Here’s your starter for ten in our weekend slot where we throw up an idea or thought for debate…
The Liberal Democrat 1997 manifesto said the following:
We will turn the Bank of England into a UK Reserve Bank, free from political interference. We will charge the Bank with keeping inflation low and make it accountable to Parliament for achieving this goal.
Of course after Labour’s landslide victory in that election, one of Gordon Brown’s first decisions as chancellor was to borrow this Lib Dem policy and essentially transfer responsibility for monetary policy to the Bank of England.
Most Labour politicians look back on this decision as one of the best that Labour implemented, precipitating a decade of low inflation, low interest rates and consistent economic growth. Indeed over the course of the economic good times of the decade or so before 2007, there was a wide consensus that Bank of England independence had been an unmitigated success, mainly because political considerations had ostensibly been removed from decisions on interest rates.
But since the financial crash of 2007-8, there has been a notable increase in criticism of the Bank itself, both of its attitude before the crash and the allegedly slow reaction after problems in the financial system became apparent.
In an op-ed in this week’s FT, the paper’s economics editor, Chris Giles, said the following under the headline ‘Bank independence was a well-intentioned failure’:
Every so often we should apply Monty Python’s Life of Brian to a new situation. “What has Bank of England independence ever done for us?” I have asked this counterfactual question of many senior figures over the past two months and no one had a great answer. None exists.
The traditional argument for central bank independence rests on preventing politicians from cutting interest rates before an election and stoking an unsustainable credit expansion. We don’t know what then-prime minister Gordon Brown would have done with the monetary policy lever, but it is difficult to make the case that elected politicians would have adopted a more irresponsible policy stance than the unelected officials at the BoE.
By contrast, it is simple to build a compelling counterfactual case that policy would have been better without BoE independence. Knowing the BoE dithered as the financial crisis started in 2007, Britain would have been quicker to spot the dangers, providing greater protection against the global crisis of confidence that occurred after the collapse of Lehman Brothers.
There is also no doubt the media, parliament and financial markets would have scrutinised ministers more carefully than central bankers in the period before the crisis.
And as Giles points out, the Bank of England is soon to be handed a whole range of new powers by the government relating to financial regulation, making a debate about the adequacies of the Bank all the more important.
So, over to you Lib Dem Voice readers. Has the Bank of England proved itself not fit for purpose? Should politicians take a more active role in monetary policy? Or was the decade of what Sir Mervyn King calls “sustainable growth” before the financial crisis proof of the benefits of independent central banking?
* Nick Thornsby is Thursday Editor of Liberal Democrat Voice and blogs here.