The Truth About Central Bank Policy

Published on
May 10th, 2019
Topic
Europe, Monetary policy, Financial System, History, Leverage, Regulation, Fiscal Policy, Macro, US Dollar, Fed, Geopolitics, Germany, Politics, Recession
Duration
62 minutes

The Truth About Central Bank Policy

The Larry McDonald Series ·
Featuring Mervyn King

Published on: May 10th, 2019 • Duration: 62 minutes • Topic: Europe, Monetary policy, Financial System, History, Leverage, Regulation, Fiscal Policy, Macro, US Dollar, Fed, Geopolitics, Germany, Politics, Recession

This unique interview highlights the view from inside the policy establishment, courtesy of someone operating at the highest levels of global monetary policy. Mervyn King, Baron King of Lothbury, was the governor of Bank of England from 2003 to 2013. In this hour-long talk with best-selling author Larry McDonald, King gives critical and pointed commentary on the conduct of central banks. He contextualizes policy in the lead up to the financial crisis, before moving on to a careful examination of today’s monetary policy. Then, looking forward, King homes in on the use of forward guidance as an ‘Achilles Heel’ for the Fed. He also discusses the way in which the political economy of the EU could serve as a trap for the ECB. Filmed on May 3, 2019 in London. Find more information about Larry McDonald’s work at http://www.thebeartrapsreport.com.

Comments

Transcript

  • WM
    Will M.
    19 May 2019 @ 14:14
    Good interview, with a "reasonable" central banker. Critical takeaways: "...the biggest deflationary force in the world in the euro area" "...imbalances within the euro area are so great that you can't have any normal monetary policy at all" The upcoming Euro elections may well return the most anti-EU parliament ever elected. It just feels to me that Europe is going to lead us into the next crisis, culminating in the destruction of the single Euro system. No clue what follows, dual Euro, no Euro but what is clear is Italy is on a knife edge and if not protected Italian Debt will destroy the EU.
  • IB
    Ian B.
    17 May 2019 @ 22:40
    Trump is experimenting right now with MMT. Trump’s tax cut is MMT. This should not be singled out to only progressive or democratic politicians. GW funded 2 wars with MMT.
  • TH
    Truman H.
    16 May 2019 @ 14:35
    Amusing that every one of the multiple times that McDonald tries to pull King into a partisan political discussion, King politely but firmly refuses.
    • DS
      David S.
      16 May 2019 @ 20:19
      I agree with your statement, but I would expand it to say that when Mr. McDonald was looking at the wrong data, Mr. King would redefine the question. After this interview three times, I watched Mr. King on YouTube and he is extraordinarily smart and experienced. He takes a complicated issue and focuses on the pertinent facts and can explain it to even me. Thank you Mr. McDonald and RVTV for introducing us to Mr. King. DLS
  • PD
    Pat D.
    16 May 2019 @ 05:58
    Great interview. Will be watching it a few times again to listen carefully to the carefully chosen words by Mr. King.
  • AB
    AJ B.
    15 May 2019 @ 17:59
    Real Vision interviews are not tough enough. How can you let Merv sit there talking about financial crisis' and not ask "Hey, do you think manipulating interest rates had anything to do with these crisis'?" Wasted opportunity. You are supposed NOT be like CNBC
    • SB
      Stephen B.
      16 May 2019 @ 14:47
      Couldn't agree more. Real Vision is meant to ask the tuff questions astute investors have on their minds. This interview could have been on Bloomberg.
  • AW
    Aaron W.
    15 May 2019 @ 08:40
    Ha Larry always asks these long-winded, loaded, multi-questions. Just ask one question at a time man, and let the interviewee talk. We're here to learn from the interviewee.
  • DC
    Dave C.
    14 May 2019 @ 23:39
    Re Mervyn King views on gold. “I am very struck by the fact that over many years central banks, governments and individuals have always, despite the protestation of economists, held some gold in their portfolio… when unexpected things happen, particularly when governments rise and fall, gold is a means of payment that everyone is always prepared to accept… I think that’s why even central banks have always had a role in their portfolios for gold.” In the event of “some awful conflagration you will need an asset that, unlike cash, equities or bonds, is not dependent on the goodwill of other countries”. https://www.gold.org/goldhub/research/gold-investor/gold-investor-june-2016
  • SU
    Shakeel U.
    13 May 2019 @ 21:23
    Excellent, 10/10 😀
  • GL
    Gary L.
    13 May 2019 @ 02:41
    I would suggest the host park his bias politics positions at the door and conduct a professional interview!
    • DS
      David S.
      16 May 2019 @ 20:27
      There are benefits to having someone as knowledgeable as Mr. King answer a somewhat bias question so the bias can be exposed. We all have our biases. Mr. McDonald is smart, and he gave us a great interview. He also stated at the end that Mr. King was by far the best CB he had ever listened to. Let us all learn from Mr. King's civility. DLS
  • DS
    David S.
    13 May 2019 @ 01:33
    Many of the US millennials received a great deal of largess from their parents while growing up and will inherit trillions of dollars from their parent's estate. Who do you think paid for Ivy League tuitions, millionaire weddings, nightclubbing and travel. Later generations are the ones that will be paying back the loans or more probably suffering the defaults. Don't cry for the millennials. Save your tears for the future generations, especially if the millennials spend all their inheritances which may be likely. Time will tell. DLS
  • BP
    Bryce P.
    12 May 2019 @ 23:30
    Was excited to see Merv. Then was thoroughly disappointed with this piece. Nothing but softball lob tosses to old Merv. Come on RV get tough!!! I can watch CNBC, Fox Business or Bloomberg anytime.
  • MT
    Mark T.
    12 May 2019 @ 19:03
    The big takeaway for me was the explanation of why central banks target inflation. They do it to support sustained growth in economic output and provide sufficient eurodollar supplies to support the economic growth of our trading partners. Before this I had no plausible explanation for why the central bank would deliberately cut my purchasing power in half every 36 years. Mervyn seems like a level headed guy. Apparently he holds Powell in high regard. That was a relief.
  • JM
    James M.
    12 May 2019 @ 17:11
    Why have central banks? Unless of course your a banker.
    • TJ
      Terry J.
      14 May 2019 @ 19:16
      That is a very good question James and it would have been a good question for Mervyn. He seems a nice enough chap like most of these former CB kings once they have stepped away from power; just look at easy money Al and his golden conversion! At the end of the day however there is no escaping the fact that collectively they predominantly have been responsible for the massive expansion of fiat debt that has ruined the global economy of the twenty first century. I almost laughed when I heard Mervyn suggest we had to be patient until the structural changes now substituting the normal business cycle played out and countries like Germany, France etc could once more see their economies grow at pre crisis rates! Seriously, I do wonder sometimes whether these Keynesians are living in a dream world, or if they genuinely believe their own wizardry of creating false money. We don't need the nightmare of MMT, as we have been living in the nightmare of fiat debt expansion ever since the Fed was created and which took on an exponential life after 15th August 1971 when the explosion of the derivative driven eurodollar money creation began in earnest. The original day of reckoning and the global implosion of 2008 was arguably avoided by a combination of clever one off monetary tricks (QE, ZIRP etc.) and courtesy of China becoming a fully paid member of the crazy club by its own money lending explosion. Now there is no one left to ride to the rescue next time, while the QE and other monetary tricks are most unlikely to serve as sticking plaster this time. MMT should Congress be crazy enough to approve it (oh wait they approved TARP last time, so Yes of course they will) might temporarily provide some additional sticking plaster and time before in the words of Dr Lacy Hunt, "the whole world ends up very miserable"! At that point all Keynsian central bank boffins may as well join Mervyn on the cricket pitch as it will be impossible to unwind more than a century of central bank monetary mischief!
  • JM
    James M.
    12 May 2019 @ 16:59
    A poor interviewer who lacks objectivity or credibility. The stereotypical indirect assertion that the "Left" will print money and promise labour the world under MMT. It has not been the "Left" (which I would argue has not existed in imperial USA post WW2 anyway) that has liquidated the purchasing power of the currency in the USA or in the West in general. It has been the corporate criminals and the bankers who finance them. The MIC comes to mind first and foremost and the main policy of perpetual war and environmental destruction of the energy lobby to name just 2 of the main culprits. This could have been a very valuable interview had we had a professional objective individual asking the questions. Capitalism is impossible without capital which comes from labor IMO. So I would suggest that a rebalancing of power to labour may be the only thing that can save the inevitable breaking of capitalism(a deeply flawed system) over time.IMO
  • PJ
    Peter J.
    12 May 2019 @ 09:47
    Excellent
  • CS
    CMC S.
    12 May 2019 @ 04:40
    Good interview. Mervyn King provides good objective view points without the obscure central bank speak. Would have liked Larry to question Mervyn a bit more deeply on inflation as I believe most central bankers, investors and savers are grossly underestimating inflation both current levels and the potential future impacts . Inflation is a recurring topic and once again we have the current narrative being repeated on mainstream financial media of ' no or negligible inflation ' seems absurd. As Angelo Z points out below, that we have seen a significant loss of purchasing power. It is also very evident that in most households now, it requires two incomes to afford what a single income could manage only 20 or so years ago. So while central banks have been able to muddy the waters on CPI, RPI etc through stealthily changing definitions to CPI from the original ' maintaining the same quality of life ' to cost of living, thereby allowing ever creeping hedonic adjustments etc. they have been able to successfully obfuscate inflation on a monthly, quarterly basis. However , the longer term broader impact across society provides evidence to the contrary and that inflation is rising and can also be seen where the average ( two income ) household is carrying an ever increasing debt load. Further they seem to not account for inflation in asset prices / or liabilities which is what the financialisation of family homes have resulted in . I'm further amazed at how central banks have been able to actually have people simply accept and agree to the inflation targeting 2% - 3%. Shaving their earnings/wealth on a daily basis. There is a lot more inflation in the system , even with current levels of stimulus. If the central bankers and governments continue to delude themselves and step on the monetary and fiscal pedals further I think there will be price to pay and investors and savers have to be wary of potential consequences and factor an alternative count and stress test their investments and retirement plans.
  • NI
    Nate I.
    11 May 2019 @ 19:59
    Not a word about gold. Forbidden topic in the interview ground rules?
    • LW
      Lukasz W.
      12 May 2019 @ 15:39
      To be frank, in previous interview he did say the word. Question: You would not own Bitcoin. Would you own gold? Mervyn King: Well, there's no-- I mean, I don't have enough money.... hahaha
  • HS
    Henry S.
    11 May 2019 @ 18:38
    Please get Mervyn back on RV in the not too distant future. He's absolutely fantastic.
  • DS
    David S.
    11 May 2019 @ 16:56
    It is the abuse of any economic theory by governments that causes the problem. Be careful that the use of MMT funding will improve the real economy like necessary infrastructure projects - repairing bridges and roads, wages, profits, taxes; not just giving money away. Then the big task comes when the governments must stop using the MMT toy. Keynes said to pay the borrowing back when the economy recovers. Somehow this never happens. The theory is not wrong, the governmental abuse of the theory is wrong. DLS
  • CN
    Chris N.
    11 May 2019 @ 15:02
    One of the best RV interviews yet.
  • SB
    Stewart B.
    11 May 2019 @ 11:29
    BTW I'd recommend Lord King's book 'End of Alchemy'. His analysis of Europe's problems as well as banking regulations is thought provoking.
    • DR
      Daniel R.
      13 May 2019 @ 01:51
      Seconded. King is maybe the clearest and most original thinker from his central banker cohort. His book is a great analysis with plenty of historical context, and an interesting (maybe feasible) prescription.
  • SB
    Stewart B.
    11 May 2019 @ 11:27
    Would have been good to hear Lord King address Carney keeping rates near zero bound even when inflation several percent above 2% target.
  • PN
    Pedro N.
    11 May 2019 @ 10:32
    This would have been a great interview if we were holding you up against CNBC like standards. But sadly, our standards for Real Vision are much higher. These were soft-ball, sell-side type questions rather than piercing questions that would enable Real Vision viewers to really better understand what the hell is going on in current central bankers’ minds.... these recluse PhDs who now seem to be addicted to the power that was (supposedly temporarily) given to them back in 08... they now believe they are rock stars but have only created a system that isn’t able to function anymore without their constant intervention and manipulation.... we went from Schumpeter’s creative destruction to a world of zombie corporations and PhD’s who have never had to meet a payroll managing the economy on the basis of their models... and as Mervin King very well says in the interview forward guidance was a mistake. But no one sees that the mistake was that we now have recurring proof that these guys have no idea where the economy is going? (As per their constant mistakes in forecasting). What did they get right in the past generation of forecasts? They were almost always wrong.... and yet the Central Bank credibility bull market makes almost daily new all time highs.... I was really excited when I saw you had Mervin King on the line-up, I thought that we were finally going to have some answers.... maybe next time.... Is Real Vision falling into the sell-side like category? Maybe your interviewers should only be buy-side investors who aren’t afraid to ask the tough questions.... you can’t win a popularity contest and be incisive... there has to be a clear choice for quality of content. Jeremy Paxman in the UK manages to ask the tough questions and people still come to his TV show. Why can’t you?
    • AY
      Alex Y.
      11 May 2019 @ 17:55
      Somehow puzzled by Lord King making impression that he doesn't know that USA trade deficit is structural and is part of dollar's reserve status. Putting UK and USA on the same side of the Global Imbalance table is hilarious. Raises question about the naming of this interview - Why "The Truth..."?
  • PP
    Patrick P.
    11 May 2019 @ 02:25
    Larry, Larry...you obviously do not understand that Central Bankers are in business to protect bankers and to manipulate interest rates to their benefit. And they are also in bed with governments in order for them to dump the bankers mismanagement on the general public and the tax payer ultimately. These guys are crooks in suits and they talk in circles by designed to keep the general public (and Larry) confused. Look at the value of your money since their inception and it's pretty clear. Larry don't put this guy on a pedestal he never had your interest or mine on the top of his list.
    • DR
      Daniel R.
      13 May 2019 @ 01:56
      Patrick - you might want to read King's book "The End of Alchemy" where he's very critical of current central bank policy and structure. They're not all the same.
    • WM
      Will M.
      19 May 2019 @ 13:52
      Sorry Patrick Mervyn King is not at all like the majority of grey suits. You are comparing him to Greenspan and Bernanke.
  • JF
    Jennifer F.
    11 May 2019 @ 01:19
    VERY WELL DONE. VERY RESPECTFUL.
  • JE
    James E.
    10 May 2019 @ 23:16
    Very interesting. Politicians in Europe need to get their act together, we live in a global society and some common sense by the elites would be helpful.
  • CH
    Charles H.
    10 May 2019 @ 23:15
    First class interview, thanks.
  • VS
    Victor S. | Contributor
    10 May 2019 @ 20:37
    That was not a “modern” central banker but a classic central banker -not made anymore as he “thinks and reasons” not breed to be a Keynesian -no matter what. Like William McChesney Martin was. In the 1950/60’s . Great talk thank you. Ps silly point but you gents should get some decent chairs like leather with arm rests? Poor Mervyn looked like he was so uncomfortable? Those chairs you have look like they are the extra’s in a closet for poker games.
    • AZ
      Angelo Z.
      11 May 2019 @ 02:24
      Re: Chairs - that is exactly what I was thinking! The table also looked ready to fold in on itself at any moment. Aside from that, what is all this serious talk about little to no inflation? "Little to no inflation", I here this all the time - Is this repeated by academics and economists in order to convince themselves of its veracity? Inflation is running hot, and is only increasing. Home prices, food, government fees, rents, tuition, etc...I feel like I'm in the damned twilight zone every time I hear it. Just because steak is replaced with minced meat doesn't hide anything. We need TRUTH in regards to our economic numbers, we are no better than China with our fabrications.
    • MK
      Mike K.
      11 May 2019 @ 13:19
      Trader Vic., telling it how it is. Agreed.
    • SS
      Steve S.
      11 May 2019 @ 13:39
      LOL @Victor's comment about the chairs
  • SH
    Stu H.
    10 May 2019 @ 19:10
    What an utterly absorbing and fascinating interview. I'd love to know how Mervyn saves and invests.
  • SA
    Stephen A.
    10 May 2019 @ 18:57
    Great interview. However, UK's economy is not big enough to sit on a table with Europe, China and the US. Maybe if you put UK, Canada and India together.
    • rr
      rlw r.
      11 May 2019 @ 22:11
      And throw in Australia & New Zealand too
  • CS
    Christopher S.
    10 May 2019 @ 18:40
    So he got the job because he hit a tennis ball really hard!!...Who would've thought it!..so no such thing as secret handshakes, underground societies, being selected because he would deliver what the elites wanted, having the right tie and the right connections etc etc...that must just be a load of conspiracy nonsense. I'm so thankful that there was someone good at tennis to bail out the banks, it just wouldn't have been proper otherwise.
    • SD
      Stephen D. | Contributor
      13 May 2019 @ 05:29
      Christopher you need to understand English modesty. Lord King comes from a realtively modest background but had a truly stellar intellectual career prior to becoming Chief Economist at the Bank of England. I know people wjo studied under him at the LSE and say he's the finest professor they have ever encountered. And as several people have already said 'The End of Alchemy', his 2106 book, was a masterpiece. He's a giant in his field but being English, he needs to belittle his abilities.
  • rr
    rlw r.
    10 May 2019 @ 18:35
    The comments concerning the structural issues within the big four is really really good. Who gets him carefully heard at the Whitehouse? His brilliant proposal has such value.
  • Sv
    Sid v.
    10 May 2019 @ 17:47
    what an excellent interview. Thank you.
  • MC
    Minum C.
    10 May 2019 @ 17:04
    This was great. Regarding MMT...there definitely seems to be "something absurd about it deep down". Was that a mini rant I detected with about 30 minutes left? When a mild-mannered expert is "quite astonished that this idea has gained credence", that tells us something.
    • CB
      C B.
      10 May 2019 @ 19:32
      Can Lord King reconcile his own paid for university experience and MMT's promise to invest in the education/development of the average citizen.
    • DS
      David S.
      13 May 2019 @ 00:37
      C.B. - As Mr. King said there were only 8% of the students that went to university. I believe in paying for a lot of education, but it is impossible for a country to pay for everyone's education when tuitions can be $100,000 per year. There is a question of balance. University is not the only place we need educational funding after secondary school. Community colleges and trade schools also play a very important part in the functioning of our economy and standard of living. Some countries like Norway with a huge sovereign fund based on oil revenues can and do pay for a tremendous amount of their citizen's education. The US is not in the same position and just printing money is not the answer. DLS
  • CJ
    Charles J.
    10 May 2019 @ 14:35
    Here's where I get tripped up on his rebuttal towards MMT, and it's possible that I misunderstood him so if I did please let me know. He's saying that MMT and current banks actions are essentially the exact same in that they are trying to increase the money supply. But we've created a system where the government has to borrow that money creating a liability and future expenses that the government is subject to. If the goal is to expand the money supply and you control the means of creating money, why wouldn't it be far more efficient to just create the money without adding debt to the governments balance sheet? Is it because is makes it far more difficult to retract the money supply afterwards or is it that people see the debt as a constraint to the government? Because it would seem to me that so far that constraint is not only not working but it is actually contributing to the problem as it becomes a larger and larger expense for the government. By the way, I am no fan of MMT or central bank action over the last 20 years either. I just don't really understand his argument.
    • LP
      Lynn P.
      10 May 2019 @ 22:04
      As Lord King noted, the cardinal rule of economics is that there is an asset side and a liabilities side to every bank's balanc sheet, including the Fed's. So it doesn't just create "money", which is a liability, without creating an asset, which may be an increase in the reserves of the primary dealers at the Fed. Unless I am missing something quite basic. Suggest you invest some time and watch Perry Mehrling's Mondy & Banking course, available at no cost on Coursera.com.
    • AZ
      Angelo Z.
      11 May 2019 @ 02:30
      Charles, without governments allowing private banks to issue our 'money' (at interest) how would the banking families enslave us all? You must consider the rights of the banking families in your equation and quit with your pesky probing......
    • DS
      David S.
      11 May 2019 @ 02:49
      Angelo Z. - Very cute. DLS
    • AW
      Agus W.
      11 May 2019 @ 07:14
      I think Lynn P.'s reply based on the double entry accounting is the main point that Mr King is trying to make and the distinction between MMT and QE. However, isnt it ironic that that is the only difference between QE on CB balance sheet vs MMT? essentially they are the same thing except the politicizing CB part and that MMT does not recognize the liability of the money printing whereby QE does.
  • PU
    Peter U.
    10 May 2019 @ 13:40
    Outstanding!
  • DS
    David S.
    10 May 2019 @ 13:29
    Mr. King is excellent. I agree with Mr. McDonald that Mr. King is a tremendous spokesperson for what is happening and what can be done. Mr. King’s comment that the problems are cyclical in nature, not structural is a gem. This is a great example of how Mr. McDonald, who I respect, teed up some question from a political point of view and was politely, but directly refuted in a very intelligent, objective manner. I will watch this interview several more times to understand better my own biases and how these biases do not help in solving the actual problems. This is not a criticism of Mr. McDonald, but normal human behavior. I would like to see Mr. King back on RVTV to help keep objectivity in our analysis. DLS
    • JM
      John M.
      10 May 2019 @ 16:51
      I thought Larry's question about why the Fed increased rates only once prior to 2016 election was a good one. Fed responded too cautiously i.e., slowly in raising rates. Would like to know why and the implications?
    • LP
      Lynn P.
      10 May 2019 @ 22:06
      Pretty sure King said the problems are structural, not cyclical. Too much saving in China and Germany, too little saving inthe US and UK. Not a problem of the business cycle.
    • DS
      David S.
      11 May 2019 @ 02:57
      Lynn P. - Thank you for your correction. I typed it backward. It certainly is structural. DLS
  • TE
    Tito E.
    10 May 2019 @ 09:07
    Like the idea of Mervyns 'deal'! I also tend to feel the same way about MMT. That at core, creating more money and giving it out simply devalues it. No matter what the mechanism. Perhaps MMT proponents feel that the value of money doesnt matter, that its the well-being of people that matter and the real world, rather than the esoteric world of money... but if we do have a money system i still feel that faith in the value of that money is important for trust in society. Am keen to learn more. I've read (and heard on here) that Warren Mosler is a smart guy in the MMT space. WOuld be great to see a conversation / debate even where the concepts are investigated.
    • JT
      John T.
      10 May 2019 @ 11:31
      So printing money to buy up bad debt is not inflationary while channeling it to the bottom of the wealth pyramid is? I would also welcome a debate on MMT where consepts would get sorted out.
    • DS
      David S.
      10 May 2019 @ 13:50
      John T. - QE, MMT and any other "free lunch" increases in the money supply will eventually lead to inflation. The velocity of the use of money is the other major variable. Do not worry, inflation will come if money can ever be used productivity again. I believe this is part of Mr. King's cyclical vs. structural argument. This is also an argument for a 25% allocation of a portfolio to commodities including gold. A 2.5% Fed rate is not stopping any productive use of funds. DLS
    • AZ
      Angelo Z.
      11 May 2019 @ 02:38
      David S. - A three dollar gold coin had a nominal value of $3.00 in 1876, its purchasing power in 2019 is $187.00. Why do you presume there is no inflation? Or that it is hiding or something. My neighbors home just sold for 4x what it was worth 15 years ago - is that inflation? People can no longer afford to save and buy a home or car, they must saddle themselves with decades of mortgage payments with compounded interest. My grandfather saved for a few years and bought his car outright. Am I missing something? Anyone?
    • DS
      David S.
      11 May 2019 @ 20:00
      Angelo Z. – You are not missing anything. It is a timing difference. CBs and economist are looking at current consumer price index inflation, wages and employment to try to hold the current house of cards together. QE along with all its sisters inflated hard assets and especially stocks, but for some odd reason the current CPI is not reflecting the increases in housing prices. Economist are completely scared of any deflationary effects. So, when CBs are talking about raising or lowering interest rates, they are looking at current quarterly data. When more money is employed profitability instead of stock buybacks, etc. we will see plenty of inflation. Both of us will be happy with houses and gold if anyone can buy them. I am worried about the value of stocks, especially large indexes, when buybacks are no longer in vogue. My Grandfather bought a two story house with basement and detached garages in the depression for $2,400. Just the thoughts of an old retired man. DLS
  • PB
    Pieter B.
    10 May 2019 @ 07:33
    brilliant interview again! Massive thanks! Please continue at realvision!