Why we should be happy that the Bank of England is putting the brakes on the government’s efforts to boost the property market.
It is the job of politicians to get elected, but it does not follow that governments always do what is in the best interest of voters. This might be the best explanation behind the actions of the current UK government with regard to the housing market – angling for voters (and an economic recovery) by pumping up property prices with little concern about the long term health of the economy (for more on this, see rebound in UK house prices is not all good news). Many expressed a sigh of relief when the Bank of England stepped in to put the brakes on a booming real estate market by taking away incentives promoting mortgage lending among banks. It is something new to see a central bank taking a stance which puts them at odds with the government but it provides a good case for arguing for greater oversight of government policy.
The current understanding of the role of a central bank is as an independent body which watches over the economy with powers to intervene if there is too much or not enough growth. Central banks are kept separate from politics where policies are aimed at winning over voters within a time frame of a few years. Some aspects of government where a longer time frame is required such as monetary policy could be influenced in a negative way by political calculations and it is thought that central banks are better positioned to administer monetary policy in order to achieve goals such as warding off inflation.
The global financial crisis highlighted that low inflation in itself is not sufficient for financial stability with aggressive lending by banks combined with excessive gains in asset prices also shown as big threats. Central banks have been given greater scope to oversee the overall health of the financial sector and this is behind the latest policy actions by the Bank of England. The UK government was hoping that a buoyant property market would increase spending and create a feel-good factor propelling it back into power in elections scheduled for 2015. Yet any gains in real estate prices without higher wages would be unsustainable and put home ownership beyond the reach of many, ultimately requiring weaker prices in the future to bring house prices back in line with the economy.
Governments and central banks had previously been operating in their own separate spheres of influence but the extended remit of central banks may bring them into conflict. This has the potential to work in a positive way to provide greater oversight for government policies shown to be at fault in the past (for example, high government borrowing in the UK in the run up to the global financial crisis). Another example of how the European Central Bank did the most to save the euro while the various governments in Europe squabbled. It is not hard to argue for giving more power to economists (see previous blog) when politicians provide so many reasons for doing so.