Ben Broadbent: Green jumper makes way for green shoots
The Business Interview: The MPC's newest member Ben Broadbent tells Russell Lynch about 'pain with a purpose' and his return to the Bank
Wednesday 21 December 2011
When the Bank of England rate-setter Ben Broadbent worked at the Treasury years ago, he apparently used to sport a green jumper "which looked like he had knitted it himself", one former colleague says. "Nobody could understand what he was going on about half the time. Brain the size of a planet though," the former workmate added in tones of grudging respect.
The green jumper is no longer in evidence – indeed Mr Broadbent is sharply accoutred – although the fearsome intellect definitely is. From Cambridge to Harvard, where he was a Fulbright scholar, and then on to Goldman Sachs via spells at the Treasury and the Bank of England, Mr Broadbent has ended up back at the Bank as one of the five external members of the Monetary Policy Committee since June.
He replaced the uber-hawk Andrew Sentance – even inheriting his impressive wood-panelled office overlooking the Royal Exchange because MPC colleague Martin Weale couldn't be bothered to move his books – and was expected to follow Mr Sentance in spirit by joining the rate-rise camp sooner rather than later. At the beginning of this year, Goldman was one of the most bullish houses around on the UK economy: in February this year at Goldman, Mr Broadbent himself was highlighting industry surveys pointing to "whole-economy growth in excess of 3 per cent" in 2011.
How differently it turned out: the Office for Budget Responsibility now predicts growth of only 0.9 per cent this year. Mr Broadbent admits that by the time he had joined the committee, the risks were much more balanced, so it wasn't such a leap to vote to extend the Bank's quantitative easing programme in September as Europe took another lurch towards the abyss.
Given that inflation – presently 4.8 per cent – has borne little more than a nodding acquaintance with the Bank's 2 per cent target since 2009, you might think voting to print money was a problem for a former hawk. He admits it has been a "very uncomfortable" period for the MPC but remains "quite reassured" on the Bank's inflation-setting credibility. "You might have worried recently that people would begin to lose faith in that target but, by and large, that has not happened," he says.
Indeed, the cost of living should fall sharply next year, easing the pressure somewhat for families up and down the country, although Mr Broadbent agrees that the economy is in a painful period of transition. Because of the problems in the banking system, "it's been a very tough road and a far slower recovery than would usually be the case", but he also talks of "pain with a purpose" as the UK begins the long road to rebalancing.
Banks have improved their balance sheets, even though the woes in the eurozone have kept their funding costs high, and the country has made some progress in weaning itself off the years of debt excess, Mr Broadbent says. He adds: "The system is better placed to deal with some of the shocks that come along compared with 2008/9... some of the pain is clearly with a purpose. Similarly household saving rates are a little higher and the balance sheets of non-financial corporations have improved significantly. All these things do not go on indefinitely."
Assuming a donnish air, he argues that even in times of plenty, the economy is constantly reallocating resources between industries as the balance of power shifts – "job losses on an enormous scale in a gross sense, but net job creation". Unemployment may rise above 2.6 million but he adds: "One should not think that change is the enemy, quite honestly," he adds.
He won't say whether the Chancellor should slow cuts, although he points out that under the Treasury's plans, the pace is due to slacken anyway, and in his view there is little to choose between the major parties on the issue. He's also uncomfortable addressing himself to the plethora of nasty scenarios which could beset the eurozone. These are "political questions".
But he is far more scathing about the wider failure of his profession in not foreseeing the dangers ahead, although it eventually learned from past lessons to deal with the crisis.
"It goes beyond forecasting. There was a deeper failing which is that people did not appreciate the build-up of risk within the banks. In some respects economists now have learnt from other experiences – the scale of losses in the banking system in 2008 was on a par with those in the Great Depression and had we not lived through that, or indeed Japan in the Nineties, monetary policy would not have been used as aggressively as it was and I think that really matters."
He adds quietly: "I think we might have had the Great Depression."
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