The Bank of England’s real failings

The Bank: Inside the Bank of England, by Dan Conaghan, Biteback Publishing, RRP£18.99 ($30)

There has long been a need for a book bridging the gap between the last official history of the Bank of England, which ended in 1979, and the present. Conaghan’s very unofficial history covers the last part of the gap, from the granting of operational independence to the Bank by the incoming Labour Government in 1997 almost to the present day. It is written in what is known in the trade as the Time-Life style of journalism. The very first paragraph starts: “In the early morning, the chauffeur of the dark green Daimler allocated to Sir Mervyn King, the Governor of the Bank of England, drives him from his flat in Notting Hil ... ” No one will look here for a critique of the ideas that drove the Bank during this period. And the unfolding of one event after another may confuse those new to the subject, although it may be useful for those who have been trying to follow events, but would like an aide memoire to what went on and when.

The book is in part meant to be a critique of Sir Mervyn’s governorship. But the underlying sycophancy of this form of writing at times gets in the way of the main thesis. For instance, the scoop highlighted on the dust jacket is that in the midst of a period of international financial stress, the governor spent most of the day watching Test cricket at the Oval. I must admit my sympathies are with Sir Mervyn. Frenetic activity is not always the best approach to difficulties.

To be fair, Conaghan does recount the inconsistencies and prevarications of Sir Mervyn’s initial approach to the 2007-8 banking crisis of which the chancellor of the time, Alistair Darling was later to complain so bitterly. Sir Mervyn is a “brilliant” macroeconomist whose main interest was in meeting the official inflation target and its incarnation in the Monetary Policy Committee. He had, like the present reviewer, to force himself to take an interest in the intricacies of banking and to overcome his distaste for the “moral hazard” involved in bailing out individual banks.

Conaghan is wrong, however, to follow unthinking City opinion in castigating the recent “quantitative easing” undertaken to alleviate the recession. Of course this involves “printing money”. How else did the currency notes in your wallet come into existence? The art is to know how much to print and when. But I did not realise that an article in the wretched European Treaties was one reason why the Bank could not engage in this task in a more straightforward way.

Conaghan rightly surmises that the next governor, who takes over in 2013, is unlikely to be a pure economist. He runs over the list of suspects for the job, but wisely refrains from picking a winner. My guess is that he or she is likely to be a chairperson type, such as the head of the International Monetary Fund, Christine Lagarde, dependent on internal economic advice.

The author’s most telling point is that the new Conservative-sponsored legislation concentrates too much power in the Bank governor – over official interest rates, prudential oversight of the banks and nearly every aspect of financial regulation and supervision, as well as a role in invigilating systemic risk at the European level. I know that Conservative governments, despite bitter experience, have an exaggerated respect for the Bank, but this is really too much for one person.

Finally, I cannot avoid mentioning that Conaghan fails to nail an infuriating shortcoming in Sir Mervyn’s own home area of economic analysis. Whenever the Bank is trying to justify either a relaxation of policy or a decision not to tighten, its statements invariably refer to the danger that inflation in two years’ time might fall below the official target of 2 per cent – and almost never to the need to combat recession or stagnation. What danger? Protestors staging a sit-in outside the Bank chanting: “Give us more inflation”?

There is, of course, a theory behind the Bank’s mantra. There does often exist a short-term trade-off between inflation and unemployment or other measures of activity. Often, but not always. Recorded inflation can fall for instance because of a collapse in oil prices or a cut in VAT. On the other hand, there can be a recession threat without inflation falling below target. All that the Bank needs to say is that it is acting to maintain economic activity and believes it can do so without triggering above-target inflation. Sir Mervyn, who can be a stickler for constitutional niceties, may cite the Bank’s objective, set by government, of 2 per cent inflation. But subject to the inflation target, the MPC is also “required to support the government’s objective of maintaining high and stable growth and employment.”

The mantra has survived because officials and commentators have recently been too preoccupied to challenge it. One hopes: no longer.

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