As with the delay over confirming Mervyn King's appointment for a second term as Governor of the Bank of England, the Treasury's refusal to name a successor to Rachel Lomax, who is leaving her job as deputy governor at the end of this month to pursue other interests, is beginning to look spiteful and vindictive.
Whatever other criticisms could be levelled at New Labour, its decision 11 years ago to cede control of interest rates to an independent Bank of England had been widely heralded as a triumph of public policy.
Then came the credit crunch and Northern Rock, and in recent months doubts have emerged even about the Bank's ability to control prices. Inflation now looks so bad that there's every possibility the Bank will have to raise interest rates over the next year, rather than cut them as the fast slowing economy would seem to demand.
As long as the Bank's choices remained easy and largely benign, ministers were happy to take credit for giving away the levers of monetary policy to the Bank's independent decision makers. Now that the going has got much tougher, with difficult decisions to make and widespread criticism of the Bank's handling of the credit crunch, they are not so sure.
Rising inflation, the economic slowdown, falling house prices, more expensive mortgages, Northern Rock and the wider credit crunch – they are all part of the catalogue of mishaps and policy misjudgements which threaten to lose the Government the next election. In the search for scapegoats, the Bank makes an obvious target.
Both the Treasury and the Bank of England feign ignorance of any row between them over the Lomax replacement, yet if there were no differences at all, the decision would already be done, dusted and announced. The Governor's preferred choice is his chief economist, Charlie Bean. He's a perfectly good candidate for the post, yet the Government seems strangely reluctant to confirm him.
Instead, the Treasury favours Paul Tucker, the Bank's head of markets, a man ministers think will be better equipped than Mr Bean to address the Bank's supposed failings in ensuring financial stability. Though the matter is now close to resolution, it has served as a proxy for the seething resentment the Government feels over the Bank's handling of the financial and economic crisis.
Responsibility for brokering a deal falls on Sir John Parker, the most senior non-executive member of the Court of the Bank of England and to the extent that the Court has one, its Sid (senior independent director). One way of breaking the impasse would have been to persuade Sir John Gieve, the other deputy governor and the one directly responsible for financial stability, to resign, thereby allowing both Mr Bean and Mr Tucker to be appointed as deputy governors.
Rightly or wrongly, Sir John Gieve has got much of the blame for the Bank's supposed failings in the credit crunch. A poor performance before the Treasury Select Committee compounded the view that he had always been the wrong man for the job. Yet he cannot be fired by the Government – that's what happens when you set up an independent authority – and as a point of principle, the Bank has stuck its heels in and refused to throw him to the wolves.
So on the assumption that Sir John Gieve remains until the end of his term in 2010, what can Sir John Parker do to satisfy Treasury demands for retribution and a beefed up financial stability function?
The Governor, Mervyn King, attempted to address at least the latter part of this question in a speech to the British Bankers Association yesterday. In it, he pledged his second term to establishing a framework for financial stability that is on as sound a footing as the one successfully established (to his mind at least) for monetary policy.
He also promised big reforms of the Bank's so-called "red book" arrangements for intervention in the money markets, including putting the Special Liquidity Scheme on a permanent footing in a manner which allows banks access to virtually unlimited liquidity at different maturities in return for a much wider range of collateral than is currently allowed. This ought to bring the money market arrangements more into line with those operated by the Federal Reserve and the European Central Bank.
Yet these pledges won't in themselves satisfy Treasury demands for greater oversight of the Bank's financial stability functions. The Chancellor has suggested outside expertise to advise the Governor and appropriate deputy governor – a kind of Monetary Policy Committee for financial stability.
By accelerating already plan-ned reforms to the Court, Sir John Parker can, in fact, quite easily satisfy these demands. In a consultation last January, the Treasury suggested a smaller, more effective Court with responsibility for overseeing the Bank's work on financial stability. This would seem quite neatly to square the circle between the Chancellor's idea of a financial policy committee and what the Bank of England has already been working towards.
A little history is worth interjecting here. Eleven years ago, the Bank's celebrations at being granted independence were soon rudely interrupted when it was announced that responsibility for banking supervision would be removed and vested with the new Financial Services Authority. Eddie George, then Governor, was so angered by the decision that he considered resigning.
In the end, he managed to claw a little of it back by gaining an over-arching responsibility for financial stability. Yet this entirely necessary concession – you cannot have a monetary authority without the levers to intervene in money markets – created a confusion in command and responsibility for oversight. If the financial stability function was taken seriously by Sir Eddie, it became neglected under his successor.
Readers will be forgiven for thinking this entire debate a bit late now. The horse has already bolted, and much of the present row is about how best to fight a war that has already been lost. Ministers might have hoped that by giving the Bank of England independence, they would escape accountability for its failings.
Unfortunately for them, it doesn't work that way. More galling still, when Labour MPs lose their seats at the next election, Mervyn King and, quite possibly, Sir John Gieve too, will still be there, presiding over the nation's monetary and financial stability as if the mishandled credit crisis never happened. Hey ho.Reuse content