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