What started as a little spat about resources has opened up cracks on the surface of the Chancellor's proudest creation, the independent Bank of England. When the committee failed to issue a statement on its decision to raise rates last week, this was taken as a sign of more serious trouble. It has brought the spotlight on to the outsiders' own, somewhat equivocal, role on the MPC. And the more the economists on the MPC fall out, the greater the pressure will be to replace them with "representatives of the real world".
It all started with the Chancellor's useful little red book on the success of the new monetary framework. The Gods, who keep a sharp watch for hubris even in this immortal government, followed swiftly with a party-pooping leak of restiveness among the MPC's outsiders. Comment, at first, was inclined to be on their side. Typical of the Old Lady to mismanage the bright young things. Very dog-in-the-manger to refuse them access to research staff. The Governor should never have let it come to this. Why didn't he buy them a few economists of their own to play with? After all, the Bank would have plenty of resources to spare if it got rid of some of its redundant regulators.
Apart from the last criticism, which has rightly stuck, second thoughts have been more on the Governor's side. As bacteria flourish in cracks, so this row grew out of the flaws in the MPC's design. These will continue to breed dissent unless the system is reformed.
When the Chancellor cut the Bank loose, he wanted to provide it with two elements of independence: freedom from political interference in the setting of interest rates, but at the same time extra talent independent of the Bank's own hierarchy and school of thought. This talent would consist of high-grade economists, able to argue the toss with the Bank, not "representational" members of different socio-economic or geographic groups. (A good decision, in my view, but then you would expect me to think that.)
The Chancellor would appoint this talent, which raised the question of whether it would be as independent of the Treasury as of the Bank. But these would be outsiders, not Treasury spies or secondees. The head of the government economic service would go along to the committee, but not vote.
So far, so good. But, with no disrespect to the individuals, these so- called independents are mongrels, cross-bred out of two different governance models. One model is the corporate board, with non-executives appointed to bring different perspectives and - being in a majority - to keep a check on the executives. The other model is the outside selection of key executives, appointed to refresh the strategy of the company.
The MPC does not fit either model. The outsiders are too dug into the Bank to pass as independents. They would certainly fail the corporate governance watchdogs' tests of independence applied to private sector boards at AGMs. Those watchdogs would also disapprove of the fact that these "independents" are in a minority - the split should be five-four in their favour, not the Bank's. In summary, the board model would suggest there should be more outsiders - but also that they should be clearly based outside the Bank.
Nor, however, does the MPC fit the executive model. There are simply too many of these appointments to make sense of them as insiders. No organisation could work well with nine executive teams responsible for the same job. It is pretty clear that the four outside economists on the MPC were originally intended to be non-executive. But by now, three are more or less full-time. It is far from clear why any of them need five days a week to do what Professor Charles Goodhart does in two.
It all began with such good intentions. In order to persuade DeAnne Julius to give up her job with British Airways and join the MPC, she was offered a full-time post. Dr Julius, an economist with serious industrial experience, has been a great asset to the MPC and the Bank, widening its horizons and attitudes. But as others followed suit, the Bank has filled up with economists wanting interesting things to do. There was bound to be trouble.
It is, however, far from clear that the outside members were hired to turn the Bank into a university. For the more they acquire their own offices and Bank support, the less they are going to look like "outsiders". They may take contrary views, but they will not be independent. And if that is the way economists insist on performing these roles, there will be more pressure to appoint non-economists.
The root cause of the difficulty was Bank and Treasury paranoia about conflicts of interest, which made it difficult for them to conceive of members of the MPC having any outside role except an academic one. And since Bank pay compares favourably with academic salaries, any economist can work out that it is better to be full-time. Now so much is known of MPC discussions, it is much harder to see why its members should be maintained in purdah, and indeed they have been admirably free to promote their views in public. So the Bank and Treasury should stop worrying so much about the need for secrecy, take a more relaxed view of conflicts, and find some outsiders who stay outside. The Banque de France managed to do so, after all.
A wider choice of economists will be highly necessary if the Treasury follows the recommendation of the Lords select committee, and increases the independence of the outside members - independence not merely of the Bank but also of the politicians. To do so, the Treasury should make the appointments longer (five years) and non-renewable. As the former permanent secretary to the Treasury, Lord Burns, has acutely observed, political influence on quangos is at its greatest not before appointment but before re-appointment, which is when those enjoying public sector positions have a lot to lose.
None of this will matter a toss if the Bank of England is swallowed up by the European Central Bank in a couple of years. But since that is looking less likely, and interest rate decisions are likely to get harder, it would be unwise to ignore these issues. The Court of the Bank of England - which frankly does not have a lot else left to do - should look for solutions rather than sticking-plaster.
Market expectations of inflation 10 years ahead fell from 4 per cent to 2.5 per cent over the first two years of independence (although public expectations have been slower to move). This credibility, a precious national asset, can robustly withstand evidence of polite disagreement amongst the MPC, but may not be impervious to serious divisions. And economists should take note of the reproof uttered last week by one of the wisest old heads in the City, the economic historian and banker Lord Roll.
He described the breed as "more prone than most people to develop a high- tensioned self-consciousness about their views and to indulge in intensive and sometimes very aggressive controversy with each other". When on thin ice ...Reuse content