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Former Bank of England rate-setter David Blanchflower launched a scathing attack on the bank's governor Mervyn King and criticized the monetary policy committee for not spotting the recession.
Blanchflower, who stepped down on May 31 from the BoE rate-setting body, wrote in an article published in Thursday's New Statesman magazine that King, "the old iron fist of the BoE", dominated the MPC with his hawkish view on rates.
The economics professor, who foresaw recession much earlier than his colleagues on the MPC, accused King of presiding over an institution which was 'hobbled by group-think'. Blanchflower is the professor of economics at Dartmouth College, U.S.
"Clever as Mervyn King may be, he missed the crash and the subsequent recession, and hence, so did the consensual MPC on which I sat," Blanchflower wrote.
"In August 2008, the MPC's quarterly Inflation Report did not even contain the word 'recession', it saw the economy standing still over the next year. I very nearly quit the committee at that point."
He pointed out that BoE policymakers lack potential experience that are vital to set policy.
"Unfortunately, practical folk who knew how to spot and cope with banking crises were in short supply at the Bank of England."
Further, Blanchflower wrote the BoE is full of mathematical modellers who had never seen the inside of a commercial bank or hedge fund. He added that the BoE may more suitably be called 'the Bank of Economic Theory'.
"Unfortunately, the economic theories failed just when we needed them most."
Moreover, he wrote the British economy is not yet out of the crisis, though there were some positive signs recently.
With regard to the BoE's asset purchase scheme, he said it is a move he strongly supported. "And the big news from the Bank of England since my own departure in May has been the MPC's vote on 6 August in favour of increasing the level of quantitative easing by a further GBP 150 billion to GBP 175 billion."
He wrote, the markets were in for a further surprise a fortnight later when the minutes of the August meeting were published and it was revealed that three members - King, Tim Besley and Blanchflower's replacement on the MPC, David Miles - had voted unsuccessfully for a further GBP 25 billion of Quantitative Easing, on top of the GBP 50 billion agreed.
Citing King's support for a bigger boost to quantitative easing, Blanchflower said, "He now understands what has to be done to tackle this crisis."
Blanchflower said quantitative easing can always be reversed. "The only way they could be right is if either the yield curve comes down a lot or the economy leaps into a growth phase, or both. I hope they are right, but I suspect that, as usual, they are not."
"The danger is that if they are wrong they will simply make the recession worse and kill off any chances of a recovery."
According to Blanchflower, the MPC will approve further quantitative easing by November at the very latest. He added that King may even manage to get rates down below 0.5%.
The MPC is set to announce its latest interest rate decision at 7.00 am ET today. The central bank is widely expected to leave the base rate unchanged at 0.5% and make no change to the asset purchase scheme.
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