Real test of courage for Bank of England’s new Governor

Talk about a baptism of fire. Andrew Bailey has started his new job as Governor of the Bank of England right in the teeth of a massive financial crisis. No time to get his feet under the desk, arrange family photos or pick out curtains for his office in Threadneedle Street.

Just four days into the new gig, he had to convene the monetary policy committee and cut interest rates to the lowest level at any point since the Bank was founded in 1694.

This is as low as Bailey thinks rates can effectively go. What’s more he’s pledged £200bn of quantitative easing to pump money into the economy and, perhaps, has encouraged banks to effectively ignore losses made on loans to companies and mortgages by saying the Bank will, in effect, ignore them for the purposes of capital provision.

This is “whatever it takes” and the new Governor is doing it. He’s also being asked to make other big calls, such as whether to close the markets.

Bailey is right to keep them open. The massive plunges in the prices of many financial assets may appear insane, but they are a rational reflection of a world that has gone bonkers. Is it mad the markets have shed a third

of their value? No, not when JP Morgan is predicting that the US economy will contract by 14pc in the second quarter on an annualised basis and the eurozone could shrink by 22pc.

Nor when Goldman Sachs is predicting that US jobless numbers will go from 281,000 to 2.25million in the space of just one week.

We have seen the markets go into a “liquidation phase”. You would expect the price of bonds, gold and other “safe havens” to go up. But everything has been falling as investors try to convert their assets into cash. Big assets managers are having to sell holdings to hand over the money that retail investors are pulling out of funds; retail investors are drawing on their savings because they are worried about how to pay the mortgage or rent. Close the markets and you make

it harder for them to get their cash.

Bailey did, however, fire a shot across the bows of short sellers. He said those investors who borrow shares in companies, sell them in the hope of buying them back when they have fallen in value and pocket the difference should “just stop”. Well,

The massive plunges … may appear insane, but they are a rational reflection of a world gone bonkers

they won’t. But, what’s more, his suggestion that this is damaging the economy is wrong-headed. It’s the spread of global pandemic, and the fact normal human activities are grinding to a halt, that is damaging the

economy, not short sellers. These types of bets aid price discovery and make markets more efficient. If they didn’t, the Bank of England and the Financial Conduct Authority, which Bailey used to run, would surely ban them, no?

What’s more, many pension schemes are invested in funds that deploy these strategies. There was, for example, a huge rush of money into so-called managed futures funds after 2008 because they made money during the financial crisis.

Sure, it leaves a bad taste in the mouth to see some people making money amid the carnage. But, the markets are amoral rather than immoral. Better to just let them get on with it. Andrew Bailey knows all this. He should also know now is not the time to be looking for scapegoats.