BOE’s Gieve Sees Risk of Decade-Long Depression (Update1)

By Jennifer Ryan and Brian Swint

Feb. 20 (Bloomberg) -- Bank of England Deputy Governor John
Gieve said policy makers are trying to protect Britain from the
threat of a decade-long slump similar to that experienced by
Japan in the 1990s.

“Do we face a ten-year depression like Japan? That is a
risk, and a risk that we and other policy makers are taking very
seriously,” he said late yesterday after a speech at the London
School of Economics. “It’s a serious risk but we are addressing
it. There’s a huge amount of policy easing in the pipeline. I
don’t think it’s inevitable.”

The Bank of England this month cut the benchmark interest
rate to 1 percent, the lowest ever, and sought permission from
the government to buy securities to create money. Policy makers
are trying to avoid the fate of Japan in the 1990s, when policy
makers hesitated before tackling a banking crisis and then
struggled to revive economic growth, leading to a so-called
“Lost Decade.”

Gieve said that the Bank of England will probably start so-
called quantitative easing in the next few weeks to increase
money supply. Policy makers are currently debating what the
“effective” zero rate is after limiting this month’s reduction
on concerns about banks’ willingness to lend at low rates of
interest, he said.

He is the latest U.K. official this month to mention the
prospect that the economic slump could turn into a depression.

1930s

Prime Minister Gordon Brown said Feb. 4 the world is
suffering a “depression.” Ed Balls, the Education Secretary
and a former adviser to Brown when he was Chancellor of the
Exchequer, suggested Feb. 7 the U.K. is facing a crisis bigger
than the slump of the 1930s.

After the panic at Northern Rock Plc in Sept. 2007, Gieve
twice joined David Blanchflower in voting in the minority for a
quarter-point interest-rate cut, while the majority of the nine-
member monetary policy committee preferred no change.

The Bank of England began buying commercial paper a week
ago when its asset purchase facility became operational using
money allocated by the Treasury. It will release data today
showing the value of transactions conducted so far.

“We don’t know how deep and prolonged this recession will
be or how soon and how completely financial markets will
recover,” Gieve said in his prepared remarks. “So it is too
early to reach settled conclusions on causes or cures.”

Last Speech

The speech was Gieve’s last as a policy maker at the U.K.
central bank. He will leave his post at the end of the month
after serving on the interest-rate setting Monetary Policy
Committee since January 2006.

Gieve will take up a position at the Kennedy School of
Government at Harvard University. On the MPC, he will be
replaced by Paul Fisher, who was previously the bank’s executive
director of foreign exchange.

There are several lessons to be learned from the financial
crisis, Gieve said. Targeting inflation may not be enough for
policy makers to steer the economy.

“If inflation targeting by an independent central bank is
an essential foundation of policy, it is pretty clearly not
sufficient on its own,” he said. “Having a large arsenal of
policy instruments, which vary in their point of influence,
provides some welcome flexibility.”

‘Cautious Skepticism’

Policy makers must “be willing to back their judgments,
whether in identifying asset bubbles or identifying firms or
markets which threaten financial stability, and to take
preemptive action,” Gieve said. “Our default position should
be one of cautious skepticism.”

Gieve said that authorities need the power to enforce
“dynamic provisioning” for financial institutions to reduce
the tendency of some accounting rules to inflate a boom and
exacerbate a bust in the economic cycle. Authorities could also
introduce restraints on lending terms, he said.

For now, the economy may slump further. Data on U.K. retail
sales and mortgage repossessions will be released today. The
next interest-rate decision is March 5.

To contact the reporters on this story:
Jennifer Ryan in London at
jryan13@bloomberg.net;
Brian Swint in London at
bswint@bloomberg.net.

Last Updated: February 20, 2009 03:52 EST

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