Monetary policy has reached the end of the line

So here we are, eight years after Lehman Brothers, and the Bank of England is cutting rates and printing money. How depressing that the monetary system is still being contorted like this. But the alternative - inaction - is probably worse.  

By coincidence, yesterday marked the ninth anniversary of the definitive monetary policy rant: Jim Cramer's epic 2007 diatribe coruscating the Fed for having 'no idea'. He blasted Bernanke for 'being an academic' and called Bill Poole (head of the St Louis Fed at the time) 'shameful'. In his rant, Cramer sets out precisely what is about to follow if the Fed does not take immediate action. Fed minutes published later noted that Cramer's warning was laughed off. This was one a full year before Lehman Brothers went bang. 

Watch the whole thing though it really kicks off about 90 seconds in:   

No time to be an academic...open the window, cut the rate

How times change. There was no chance Carney and the Bank were going to leave themselves open to the charge of being complacent. So the monetary bazooka has been fired once again even through the Bank knows that it might not make that much difference. This was about sending a message more than anything else. 

While the rate cut to 0.25 per cent was expected, the scale of unconventional monetary policy measures, including a new lending scheme for banks and gilt and corporate bond purchases is eye opening. Together the measures will add £170 bn/ $224 bn to the BoE's balance sheet which to me suggests to me the Bank is pretty worried. The Bank hopes that its targeted measures will support the real economy as opposed to inflating asset values. 

Yeah right.... Boing!:

Project fear redux

Will this be a short-lived post-Brexit blip, or - as the Bank suggests - a longer term reduction in the growth potential of the economy? 

It cannot be denied that the Markit PMI numbers on services have been absolutely piss-poor. The Bank's growth forecast for next year has been reduced to 0.8 percent, down from 2.3 percent. The 2018 forecast has dropped from to 1.8 percent from 2.3 percent. 

Mark Carney has already said that we have pretty much reached the edge of monetary policy. That means it is now down to the Chancellor to pursue a fiscal stimulus if he wants to stimulate growth in the economy. But Philip Hammond is going to have a real bear of a time with the public finances if growth falls off that sharply. This is a real bind. 

So now the post-Brexit rubber really hits the road and we'll find out if project fear is actually project reality or not. I hope that it is a blip - but the data don't appear to look good at the moment and we won't be able to rely on monetary policy to dig us out of the hole.