Ushered into David Miles' new quarters at the Bank of England, I am struck, as are all visitors to the Bank's inner sanctums, at the quantity of nice old paintings and furniture there is around the place. It all looks solid and traditional, just like a central bank should be, which is the point, I suppose.
I idly inquire from whom Mr Miles inherited his fine antique oak desk. "David Blanchflower" is the reply. I half expect to see teeth marks where Mr Blanchflower had chewed the woodwork in frustration at the failure of his "inflation nutter" colleagues to see the depth of the impending recession last year.
I can't help thinking that his new colleagues at the Bank of England hope that the desk is all that David Miles has inherited from his turbulent predecessor. Mr Miles joined the Monetary Policy Committee in June, taking Mr Blanchflower's place at that month's meeting. Mr Blanchflower was hardly off the Bank's premises before he penned for The New Statesman what can only be described as a slagging of his erstwhile colleagues, especially the Governor, Mervyn King, but also most of the rest of the MPC – "plodding". "The Bank was full of mathematical modellers who had never seen the inside of a commercial bank or hedge fund," said Mr Blanchflower as he looked back in anger.
Well, Mr Miles certainly has seen the inside of an investment bank, having served as chief UK economist at Morgan Stanley for five years. However, like many people at the Bank, he also has an academic background. He is visiting professor at Imperial College.
In terms of his views, Mr Miles can fairly be described, in the shorthand beloved of journalists and loathed by the Bank, as a "dove", just as Mr Blanchflower was. At the August MPC meeting, Mr Miles voted with the Governor for an even larger increase in the quantitative easing programme than was in fact agreed – a rise of £75bn rather than £50bn.
Mr Miles is more candid than any of his colleagues have been so far about the timing of the recovery. "We may get a couple of quarters pretty soon of very small increases in GDP. If you take that technical definition we might be out the recession in six or nine months," he says. But he is at pains to stress how meaningless this may actually be: "This is going to be a protracted period of a return to a more normal level of activity. ... The day we get to a year-on-year growth rate of 2.5 per cent which is the long-run growth rate is NOT the day when we can say, 'Wow, we got through this all. We're absolutely back to normal.'"
He adds: "If you ask the question when will growth return to a level when, say, unemployment stops rising, I fear that's a little bit further down the road, and I think that's a more realistic definition of coming out of recession."
Whether a victim of what Mr Blanchflower calls "group think" or not, Mr Miles echoes the Governor's view that it is the levels of output that really count rather than quarterly growth, and stresses time and again the "very substantial" amount of "slack" there is in the economy, how "key" that is in determining the extent of inflationary pressure, and how that slack is actually likely to rise.
We met shortly after the news that unemployment has risen to close to 2.5 million: "It is likely, unfortunately, that unemployment will continue rising for some months yet. There is already a substantial amount of slack. That degree of slack is likely to increase for some months yet. ... If you look beyond just the next three or six months to where underlying inflationary pressures are over a two or three-year horizon, they look certainly in domestic terms pretty subdued."
The amount of slack in the economy, he believes, won't be back to normal before we have "a period of above trend growth". "I don't think it's realistic that you'll use up the substantial amount of spare capacity in a matter of a few quarters," he adds.
Money supply figures are not the "definitive" judge on the success of QE, says Mr Miles. He points to the general reduction in yields and "portfolio reallocation" effects as alternative transmission mechanisms and says the evidence of success is "pretty strong", bypassing the banking system. "I think it [QE] is working, but you've got to be looking in the right places. One point I'd make is that it's a mistake to look at the accumulation of reserves the banks are holding at the Bank of England, and say, 'Oh look, it's not doing any good.' It's virtually inevitable, an almost mechanical response to the Bank buying assets."
Mr Miles appeared to be more sceptical when he was with Morgan Stanley, contributing to a research paper in March that stated: "Banks could just hoard the money in Bank of England reserves, earning the current policy rate, or potentially in the Bank of England's operational standing deposit facility. ... The Bank could discourage this from happening by, for example, changing the rate at which deposits above reserve levels are remunerated or (more extremely) by removing the operational standing deposit facility altogether."
What does he think about that now? "We're at the stage of thinking through the economics of all that and analysing whether there might be something useful to do there. You might almost call it fine tuning or a supplement to the operation of QE. I'm open-minded on it... it's not something we need to make a decision on at every MPC meeting."
The exit strategy for QE remains a "tricky judgement", and he seems less fixated on the budget deficit than some observers: "The fiscal situation is one of a very large number of factors... I don't think there's any automatic link. And, of course, changes in the balance between spending and taxing themselves will affect things like yields on government bonds, which you then have to take into account. It is quite difficult to predict in advance the response in asset, gilts and foreign exchange markets to a particular stance of fiscal policy. What matters is that people be convinced there is a strategy to put the fiscal situation on a sustainable basis."
With pronounced white plumage on his fledgling coat, Mr Miles appears to be a usefully dove-ish addition to the MPC. Useful, that is, because he is, at a guess, closer to the current mindset of both Mr King and Mr Brown than many of the more established MPC figures. As a former adviser to Mr Brown on the mortgage market, and one who predicted the coming housing crash way back in 2006, Mr Miles also appears to have some capacity for judging things correctly and calmly arguing his case. Let's just hope he doesn't end up chewing his desk.
David Miles: New man at the MPC
* Miles worked for the Bank of England for several years after graduating from Oxford. After a spell in the economics department at Birkbeck College, London, he was chief UK economist for Merrill Lynch. He joined Imperial College as professor of finance in 1996.
* He is a council member of the Royal Economic Society, and a research fellow of the Centre for Economic Policy Research and the CESIFO research institute in Munich. He is a former editor of Fiscal Studies.
* At the 2003 Budget, Gordon Brown commissioned him to lead a review of the mortgage market. The result, published at Budget 2004, was the report: The UK mortgage market: taking a longer-term view. He wrote: "In many ways the UK mortgage market works well. It is a dynamic and innovative market. Competition is intense for new business; new products emerge at regular intervals."
* He has been a specialist economic adviser to the Treasury Select Committee.
* Miles was appointed an executive director of the Financial Services Authority in December 2003.
* Served as chief UK economist at Morgan Stanley from October 2004 to May 2009.
* Joined the Monetary Policy Committee at the Bank of England in June 2009.Reuse content