This week the latest battles in the parliamentary trench warfare over Brexit will again dominate the headlines. It is a little like the closing stages of the Great War where exhaustion prevails and the generals promise one big final offensive to decide the outcome. I suspect however that we are some way from a breakthrough. One practical consequence of the continued stalemate is that some big decisions affecting the economy are stuck in the mud.
One of the most important is who should be the next governor of the Bank of England. The chancellor has the shortlist on his desk. He was expected to announce his choice in the 6 November Budget but that has now been cancelled – the first casualty of the government’s push for an early election. Yet the decision still needs to be made. It is a big decision because it is a very big job: steering monetary policy and regulating the financial sector on whose stability and success we all rely.
Media gossip has centred on the candidates’ attitude to Brexit, political affiliation, nationality and gender (including the fecundity of one of the frontrunners). None of these factors is remotely relevant. What matters is that the next governor should have demonstrated economic competence and authority and an understanding of financial markets and initiatives, without being captured by City interests. These are big shoes to fill, left by Mervyn King’s formidable intellect and Mark Carney’s skilful management.
Serious central banks like ours are operationally independent of the politicians who establish their mandate and make appointments. I made my maiden parliamentary speech back in 1997 in support of Gordon Brown’s legislation freeing the Bank of England from political micromanagement. That legislation put Britain top of the class in monetary policy and the operation of inflation targets. We can see the continuing relevance of central bank independence when we look across the pond to the US where President Trump is trying to bully what he calls the “bone heads” in the Federal Reserve into manipulating interest rates to get him re-elected. Mercifully, our government is not quite so crude or corrupt but the same temptations are there.
Since the financial crisis, central banks have assumed a much bigger role by using unorthodox policy, like quantitative easing, to stave off a 1930s-style slump. We should be grateful to Ben Bernanke, Mario Draghi, King and the other central bankers for saving the day. But they have come under attack from both the political left and right because of the side effects: inflated asset prices and wealth inequality, and negligible interest rates, which undermine both the savings culture and the operation of deposit banking.
Those attacks are like lambasting oncologists because chemotherapy can be a very unpleasant treatment. If there is a failure it is of politicians to use alternative therapies, like more government borrowing for capital investment, or taxation to redistribute unearned windfalls and dampen inflated property prices.
Looking forward, the incoming governor will face the challenge of the next, serious, recession. Brexit, trade warfare, or another unforeseen financial crisis could all be a cause. The scope for using more monetary policy is very limited since short-term interest rates are close to zero as are long rates, measured in bond yields. There are apparently $17 trillion of bonds out there with negative yields. This is the “liquidity trap” John Maynard Keynes warned about 90 years ago: that no amount of monetary expansion is going to persuade traumatised businesses to invest. The remedy lies with fiscal policy. Governments, especially Germany and in the UK, should be borrowing at low interest rates to replace our decaying infrastructure. But we start with already high public debt levels, so there is continued nervousness.
If these measures are insufficient the last resort will be “helicopter money” – effectively, printing money – to put in the hands of consumers to spend. Already populist politicians of left and right are queueing up with all their good causes on which to spend this potential magical money – from tax cuts to ending poverty to saving the planet. These are all valid and important objectives but it is for governments to choose tax and spending priorities, not central banks. If such an extreme remedy is required to put cash into the economy then a robustly independent bank will continue to be vital in controlling monetary policy and firmly rebuffing attempts to convert the Bank of England into an early Christmas money tree.
Of course it would be much better to head off the next crisis.
Roll back protectionism. Embrace, not fight, China. Stop Brexit. Try to spot the next Northern Rock or the next dangerous bubble. But realistically we know that lightning will strike soon even if we don’t know where. We must hope that the next governor will be smart enough to have the fire brigade ready.
Sir Vince Cable is MP for Twickenham
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