Andrew G Haldane: Haircuts Remarks by Mr Andrew G Haldane, Executive Director, Financial Stability, of the Bank of England and member of the Financial Policy Committee, summarising a forthcoming paper in the Journal of Monetary Economics “Complexity, Concentration and Contagion”, 1 August 2011. *  *  *  The views are not necessarily those of the Bank of England or the Financial Policy Committee. I would like to thank Marnoch Aston, Benjamin Nelson, Sujit Kapadia, Vasileios Madouros, Priya Kothari and Andrew Mason for comments and contributions. During the summer months, I have my hair cut slightly shorter than during the winter months. This helps keep my head a little cooler in the summer heat and my ears a little warmer in the winter cold. Anyone who has seen them will know this is a smart strategy for my ears, to say nothing of my head. This strategy is explicitly counter-cyclical. When the temperature goes up, my hair-length comes down and vice-versa. I am not alone. National statistics show that expenditure on haircuts increases as temperatures rise. The financial system also makes choices about haircuts. The haircuts in question are the amount of collateral a borrower places with the lender over and above the face value of borrowing. But collateral haircuts tend to behave rather differently to personal haircuts. They fall when the financial temperature is increasing and rise when the chill sets in. This strategy is explicitly pro-cyclical.
It is a great strength of the MPC that regional visits are a key part of the activities of all members of the Committee. And in the four and a half years I have spent as a member of the Committee, I estimate that I have visited around 140 individual businesses and talked to around 100 business groups – across England, Scotland, Wales and Northern Ireland.1 There are two reasons why I am particularly pleased to speak at today’s lunch. First of all, the East of England is my home region as I live in Essex and have done so for over a quarter of a century now. Second, I am always delighted to speak on a CBI platform as the seven and a half years that I spent as a CBI economist in the late 1980s and the early 1990s was a very important and formative period in my career. I have a great respect for the work of the CBI which remains the pre-eminent business organisation in the UK. That period I spent working in the CBI’s Economics Department about twenty years ago was also a period of major economic turbulence in the UK. I joined the CBI in September 1986, just as the “Lawson Boom” was getting underway. And I was the CBI’s Director of Economic Affairs from 1989 until the end of 1993 as boom turned to bust and the UK economy went through the last major recession before the global financial crisis of 2008/9.