Examination of Witnesses (Questions 40-47)
PROFESSOR TIM
BESLEY
12 OCTOBER 2006
Q40 Mr Newmark: No, but there is
some monetarism in your DNA.
Professor Besley: I do not view
this as an issue of monetarism. I view this as an issue of trying
to have a view of how
Q41 Mr Newmark: When you take into
account money supply and the pressures on money supply, which
you have acknowledged is an issue, particularly with M4 and how
that seems like it is going through the roof, you must take that
into account.
Professor Besley: Yes, but that
does not make me a monetarist. I think that is the issue I am
taking issue with. I think one can be concerned about these issues
without being in any sense a crude monetarist. That is what I
am saying.
Q42 Mr Newmark: To what extent were
you surprised by the muted effect on inflation on the recent rise
of oil prices?
Professor Besley: I think that
like everybody I was surprised but I think I am beginning to form
a view which is quite consistent on this and I think it is a view
that many people are coming to that at the end of the day—this
links back to your previous question—inflation is created
by an excess of demand over potential supply. You can have shocks
in prices that bear on that and oil prices or cheaper goods from
China or wherever they might be, but at the end of the day what
matters for inflation is exactly that. I think too many people
were looking back to the 1970s and saying that we had this huge
oil price shocks, it had a massive systemic impact throughout
the economy, and I think now we have a somewhat different view
of the world and it is one which means we concentrate on what
really matters which is nominal demand relative to supply capacity.
I think the surprise is in the fact that we were not, when this
initially hit, sufficiently influenced by what really matters.
People were surprised and I would put myself in that camp.
Q43 Mr Newmark: In your answer in
your questionnaire you say that despite oil prices now falling
we may enjoy less relaxation in inflationary pressures than might
have been hoped for. I am just curious as to why you think that.
Professor Besley: That is exactly
the other side of this coin, namely that if really what is driving
inflationary pressures is nominal demand versus supply capacity,
a fall in the oil price shock may give some temporary respite
coming through CPI directly and we are observing direct effects
on CPI already through falling petrol prices. In the medium term
that is not the factor that is going to drive inflation, it is
going to be whether the balance of supply and demand factors in
the economy is right. That is the sense in which I think that
to say just because we are having a relaxation of oil prices we
are going to enjoy some better medium term inflation outlook just
does not follow. What follows is that we have to keep an eye on
what matters.
Q44 Kerry McCarthy: You have already
mentioned that you are initiating a research project on personal
debt and you were asked in your questionnaire about the significance
of the recent rise in personal insolvency. Given that we have
very benign economic circumstances at the moment, to what do you
attribute the rise in personal insolvencies?
Professor Besley: I think there
is little doubt that there has been a structural change in the
market for debt, particularly around—as you know and I am
sure your Committee is concerned with—the sharp increase
in the number of IVAs that people are taking out (Individual Voluntary
Arrangements). That has gone up very significantly in part because
I think they have been heavily marketed in certain quarters as
you are probably also familiar with. What you are beginning to
see—if you look at the recent data on unsecured debt I think
this is borne out—is that the lenders in unsecured debt
markets are becoming a little more cautious and we are seeing
a cooling off in lending in the form of unsecured debt, albeit
at a time where of course there is more secured debt perhaps on
the back of the strength of the housing market. I think if it
is the case that there has been, if you like, a structural change
which means individuals are more inclined to re-negotiate their
debts through IVAs that will have an ultimate effect on the way
lenders perceive lending in this market. My own take is that there
has been that change and I think we will see a market correction.
Indeed, as I say, the recent evidence on unsecured debt suggests
there is a market reaction to the increase in personal insolvency.
Q45 Kerry McCarthy: Since there is
already a cooling off in the market, that would presumably have
even more of a restrictive effect in that the supply of lending.
Do you think that is a potential concern?
Professor Besley: In terms of
the monetary transmission mechanism that somehow that will have
less effect on the economy, I think it is unlikely partly because
secured lending is quantitatively much more important that unsecured
lending where I think most of this activity is concentrated.
Q46 Kerry McCarthy: Do you think
that the increase in personal insolvencies is a result of increased
interest rate sensitivity in the population as a whole? Or is
it more linked, as you say, to firms out there marketing the idea?
Professor Besley: I think it would
be hard to document persuasively that the interest rate increase
has really been the principal driving factor relative to these
other factors that I have already mentioned.
Q47 Chairman: Professor Besley, thank
you very much for your evidence this morning. You are thinking
hard about a lot of things but we have not heard many conclusions
this morning so when you come before us again we are looking forward
to these conclusions flowing out at your next appearance.
Professor Besley: I will be delighted
when I have myself fully played in to offer more concrete conclusions
on this business.
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