May 10 2012

Bank of England’s independence was a failure – FT

Posted by: Nick Shaxson in: Thoughts

The FT’s Chris Giles, fresh from his devastating exploration of Mervyn King at the Bank of England, has written another damning article looking at (among other things) what happened when the Labour Party gave operational independence to the Bank of England to set interest rates, a move that was widely praised at the time but in fact represented an astonishing capitulation to the City of London.

In Treasure Islands I quote Labour MP John McDonnell, who explains the politics behind Labour’s capitulation:

“You have been eighteen years in opposition and you are desperate to get into power, no matter what. Blair and Brown made a Faustian pact to give the City its head. The idea was to let them do their profiteering and just take the tax benefit. It was not a relationship on our terms; it was simply ‘Give them what they want.’ I don’t think Brown understood what he was doing. It was simply a whizzo scheme to stabilise their government.”

Giles’ article in the FT today says:

“With the benefit of hindsight, the first 15 years of BoE independence should be seen as a well-intentioned failure, so it is all the more surprising that the central bank is about to be granted greater powers over system-wide financial stability and banking supervision.”

Indeed. He stops short of calling for a reversal of the Labour policy, with the excuse that “the change is already hard-wired,” but nevertheless makes some very useful further recommendations to bring this unaccountable institution that has been led by a dictatorial leader, Mervyn King, who brooks no dissent and has shown himself to be wilfully blind to issues of financial stability and to the dangers that faced the global financial system in 2007. (His only credible defence is that he certainly wasn’t the only one – although Giles’ earlier article makes it plain that not only was he in a better position than almost anyone else in the world to be able to foresee the dangers, he refused to take an interest and was contemptuous of those who tried to do so.) The article makes it quite clear, without actually saying it in so many words, that the BoE governor is a disgrace. The closest he comes, perhaps, is to say

“Sir Mervyn cannot retire with a happy economic legacy.”

Yes, well, indeed. And King has remained true to form after the crisis:

“Since the change is already hard-wired, it is more important than ever for there to be sufficient checks and balances in financial regulation. The biggest beneficiary of such constraints is the BoE itself, which makes the opposition of governor Sir Mervyn King all the more bizarre.
. . .
Far from supporting greater transparency and stronger governance, the BoE’s top brass has been shouting its opposition from the rooftops.”

Giles calls for the governor’s role to be curtailed:

“In a constitutional democracy, there is no place for a monarch in the UK’s most important economic institution. “

Absolutely. This is a rather explicit case of financial markets having power over democratically elected legislatures, and has (somewhat distant) parallels with what Martin Wolf was saying in the FT yesterday about the European Union’s travails:

“This is not a monetary union. It is far more like an empire.”

Giles also calls for more transparency: as he notes by way of example there is no reason for this unaccountable institution to be exempted from Freedom of Information acts.

And there’s plenty more. It’s subscription-only, unfortunately, but if you can get hold of the article, and the longer one at the weekend, it’s well worth it.

2 comments so far

[…] devastating take-down of BoE governor Mervyn King, here and more importantly here, slammed the BoE’s hierarchical structure, King’s appalling lack […]

[…] – on tax, but on many other things too, were fantasies. Just take a look at the FT’s two devastating recent critiques of Mervyn King, governor of the Bank of England, for an illustration […]

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