Goodhart Says ‘Sack’ DMO to Bolster U.K. Economy

By Svenja O’Donnell

Jan. 13 (Bloomberg) -- Prime Minister Gordon Brown should “sack” the U.K. Debt Management Office and refrain from issuing government bonds as a way of bolstering the economy, former Bank of England policy maker Charles Goodhart said.

“The one single thing that I would like to see, in a sense to get us out of the present problem, would be very simple,” Goodhart told lawmakers on Parliament’s Treasury Committee today. “It would be: sack the Debt Management Office and just not issue gilts for quite a long time so that the huge deficit simply comes into the system in the form of increases in liquidity and increases in the money supply.”

Policy makers are seeking new tools to fight the recession as interest rates approach zero. Brown’s government plans an unprecedented 146.4 billion pounds ($214.15 billion) of debt sales in the fiscal year ending March 31 to finance bank bailouts amid a decline in tax revenue.

“To keep the system sufficiently liquid and monetary growth sufficiently high, the government ought to be under- funding the deficit,” Goodhart said. “When banks are having difficulty in lending to the private sector, there needs to be a much greater expansion of lending to the public sector.”

Underfunding the gap would see the government selling fewer bonds than are necessary to pay for its budget deficit. That leaves more money in the hands of investors who may have spent them on gilts, keeping more money in the economy than would otherwise be the case. Brown forecasts a deficit of 118 billion pounds in the year through March 2010, or 8 percent of gross domestic product, the most since modern records began in 1970.

Rate Cuts

The Bank of England on Jan. 8 cut the benchmark interest rate to 1.5 percent, the lowest since 1694. With the prospect of further reductions, Governor Mervyn King may have to cooperate with Brown to inject money into the economy through so-called quantitative easing.

Banks, nursing more than $1 trillion of losses from the financial crisis, have rationed lending, driving Britain deeper into a recession. After almost 16 years of continuous growth, the economy contracted 0.6 percent in the third quarter. The economy slumped the most in at least two decades during the fourth quarter, the British Chambers of Commerce said today.

“Under-funding the deficit would be far less damaging to the economy that to force some minimum of lending,” Goodhart said today.

The Debt Management Office, which oversees auctions of government bonds for the Treasury, on Jan. 7 held the first of 20 sales earmarked for January through March.

Policy makers have yet to explain what options may be available to them to combat the recession if they cut interest rates close to zero.

Former Bank of England economists Shamik Dhar and Danny Gabay suggested last week that the government should purchase houses on the verge of repossession to add money to the economy and save families from being thrown out of their homes. The plan would cost about 50 billion pounds over five years, they said in a report on Jan. 9.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.