BOE’s King Should Be Aggressive And Go ‘Too Far,’ Goodhart Says
Bank of England Governor Mervyn King should exercise “aggressive” policies to combat the credit crisis, said Charles Goodhart, a former member of the central bank’s monetary policy committee.
“The monetary authorities have got to be aggressive,” Goodhart, now a professor at the London School of Economics and Political Science, said in a Bloomberg Radio interview to be broadcast today. He said King should approach next year with “courage, flexibility and perhaps going a bit too far with the very serious occasion we’re in.”
Goodhart said that the Bank of England, along with other central banks, didn’t fully realize “ the extent of the problem of liquidity.” He added that if the banks “had taken the steps that they have taken in the last few months much earlier we would never have got to the stage that we’re currently in.”
The Federal Reserve cut the main U.S. interest rate to “a target range” of between zero and 0.25 percent and said it will take all necessary steps to end the recession and unclog credit markets. Policy makers “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said in a statement.
Goodhart, who made his remarks before yesterday’s interest- rate cut by the Fed, said the U.S. central bank has been “doing exactly the right thing” to help alleviate the credit crisis by purchasing commercial paper wired payday loan. “There is a case also for trying to provide guarantees for certain securitized mortgages,” he said.
U.S. Deficit
Expanding the Fed’s balance sheet is not a concern, Goodhart said, while the U.S. budget deficit poses a greater challenge. “The Fed can shift its monetary policy back from quantitative easing to greater restraint much more easily, I think, than the federal government can shift from deficits back to surpluses,” he said.
The U.S. deficit for the fiscal year that started Oct. 1 climbed to $401.6 billion in November, a record for the first two months of the government’s budget. The gap is likely to widen if President-elect Barack Obama implements a stimulus package next year.
The euro zone faces similar difficulties, Goodhart said, as the “maintenance of the euro system” puts some of the weaker member countries “under intensive stress.” Still, Goodhart warned, “leaving the euro is just unbelievably expensive for the country that might try to do so.”
Other central banks have initiated interest-rate cuts. The European Central Bank lowered its main rate to 2.5 percent this month from 4.25 percent in July, while the Bank of England reduced its rate to 2 percent this month from 5.75 percent in July.