The Governor of the Bank of England today becomes a politician. We are told in advance of his audience hearing that he will offer to protect the public from the banks. That is not what I want to hear.
The Governor is the senior unelected official in economic policy. He and his institution are responsible for interest rates and the rate of inflation. He should read the cycle well, and report and defend his actions on monetary policy as required. He should also act in private as an honest and fearless adviser to the Chancellor, the senior elected official, who has overall responsibility for economic policy, and who has the power to change the Bank and its functions.
I want to hear today from the Governor answers to the following questions:
1. Why did the Bank so misread the cycle 2005-9? Why did it encourage or allow dramatic overheating, when the smell of scorching was powerful enough for outsiders to notice it? Why did the Bank then lurch to freeze the monetary and banking system, so we had many banks in trouble? Why couldn’t the bank feel the icy blast in 2007-8 which brought down Northern Rock and undermined others? Why did they ignore the strong advice some of us gave to ease money markets earlier to avoid the worst of the crash?
2. Why is inflation still at 4.7% (RPI) and 3.1% CPI when the target rate is 2% on the CPI? Why has it been persistently above target for so many months? Why have Bank of England forecasts of inflation been too optimistic?
3. How can we have confidence that the Bank is now reading the cycle better? Does the Governor think now is a good time to demand more cash, capital and caution from the banks? Could it be that the economy still needs a more generous approach to money and bank credit to help it out of the deep hole recent policy forced it into?
4. Why does the Governor think sovereign debt is a risk free asset class for banks to hold, and why do the authorities now demand that banks hold so much more sovereign debt? Could this store up trouble for the future, especially where banks buy sovereign debt in Euroland countries with poor balance sheets?
The Bank of England wrongly advised a previous Conservative government to go into the Exchange Rate Mechanism, which did damage to jobs, prosperity and enterprise. The Bank of England set wrong interest rates in the boom and in the early bust 2005-9, making the task of the last Labour government that much more difficult.
The new government trusts the Bank and is giving it large new powers. The Bank and the Bank alone now can lead and regulate the banks and the monetary system. We need a full statement from the Governor on how he and his colleagues will carry out these new responsibilities. We need to know they have learned from past errors. Grandstanding at the expense of the banks he is regulating is not a good idea.
We need to believe the Bank will this time listen to their criticis, instead of drawing on a narow group of economists who all agree they are right and end up with a slump and 5% inflation at the same time.