Paul Fisher: the full transcript
I’ve interviewed Paul Fisher, who this month attended his final Bank of England Monetary Policy Committee meeting. Read the write-up in the Indy here.
Fisher joined the MPC in March 2009 and, as Executive Director for Markets, he was responsible for overseeing the Quantitative Easing and the Funding for Lending Scheme. In all those five years Fisher did not vote for rate rises once. He is now deputy head of the Bank’s Prudential Regulation Authority.
Here’s the full transcript of the interview below for those who are interested in monetary policy and financial regulation.
1) On the Bank’s communications strategy on interest rates: “If we’re not explaining ourselves then obviously we need to do better”.
2) But in a final dovish flourish he notes: “There’s no rush here. There’s no sign of inflationary pressure.”
3) On reversing QE Fisher notes that over four years a quarter of the Bank’s £375bn in Gilts would mature naturally, reducing the Bank’s balance sheet without actually requiring any sales.
4) The Bank’s supposed collusion in forex rigging by traders is a “non-story”.
5) Fisher’s move from the MPC to the PRA was not, he stresses, the result of the forex affair.
6) The liquidity regime for banks before the financial crisis was “not fit for purpose”
7) The European Central Bank has played its hand “pretty well”.
You left the Bank of England’s Monetary Policy Committee this month after serving five years. Looking back, do you have any regrets about the decisions taken?
I don’t think so. If I look back on policy settings, in my first week in the job we cut rates to 0.5 per cent and announced the start of the QE programme. My feet hardly touched the floor for the first six months or so because I was busy getting that programme under way and conveying to the market what was going on. We also launched the corporate bond and financial paper scheme at the same time so we had three schemes on the go at once….It’s a privilege to serve in these committees [the MPC and the Financial Policy Committee]. It has been very stressful at times but a great experience over these five years. I have been particularly proud of the work the markets area has done. Leave aside all these scandals, they did immense efforts in going out to by £375bn of Gilts, £2.5bn of commercial paper and £1.5bn of corporate bonds. Fantastic efforts. Whatever else has happened I’m extremely grateful for the staff at the Bank who really did pull all the stops out to try to turn the economy round, whether it was on QE, Funding for Lending or the Special Liquidity Scheme. Tremendous effort.
Had the QE programme been prepared before you came on board?
A lot of the work on Gilts had been prepared and I just inherited that. Commercial paper was already underway. The corporate bond scheme we launched in my time. But it’s one thing designing the operation and another actually carrying it out and convincing the market what about you’re doing. In my first six months I spoke to nearly all the Gilt-edged market makers and asset managers I could find, trying to explain to them what the rationale was for the programme. What we didn’t want was operations that were unsuccessful because that would have questioned the credibility of the overall programme. It was designed so that all the operations worked – which by and large they did. I wouldn’t change the [other] policy settings much. Maybe during 2011 we could have started, or resumed, QE a little bit earlier than we did in the October meeting. But basically we did QE in two bouts – the first time when market dysfunctionality was at its height and again as a result of the euro crisis later. Those were the right times. The amount, £375bn, you could argue for a little bit more or less but for me that’s about right. The one big, brave call we made in my time on the committee was when inflation went up to 5%, that that was because of one-off factors, and we should keep policy accommodative. By the time we got to this point we would have growth resumed and inflation at or, as it turned out, slightly below target. Had we tightened policy in response to that increase in inflation we would have had a much deeper recession, higher unemployment and now we would have slow growth and deflation.
Would we have had a “double dip” recession?
Certainly the recession would have been much worse and the recovery from it much less pleasant. It’s always difficult to say exactly what would have happened because you have to map through everything. We had the deepest fall in output in 2009 in living memory – 7% peak to trough. Unemployment should really have gone very much higher – 14%-15% it could easily have been. It peaked around 8.5%. And the number of companies that went insolvent was much reduced relative to the early 1990s, which was a much smaller recession. So a number of our policies had very big powerful effects on the recovery phase – and without doubt would have been much worse if we hadn’t stuck to our guns, even though inflation temporarily went up so high.
You’ve experienced the transition from the Governorship of Meryvn King to Mark Carney. How much a shift in style and substance has there been?
Look, personalities differ and people chair meetings in different ways. The life of the central bank goes on. We’ve moved into a different phase. Actually just before Mark arrived we saw a sudden spurt of confidence kicking in, which was very welcome. The main surprise was that it hadn’t happened before actually. So we’ve been playing a different game since then – which is all about ‘what is the path to the normalisation of policy’. And so that shift is much more important than the personality involved. The Bank will change and has changed in each of the 24 or so years I’ve been here and under Mark it will change again – probably be a bit more outward-facing as an organisation. We’ve now got all of our powers in terms of prudential supervision, macroprudential policy through the FPC [Financial Policy Committee] and monetary policy through the MPC [Monetary Policy committee]. They only kicked in from last April, so there was a very short period under Mervyn where we had all of that. Mark’s taking these big changes forward. So: huge changes in the economy, huge changes going on in our responsibilities.
One of the criticisms of the previous regime was that it was less conducive to people at the Bank bringing ideas up the chain of authority? Has that changed?
That wasn’t a criticism I recommended. Throughout the crisis my team was bringing forward new proposals to changes in QE and how we did things. Most of those got accepted. Or if they weren’t accepted as they were brought forward they were adapted into something else. It was a relatively junior team that came up with the Funding for Lending Scheme, for extending Collateral Term Repos. So we never had that [problem], but it was perceived that way from the outside. One of the main lessons we’ve learned is that we need to have the best possible communications with the outside world about what we’re doing. Particularly when we’re doing things which are new and unusual. We’ve always tried to do that. We’ve been through such extraordinary times that it makes it that much important that we get on the front foot and explain. The policies will be more successful the more we can explain them.
There have been rumblings in the City that communications have gone a bit haywire over Forward Guidance and the timing of the next rate rise…
This is a bit frustrating because I think we have been very consistent. We have never said that we intend to raise interest rates at a certain time. The whole point of forward guidance is that we won’t put rates up until the economy can sustain it. And then actually when we get there we don’t think rates will go up very fast because of a whole range of pressures. But we will be driven by economic conditions in the data ‑ that’s when we will put rates up. We’re always uncertain about the exact path of the economy, so you’re always uncertain when it is likely that you’ll get the point of rates needing to go up. People don’t want to listen to the uncertainty in that message. They want to get to a very certain date. There should be uncertainty because we are uncertain. It’s been a struggle to get across that normal natural uncertainty.
So this is an inherent problem with the way people interact with central banks, not the Bank’s communications?
If we’re not explaining ourselves then obviously we need to do better. We just have to keep going out there with the messages, trying to find new ways to frame those messages to get the point across. The point is, the economy evolves, we know we’re going to have to put interest rates up at some point, we don’t know precisely when, we can describe the conditions under which it’s likely, but we have to wait for events to unfold. Who knows what might happen – you might have a sudden spurt of world growth which changes the picture. All we can do is describe how we think about the economy, how we might react to it. Forward guidance is really doing no more than putting that into the current context – where we start a long way from normal. There’s no rush here. There’s no sign of inflationary pressure. We don’t know what happened to the supply potential of the economy – that appears to have been moving around. So we’ve got to play it by ear.
The previous regime was month by month interest rate decisions. Why is forward guidance superior?
It’s just trying to be a bit more explicit. For most of the time we were around about the normal level of interest rates, and they were a bit tighter or looser – and that’s fine, you take it month by month. You then had to very rapidly cut interest rates to unnaturally low levels. And for four years it was a no brainer that that was where we were going to stay for most of us. We then start coming to a point when growth is resumed and you know at some point you’re going to have to tighten rates and we’re a long way from normality. So this isn’t a circumstance we have actually seen before. That’s why forward guidance was relevant. We’re a long way from normality. Everyone can see we’re heading in a direction when normality is going to get restored. So what can you say about that path? The one thing we can’t say is exactly when it’s going to start. What we can say is there’s no rush, the conditions are likely to be those in which the economy will be robust to a rise in interest rates. All the scare stories about what the effect of an interest rate rise will be on this group or another group – well, why would we change rates if it was going to have such a devastating effect? We can say that the normal is going to be subdued interest rates for quite some time.
Would markets have priced in tightening earlier in the absence of forward guidance?
I’m sure they would have done. If we’ve kept rates lower for a bit longer that’s probably a good thing. Now that we’re getting a bit closer we can make a finer judgement. What happens is that markets and commentators focus on what we’re trying to do, rather than looking at the data and trying to assess how we would react to that data.
Turning to the Funding for Lending Scheme (FLS), you’ve said the supply of credit would have been worse without it. But doesn’t using that counterfactual make it impossible for outsiders to evaluate whether or not it’s been successful?
It’s always difficult. You’re doing such large things with no historical experience. It’s difficult to do controlled experiments. But we can see what the effects were with FLS. We knew that rates for lending across the board were falling, we had negative money growth. Interest rates in the market were going up at a time we were trying to keep interest rates low and bank funding was a big problem across Europe. FLS wasn’t the only thing that addressed this – Europe took steps as well. But as soon as the FLS was announced you saw bank funding costs tumbling down so interest rates to businesses and households were much lower as a result within months. First of all, private sector lending turned around. Then lending to large corporates and SMEs (small and medium size enterprises) is still in that process of turning around. Now it’s fairly clear to anyone in the industry that that process of turning around was helped by FLS. Can I show you empirical tests that would prove it? No I can’t. But even the banks that didn’t draw money from it have been very supportive because it brought down their funding costs.
You mention SME lending. Wasn’t one of the points of FLS to get SME lending positive? And they’re still negative…
I don’t know if you came to the press briefing at the launch of FLS [in 2012] but I was quite clear we weren’t trying to direct credit to different parts of the economy. We were trying to get the economy growing. The key thing for SMEs is now whether they can get credit from banks but whether there’s demand for their products. We thought that banks would want to maximise their use of the FLS. If you look at the individual banks there were many more banks that actually increased their SME lending, some of them quite significantly. But there were one or two that shrank it. One of those that shrank it was the Royal Bank of Scotland, the market leader. They have their own problems. The FLS helped them reduce their funding costs, but it didn’t help them resolve their internal issues. Lloyds, Santander and some of the challenger banks were able to increase their lending much more positively that they would have been without it. I’ve no doubt it had a positive impact on SME lending, but this was counteracted by other things that were going on. So it wasn’t sufficient to solve the problems – and the RBS issues can only really be solved by RBS and structural change there. You only have to read the Large Report, which was written for them, to get some sense of what the problems where. There were some frictions within the dominant lender that made it very difficult for them to change their lending practices. But a lot of the other banks were able to use the FLS to get SME lending done. Which meant that if you were a new SME coming into the market you could go to one of those banks and you should have been able to get funding.
The Competition and Markets Authority is looking at the structure of the retail banking sector. Would you like to see more competition?
We’re always in favour of competition, it’s a good idea they’re doing the review. There is a structural tendency within banking to go for returns to scale. There have been returns to scale so large operations will reduce IT costs and their back office costs. There has been a tendency to more consolidation within banking. We would prefer there to be more competition.
Should regulators prevent consolidations in future?
That’s not our job to rule on mergers and acquisitions in that way. We have the competition authorities for that. But we do have a secondary objective now for competition. In any rule making or policy that the Prudential Regulation Authority introduces we have to bear in mind the impact on competition. And other things being equal we would choose the policy that was more supportive of competition. So we can make our contribution. The Financial Conduct Authority has a rather stronger competition objective, to actually promote competition, particularly for retail.
One can almost hear the lobbying now: “if you do break us up it’s bad for financial stability”. What’s your view on that?
I’m not really involved in that. People will always resist change, particularly if they think it’s not going to help them make profits. People will adapt. It’s up to the competition authorities.
But they don’t look at the financial stability implications. Would they consult you at the PRA on that?
I’m not sure financial stability is something that is central to a competition inquiry. If they wanted our input they would ask us.
You were dragged into the forex rigging furore. And it emerged that there were various meetings in high-end restaurants, some of which you attended. There is a perception that the relationship between the Bank and City traders was a bit too cosy. Is that an unfair criticism?
I attended one and I wouldn’t describe it as high end. Most of those restaurants were pretty ordinary by City standards. It’s just a story to make some headlines. We’ve got an internal investigation into this, about what we might have known and when. I don’t really want to talk across that. But that’s a non-story really, in my view. We had our role of trying to liaise with the market. We did it in various ways, some of them were more innovative than others. Meeting traders at lunch time on a US holiday is one way of getting them out of the office. It’s not really the issue. The issue is misconduct, that traders are alleged to have been engaged in.
But they have effectively turned around and said “look, the Bank knew what we were engaged in”…
I think you’re mixing up two things here. The sort of allegations that the FCA are investigating here are not the things that were being discussed with the chief dealers group. Funnily enough people don’t come to meetings with the Bank, put their hand up and say: “You know what, we’ve been sharing client confidential information between us, is that all right chum”. If you go back and look at what’s been alleged that is not the allegation.
Isn’t it the traders that have conflated the two?
Well people are reading two plus two and coming up with six. Let’s wait for the investigations to conclude and then hopefully everything will be a lot clearer.
You were moved [from your position as executive director for markets] around the same time that this forex thing blew up. Were you moved because of that business?
I don’t think so. I wasn’t the only person to be moved. Others involved in the moves weren’t in anyway involved in this. No, it was incidental. I had five years on the committee. I think 65 MPC meetings is a long enough sentence for anybody! Not forgetting that I had been involved in the same number as secretary to the committee before that. In total I sat through 120 meetings in my time. So I think I’ve done my bit. This is the third leg of central banking that I haven’t yet done.
Given Libor, and the allegations over forex, oil, goal etc is it reasonable for people to think there’s something rotten in investment banking?
This is why we set up the Fair and Effective Markets Review to look into what we can do to improve the structure of these markets so you don’t get this sort of behaviour. Misconduct is misconduct. People will get prosecuted, they will get punished. But why did people ever think this was the right thing to do in the first place? What’s really shocking is the collusion between traders across firms. These firms are supposed to be ferociously competitive, so how come their traders were talking to each other and arranging things between them? That’s not the sort of thing that gets through to the top of the shop, or through to us. What can we do to stop that kind of misconduct in future?
And what are your thoughts on that?
We’ve got a whole group of people set up to look at this so I don’t want to prejudge where they will come out over the next year. But it basically comes down to what incentives people have got and what opportunities people have got. It’s important to reduce both. In our forex report we found that people had an incentive to misbehave and we don’t know for sure whether they did or not – that’s the allegation. You would really rather have a market structure where the incentive and opportunity isn’t there.
There is a view that it was always like that this in the City and what has changed is that this kind of activity has come into the light…
The observation is that new technology makes it more likely they will be caught because we have telephone lines being recorded, chat lines being recorded, emails being recorded and what people have said to each other in those is remarkably stupid if they were misbehaving. It’s very painful and costly to unearth and you need dedicated teams of people to sift through the tens of millions of communications to find the evidence but that’s what’s happening and people are getting the book thrown after them as a result – and rightly so.
There’s an argument that you should imposes taxes on trading to make it less profitable…
We’re getting into very speculative territory here which I don’t want to have a philosophical discussion about. The truth is there are certain things you know are wrong: You do not collude with other people to fix prices. You do not share client confidential information. Full stop. People who are doing that, they should get caught, they should be punished. That’s the starting point.
And you can’t plead: “we didn’t quite know”…
Everybody who works in markets knows those two things. It’s in the code of conduct for foreign exchange. If that’s what they were doing they will get done for it, and rightly so. But these markets are here for a purpose – they’re not just playgrounds for people to make money. They actually serve a vital role in allocating resources in a capitalist system. It’s important they do that job properly. You stop all these markets and you do damage economic growth. What we need is fair and effective markets and that’s what the Bank’s study is set out to help deliver.
But is the sheer scale of the forex market necessary to serve the real economy? Could it be smaller and still do the job?
Again we’re getting into speculation. I haven’t done the calculation to show what the right size of the forex market is. The vast majority of it is to support real economic activity. And with globalisation it’s become even more important.
QE and exit is on people’s minds…
That’s one thing I’ll miss. If you set up a policy and then don’t unwind it…there’s a little bit of sadness about that. But it’s going to be really interesting to see what we do. It’s all tied up with what the new world will look like, what size of balance sheet do we need to have? In the past banks kept very small liquid reserves, just enough to deal with payments. In future they’ll be told to keep much more liquid assets. Some of which they may want to keep as reserves here. We can supply those reserves either by lending to them or by holding assets outright. We we’ve got to decide how much of QE becomes semi-permanent and how much we actually want to unwind. The basis is our balance will likely be much bigger going forward, permanently, than it was pre crisis. We’re insisting that all banks have bigger liquidity buffers. They can either hold it as cash or Gilts. If they want to hold it as Gilts we can happily sell them some. We won’t know for sure how much they hold until interest rates return a bit more towards normal. But our best guess is they will want to hold very substantially larger reserves.
So was it mistake pre-crisis to let them hold such small liquidity buffers?
I think the liquidity regime pre-crisis was not really fit for purpose, that’s true. There’s a question whether it was really being implemented properly as well. What is absolutely certain is the banks weren’t holding enough liquid assets pre-crisis.
Was that an FSA responsibility?
I think it was, but this wasn’t just a UK failing, this was internationally. Markets had been well behaved for such a long time [that] people’s appreciation of risk had been diminished. But don’t expect banks to hold enough liquidity for every single possible conceivable event, there will always be some tail risk where they might need central bank liquidity support. But they should hold enough for a much higher proportion of potential events than they were.
So they need more liquidity as well as capital?
Both. Capital is a source of funding. The proposition on capital is that they should have more capital and less debt. Now the debt is cheaper than the capital so they will naturally try to economise on one and we say, no, you should have more, or loss absorbing instruments on your balance sheet. That in itself shouldn’t damage lending to the real economy. Liquidity you need to be a bit more careful with because the liquid assets on the other side of the balance sheet, they do compete with your loans to the real economy. First of all you need to get the amount of liquidity right and then you need banks to be able to dip into that liquidity when they’re under stress. It’s a buffer – and it’s a buffer that’s there to be used. The two things are quite different – but the banks had enough of neither pre-crisis.
So that was a policy mistake?
Well, it’s always up to the banks to choose what to do in the first instance. So in the first instance it’s always the managements and they had generally been allowed to do that…
Is the Bank keen to see its own balance sheet reduced? Is that a sign of success?
I think the normalisation of monetary policy will be a relief for everybody. The system is not meant to work at 0.5% interest rates. So even those of us who have been reluctant to put rates up it will still come as a welcome relief when we get to the point of putting rates up. Once we put rates up and they are sufficiently far up that they can be flexible both up and down then we can consider what to do with the stock of Gilts.
So you wouldn’t put up rates slightly and then sell of some Gilts, then raise rates again?
No. With something like asset purchases and sales you don’t want to be starting, stopping and reversing because that would keep the market in a state of complete disarray. When we do start selling we want to be reasonably sure about how much we’re going to sell, and over an extended period, and do it slowly. And so you don’t want to do that until you’ve established interest rates again as your active instrument of monetary policy. And for that you need to be able to move them both up and down. You want interest rates to get high enough that you can reasonably cut them were the economy to slow down.
And does high enough mean the medium-term equilibrium rate of 2.5-3%?
Not necessarily. We’re not talking about 25 basis points and then you can go. It will be for the committee of the day to decide how high is high enough. You want to feel you’re in a position where you can reasonably cut rates before you started selling off the Gilts, which essentially will be a tightening of policy. You would not want to do that very quickly, or in a rush, because that would create disorderly Gilt markets.
It could be over several decades then…
In the first instance, it’s quite likely that you’d stop reinvesting. Then they’d mature. It works out to be £20-25bn a year in run-off for the first few years. So over four years you could run off a quarter. So you can make inroads quite quickly just from not re-investing. And if you add some sales on top of that…
Are Gilt sell-offs a policy tightening then?
It would be part of setting monetary conditions. So you’d be doing this during a phase when you wanted to slowly tighten policy. But the effect won’t be as significant on the way out as in. QE is most effective when markets are dysfunctional. Then as markets start to function properly again some of the effect wears off. Some of the effect has already worn off. In completely functioning markets the difference between cash and Gilts is much less. So you wouldn’t expect as much tightening on the actual sales as we had loosening on the purchases. In effect, some of that effect has already happened. It won’t be completely neutral but it will have a more mild tightening effect than otherwise.
What’s your view about whether the European Central Bank should engage in Quantitative Easing?
It’s a much harder problem for them. We had one government debt market which we could use. When we did the FLS we had six big lenders. When you’ve got so many countries, different types of debt markets, different banks, it’s much harder. The real difficulty of the ECB is that it’s not monetary policy which is the source of their problem. Their problem is structural issues, supply side reforms and real economic developments. They’re obviously trying to play their part in supporting the economy and good luck to them. For what it’s worth I think they’ve played their hand pretty well. I wouldn’t want to criticise fellow central bankers in public. I just think it’s a much harder job for them.
There is a view that they’ve been massively behind the curve…
They have got labour market problems that will last a generation in terms of getting sustainable growth back into some of the vulnerable countries. That is not monetary policy. Monetary policy can support but we don’t make anything real at central banks. Those fundamental real problems of growth come from the government and private sector, not from the central bank.
But you can allow space for those structural reforms and remove the threat of debt deflation…
And they have said that if they have the risk of deflation then QE is the appropriate policy. But it’s not easy for them to do given they don’t have single government debt market.
How much interaction is there between central banks?
Quite a lot. Every two months central banks all get together in Basel. I spent seven years on the markets committee and five years on the committee for the global financial system, both of which report to the governor’s meeting in Basel. So there’s a regular exchange of views and information about the state of the economies. We have private discussions regularly, can pick up the phone at any time to our colleagues, particularly in the markets section, as you would expect.
You have the International Monetary Fund and the Bank of International Settlements publically at odds over QE and the European Central Bank in the middle. Is that better or worse than private exchanges of views?
Debates generally are helpful as long as they are informed and balanced. You see things in the press – there have been some this week – which are just whole columns of unsupported assertions, of somebody’s opinion. Well, that’s not really very helpful to a debate. What you want is sound analysis and proper reasoning. If that’s in the public domain then so much the better.
What’s your view of the BIS that rates were kept too low in the boom?
Let me give you the UK point of view. We had the highest interest rates in the G7 for most of the 10 years leading up to the crisis. That had given us an overvalued exchange rate. What was happening was that short-term money was flooding into the UK to take advantage of those short-term interest rates. That was pushing up the exchange rate giving us a big current account deficit. That money went straight into the banking system. So the right policy prescription would have been to put interest rates up? I don’t think so. It would have meant more hot money coming in, straight into the banking sector, pushing up the exchange rate, widening the current account deficit, making the problem worse. Now you could have argued for higher world interest rates. But for the UK to have put interest rates up would have been exactly the wrong response to that situation. What you would have had to do – and it would have been quite tricky – would have been to have tighter fiscal policy so you can have looser monetary policy so that our interest rates would have been in line with everyone else’s. Now we would still have had a problem, but we wouldn’t have had the exchange rate effect. But then you get into the question of what would US monetary policy have been doing, why were interest rates so low? And that was in part because of what was happening in Asia as well as the US. You get into very complicated stories. But I’m fairly clear in my mind that the right policy prescription was not to have higher rates pre-crisis.
And macroprudential policies to curb leverage?
Macroprudential policies would certainly have helped and we didn’t have those options at the time. You also get into questions of was there more room for international policy coordination. It was certainly giving us a problem.Tagged in: bank of england, Paul Fisher
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