I read this blog entry by the BBC's economics editor Stephanie Flanders. It is most interesting because apparently the treasury are going to a lot of effort to prove that there was no induced boom leading up to the bust. They would have it that everything was fine with the UK economy and we were just struck down by global economic forces which the government (and the bank of England) could have done nothing to prevent.
Stephanie provides two charts, one produced by the government seeming to show that we had no artificial boom in the years preceding the bust. The other produced by indepentent analysists that appears to show that there was. Yeah, I know they are strange measures, looking at whether we were over producing as an indicator to whether we were in an unsustainable boom or not, but they're interesting none-the-less.
Stephanie's analysis is quite confused however;
If (then) Chancellor Brown had known that we were heading for this kind of bust, he would presumably have wanted to do something to stop things getting out of hand. The interesting question is what. After all, inflation wasn't showing any sign of an unsustainable boom, and that was all the Bank of England was supposed to be worried about.
Well, inflation was in and around the inflation target of 2% (although more often than not nearer 3%) but what does that prove? Either that inflation wasn't part of the problem or else the policy of inflation targeting itself is flawed and was part of the problem. A possibility that Stephanie doesn't even consider.
Austrian economic theory suggest that a policy of deliberate inflation, even if relatively moderate, still leads to boom and bust scenarios. Only by dispensing altogether with an expansionary monetary policy can we expect to see an end to boom and bust. Actually, I suspect that monetary inflation was far larger than price inflation would suggest. It was common knowledge how many goods prices were kept so low thanks to our increasing dependence on cheap imports from places like China. I don't think that our real rates of inflation were moderate attall.
So, it is no wonder that she goes on to conclude that the government couldn't really have done much to avert the crisis.
There is a huge problem with both analyses, in that they use the largest aggregate possible as an indication of monetary policy. What if traffic reports said "traffic volume in the UK is up 2% today" and left it at that. Is that going to help you on your commute from Leatherhead to London?
Gross Domestic Product covers all spending, and is useless in figuring out what is going on in the economy. I haven't studied the UK economy in detail recently, but the article and what I've seen and read, it appears that there was a boom in government spending and spending on housing. Wherever the bubble emerged, it was likely offset in the GDP numbers by reductions in spending in other areas of the economy. This is impossible to see using aggregate indicators like GDP. The job of the BOE is impossible anyway, but at least more detailed analysis would give them some idea of what's going on.
Particularly absurd is the idea that to prick the bubble earlier is not worthwhile because it simply brings on the recession that you're trying to avoid. That's like a boater deciding they prefer 15-foot seas to 1-foot seas. Sure, you'll be higher when you reach the peak of the 15-foot seas, but watch out when you reach the trough. They don't seem to understand that bigger the bubble is the bigger the pop will be.
Anyone who tried to purchase property in the UK in the last decade can tell you that inflation was out of control.
The fallacies of intellectual communism, a compilation - On the nature of power
Government inflation #s tell us nothing. The numbers are massaged and finagled constantly to produce the information the state wants to promote.
Remember, if the state shows too much inflation, there are significant budgetary consequences from COLA adjustments to welfare programs.
The state doesn't want to the cost of the programs to get out of control, because
1. This shows monetary inflation is directly affecting prices
2. Expensive programs become targets for cuts and/or reform. The state needs the program to justify stealing, fulfilling or failing the program are both counterproductive to government's ends.