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March 18, 2014 6:09 pm
We saw advantages in dovetailing monetary policy with financial policy. As the financial crisis showed, depleted capital ratios can sometimes matter more to the real economy than interest rates. Mr Osborne’s proposal also had the benefit of making it absolutely clear who was in charge of the financial system.
The question was whether the BoE had the skill to make the new system work. One worry was that a single super-regulator would be prone to groupthink, a particular problem for the central bank and one reason for its poor performance before the crisis. There was also the sheer scale of the management task – which sat uncomfortably with the central bank’s stuffy, traditional culture. Slapping the BoE’s brass plaque over the FSA’s door would not suffice. The central bank would need to mesh together its expanded responsibilities in ways that would ensure that overall policy remained coherent.
Since he took over as governor last year, Mark Carney has sought to fit the BoE for its new purpose. On Tuesday Mr Carney laid out his thinking and named some of the people who will be given the job of making the new structure work.
Mr Carney’s new model central bank has a simple mission statement that promises to secure the wellbeing of the British people through the maintenance of monetary and financial stability. Under that rubric, however, his plans are anything but simple.
The governor’s biggest gamble involves his choice of management structure. This is much more intricate than in the past. Under Sir Mervyn King, there were just two deputy governors. Mr Carney will have four, as well as a chief operating officer responsible for day-to-day management. Three of these will share overlapping responsibility for financial policy.
This approach may seem an odd way to promote co-operation. Mr Carney seems to be calculating that by creating overlaps he will force departments to talk and collaborate. The governor may be right that this is the only way to break “silo thinking”. He may also be helped by the profusion of new blood he is bringing into Threadneedle Street. But it will still require a deft touch on his part to make this system work.
Elsewhere, the governor has been equally bold. He is in principle right to seek wherever possible to break down internal barriers within the BoE. Andrew Haldane’s switch from the financial stability side to running the bank’s new forecasting unit is an eye-catching statement of intent. Under Sir Mervyn, the old BoE had become a rather stale and narrow monetary clique. Nonetheless Mr Carney must beware of shoving round pegs into square holes.
More worthy of unqualified applause is his decision to open up the BoE to scrutiny with the creation of an independent oversight body to review its performance. Mr Carney has understood that with greater power comes greater responsibility. An expanded central bank must be exposed to sharper public oversight.
While Mr Carney may not quite have torn down Sir John Soane’s celebrated curtain wall, he has shown a refreshing willingness to depart from convention. Bringing in outsiders such as the highly regarded Nemat Shafik from the International Monetary Fund – young, female and internationally minded – may help him to entrench the changes he clearly wishes to make.
In the end, much will depend upon Mr Carney’s own management skills and his ability to pull colleagues with him on the journey. It is an ambitious undertaking and one in which all observers can only wish him well.
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