Gieve on interest rates

Sir John Gieve’s comments to Robert Peston are quite interesting, and tonight’s Panaroma sounds like it will be worth tuning in for. He explains some of the thinking behind the failure to increase interest rates earlier to deflate the housing bubble. He also goes on to talk about the limited value of interest rates as an economic policy tool, and goes on to suggest that alternatives are required:

I think that one of the main lessons from this is that we need to develop some new instruments which sit somewhere between interest rates, which affect the whole economy and activity, and individual supervision and regulation of individual banks.
Maybe we need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand... I think we need to complement interest rates, which are a blunt instrument - you set one interest rate for the whole economy - with something which is more financial-sector specific.

Here’s a response from Nick @ The Capitalists.

The striking thing about Gieve’s comments is how well (comparatively) they have gone down. Although today’s headlines are a bit hysterical, the actual reporting of the interview is far less so. You would have thought that an admission by the BoE’s deputy governor that the Bank hadn’t really grasped the nature of the crisis early on, or that they thought that the housing bubble was separate from the real economy would normally earn them a shoeing. But not today it seems.

Are the business commentators simply too full of xmas cheer to lay into the Bank (again)? Or is it a sign that we can now have a proper debate about economic policy in the meejah, without resorting to ‘exposing’ officials for ‘admitting’ mistakes? Perhaps Gieve’s admission of failure will help us learn the lessons, as Pesto says we need to.