When fi­nan­cial mar­kets come for Labour, there’s one line of de­fence

The Sunday Telegraph - Money & Business - - Business - JEREMY WARNER

There was an over­ar­ch­ing and sim­ple rea­son the Bank of Eng­land was granted in­de­pen­dence 20 years ago, which seems to have gone sub­stan­tially over­looked in the del­uge of last week’s com­ment and anal­y­sis to mark the an­niver­sary. It was to buy the newly elected Labour govern­ment cred­i­bil­ity in fi­nan­cial mar­kets. To the cyn­i­cally minded, it was also to pro­vide cover for the fis­cal and credit ex­pan­sion­ism that later en­sued.

Yet at its in­cep­tion, the think­ing was sound enough. All Labour gov­ern­ments are even­tu­ally fin­ished off by fis­cal and fi­nan­cial cri­sis; Gor­don Brown, then Chan­cel­lor, and Ed Balls, his eco­nomic ad­viser, were de­ter­mined that this should not hap­pen to them. The City could be made to love Labour, they be­lieved; Bank of Eng­land in­de­pen­dence was per­haps the most im­por­tant part of that strat­egy.

And it worked, at least for the first ten years, a pe­riod that Mervyn King, Gov­er­nor for some of that time, chris­tened the NICE decade – for non-in­fla­tion­ary con­tin­u­ous ex­pan­sion. But the Bank of Eng­land’s 20 years as an in­de­pen­dent pol­i­cy­maker has proved, re­gret­tably, to be a game of two halves. The rel­a­tive sta­bil­ity of the first ten years was re­placed by tur­bu­lence in the sec­ond. In the end, the Bank could not pro­vide the pro­tec­tion that Brown and Balls craved, and they were brought down by much the same forces as had sunk all pre­vi­ous Labour gov­ern­ments.

When John Mc­don­nell, the shadow chan­cel­lor, ad­mit­ted last week that he had been “war-gam­ing” a run on the pound to “an­swer the ques­tion about what hap­pens when … they [the City es­tab­lish­ment] come for us”, he was there­fore touch­ing on a source of deep-rooted para­noia within the Labour Party. Rather than re­gard­ing these crises as a judg­ment on their own eco­nomic man­age­ment, many on the left con­tinue to think of them as a sort of es­tab­lish­ment con­spir­acy to re­move Labour from power.

In the Six­ties and Seven­ties, Labour politi­cians would rou­tinely blame their eco­nomic up­sets on the so-called “Gnomes of Zurich”; the real men­ace was fi­nan­cial spec­u­la­tion, the likes of De­nis Healey would claim, not un­sus­tain­able fis­cal pol­icy and an un­com­pet­i­tive econ­omy.

Among those in­vited to Lon­don to cel­e­brate 20 years of in­de­pen­dence last week was Chris­tine La­garde, man­ag­ing di­rec­tor of the In­ter­na­tional Mon­e­tary Fund. I doubt she’ll thank me for re­mind­ing her of this, but with ex­quis­ite tim­ing nine years ago she was host­ing a party for the great and the good of Euro­pean eco­nomic pol­i­cy­mak­ing at the Villa Ephrussi de Roth­schild, Saint-jean-cap-fer­rat. It was on the very week­end that Lehman Broth­ers went bust.

Opera has an aria for all oc­ca­sions, and to go with the fine wines and haute cui­sine, Madame La­garde had man­aged to dig out one which of all things was in praise of cen­tral bankers.

It was one of those par­ties be­fore the Somme mo­ments. All puffed up with self-be­lief, the as­sem­bled were seem­ingly un­aware of the fi­nan­cial hur­ri­cane about to en­gulf them.

The eco­nomic or­tho­doxy of the time – that all you had to do to sta­bilise the econ­omy was to keep con­sumer price in­fla­tion un­der con­trol, and the way to do this was to es­tab­lish an in­de­pen­dent cen­tral bank staffed by peo­ple who cared more about their own rep­u­ta­tion for com­pe­tence than they did the political cy­cle – was com­pletely blown apart by the events of the next sev­eral months.

Re­mark­ably, how­ever, the Brown­ite con­tract of Bank of Eng­land in­de­pen­dence has en­dured and strength­ened. In the af­ter­math of the fi­nan­cial cri­sis, cen­tral banks were re­lied on to pro­vide the sup­port that the politi­cians seemed in­ca­pable of de­liv­er­ing them­selves. To­day, the Bank of Eng­land is more pow­er­ful than ever, lead­ing even the likes of Brown and Balls to ques­tion whether it shouldn’t be brought more within the Trea­sury’s am­bit.

Now re­united with bank­ing over­sight, the Bank also reg­u­lates the credit cy­cle and over­sees the in­sur­ance sec­tor. Quan­ti­ta­tive eas­ing and other un­con­ven­tional tools used to fight the fi­nan­cial cri­sis have blurred the bound­aries be­tween mon­e­tary and fis­cal pol­icy in ways that chal­lenge the whole no­tion of an in­de­pen­dent mon­e­tary au­thor­ity. All this while re­main­ing rel­a­tively un­trou­bled by any­thing as vul­gar as public ac­count­abil­ity.

The ap­peal of the in­de­pen­dent cen­tral bank as use­ful political cover none the less re­mains undimmed. Af­ter briefly toy­ing with tak­ing back con­trol of the Bank, so as to turn its print­ing presses to the task of fund­ing govern­ment ex­pen­di­ture, Labour’s new hard left lead­er­ship has come round to the same way of think­ing as Brown and Balls 20 years ago. An in­de­pen­dent Bank, they fig­ure, pro­vides a first line of de­fence against at­tack from the fi­nan­cial mar­kets. If in­vestors are confident that the fis­cal in­con­ti­nence they pro­pose would be coun­tered by higher in­ter­est rates, then they might be more com­fort­able with a Cor­byn-led Govern­ment. We’ll see, but un­like oth­ers, I sus­pect the age of the all-pow­er­ful in­de­pen­dent cen­tral bank has got some years left in it yet.

Open bank­ing revolution

Full marks to HSBC for be­ing the first ma­jor bank out of the blocks with an open bank­ing app.

Full marks too to the UK Trea­sury and City reg­u­la­tors for be­ing so far ahead of the pack glob­ally in es­tab­lish­ing the reg­u­la­tory frame­work for this promised tech­no­log­i­cal revolution in re­tail bank­ing. It was all the sub­ject of hot de­bate at last week’s

Daily Tele­graph Fu­ture of Fin­tech con­fer­ence. Does HSBC gain first­mover ad­van­tage by launch­ing so soon, or does it pay to wait a lit­tle, as Bar­clays and oth­ers are do­ing, for the ad­vent of more se­cure plat­forms?

Open bank­ing prom­ises much, but if it can­not con­vince the public that it will keep their money safe and their data pri­vate, it won’t go any­where.

‘The as­sem­bled were seem­ingly un­aware of the fi­nan­cial hur­ri­cane about to en­gulf them’

Then chan­cel­lor Gor­don Brown with Al­der­man Roger Cork, Mayor of Lon­don, and Eddie Ge­orge, Gov­er­nor of the Bank of Eng­land, in 1997


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