role of markets in aiding the downfall of a Chancellor and Prime Minister
By: Simon Wren-Lewis – Oxford University
