free market fundamentalists austrian, chicago, calgary schools of crank science, just cannot grasp what deflation is, and what it does to a economy:Bank of England Governor Mervyn King should print money now and abandon economic assumptions that have failed to save the U.K. from its worst recession since World War II

Anonymous Wrote:

free market fundamentalists austrian, chicago, calgary schools of
crank science, just cannot grasp what deflation is, and what it does
to a economy:Bank of England Governor Mervyn King should print money
now and abandon economic assumptions that have failed to save the U.K.
from its worst recession since World War II

http://www.bloomberg.com/apps/news?pid=20601110&sid=aWPDskg_8RFE

King’s BOE Should Print Money in U.K., Fathom Says (Update1)

By Svenja O’Donnell
Feb. 10 (Bloomberg) -- Bank of England Governor Mervyn King should
print money now and abandon economic assumptions that have failed to
save the U.K. from its worst recession since World War II, a group of
former central bank economists said.
King and his colleagues are too reliant on an economic model that
doesn’t pay enough attention to credit and housing bubbles, said Danny
Gabay, director of Fathom Financial Consulting and a former author of
the bank’s quarterly inflation report. Ignoring these key drivers of
the downturn bears “some responsibility for the current malaise,” he
said.
“Things are awful,” Willem Buiter, a former member of the central
bank’s rate-setting panel, said at a panel discussion in London today.
“This is a globally coordinated slump. Bank rates should be at zero
and should have been there for a while.”
The Bank of England has so far stopped short of increasing the supply
of money even after cutting its benchmark rate to a record low of 1
percent this month. Officials should now cast off the mindset of “the
Threadneedle Street establishment” in favor of faster action and
“bold, fresh thinking,” Fathom says, referring to the central bank’s
address.
‘Printing Money’
“The bank should be printing money by now, and should have started
doing it some time ago,” said Gabay, who will present an alternative
approach to the crisis in London today. “The framework at the Bank of
England is based on an economic nirvana. If you assume, as we feel
they did, that it represents reality, you end up in the kind of mess
we’re in now.”
Buying homes on the verge of repossession to add money to the economy
may prove an effective tool to fight the recession, Fathom says. U.K.
economic prospects may be even “bleaker” than those released in the
Bank of England’s quarterly inflation report tomorrow, it forecasts.
The Bank of England’s inflation-targeting approach, which King helped
draw up in the 1990s, is showing cracks after successfully helping
policy makers keep consumer prices under control for most of the past
decade. Inflation breached the Bank of England’s upper 3 percent limit
last year after a surge in oil prices. The credit crisis has now
sparked fears among policy makers that inflation will turn negative in
coming months.
‘Framework Worked’
“The Bank of England’s analytical framework worked well in terms of
anchoring inflation between 1997 and 2007 but its inability to respond
to the housing bubble and the subsequent crisis of the last 18 months
has exposed its shortcomings,” said Gabay.
U.K. gross domestic product will drop 2.8 percent this year, the most
since 1946 and more than any other industrialized country, the
International Monetary Fund said on Jan. 28. The Bank of England said
last week there’s a “substantial risk” inflation will undershoot its
central 2 percent target.
Purchases of homes by the Bank of England would help put a bottom on
the decline in the housing market and help fight deflation by pumping
money into the financial system, Fathom says. Housing sales in Britain
dropped to the lowest level since at least 1978 in the quarter through
January, the Royal Institution of Chartered Surveyors said today.
“The underlying problem in the economy lies in falling asset prices,
notably housing,” Fathom said in the report. “The government should
buy houses directly and instruct the Bank of England to print the
money to pay for them.”
Interest Rates
The Bank of England on Feb. 5 cut the benchmark rate to 1 percent, the
lowest level since the bank was founded in 1693. The Treasury last
month granted it unprecedented powers to buy assets, as rates head
towards zero, forcing the bank to adopt less conventional monetary
policy tools.
DeAnne Julius, who served on the Bank of England’s policy committee
from 1997 to 2001, said she wouldn’t cut rates any further than 1
percent and urged Brown’s government to limit the budget deficit.
“The situation is indeed dire,” Julius said. “Britain cannot afford to
run budget deficits of 8 percent to 10 percent of GDP for any length
of time. Britain is not the U.S. I would like to see the government
commit itself to a cap on the budget deficit -- rather than saying
we’ll do whatever it takes whenever we need it.”
To contact the reporter on this story: Svenja O’Donnell in London at
sodo...@bloomberg.net.
Last Updated: February 10, 2009 04:42 EST