Reluctantly and later than the other main participants the Bank of England has agreed to a review of its conduct during the recent banking crisis, Credit Crunch and recession. There is plenty of material for it to sift through, and plenty of issues for it to handle.
I will be setting out some of the questions, and looking at some of the answers over the next few days. I see the Boom-bust cycle of the last few years as primarily a crisis in Central Banking. It was a crisis brought on by regulators who allowed excess credit and money in the system up to 2007. It was a crisis made far worse by the sudden lurch to very restrictive money and credit policies in 2007-8. It is a recession that has taken a long time to reverse thanks to tough pro cyclical banking policies after the crash.
The official enquiry will want to know why the Bank’s Monetary Policy Committee proved so bad at forecasting inflation, let alone at controlling it. It will want to know to what extent the Bank thinks it has some wider role in maintaining output and activity, and why it was unable to do this in 2008. I hope it will examine the popular view that the whole crash was the fault of the commercial banks, aided by “light touch” regulation. It should go on to ask why the economy is not now performing well given that presumably we now have “heavy touch” regulation. It will need to review the impact of taking away powers to regulate banks from the Bank of England in 1997, and how the tripartite system of Chancellor, FSA and Bank tried to work together during the crisis.
The UK was not alone in putting its economy through a boom/bust cycle of unusual violence. The US and the Euro areas authorities also did something similar, though there were important differences in how they responded to the worst of the crisis, and how they handled the problem of banking weakness in their jurisidictions.