A long time ago (let's call it 1997) Labour thought it could bolster its economic credibility by setting the Bank of England free from Treasury control and making the control of inflation its central mission.
The idea was simple. Labour's economic credibility had been lost in the 1970s when inflation was rampant and the Treasury had been seen as unable to control the beast. So there were two gains from setting the Bank of England free. First, Labour was not now responsible for controlling inflation and, secondly, 'the markets' were given the power to do so - suggesting the City friendliness of New Labour.
That market friendliness still haunts Labour.
And now we know that the Bank of England is not free of the Treasury. Mark Carney has had to back track on his forward guidance on interest rates because he would otherwise be increasing interest rates soon, and all over the UK households would be tipping into foreclosure and recession would very definitely be on the cards again.
So we now have a bankrupt policy of market friendliness and no room for economic manoeuvre on monetary policy. I think it's fair to say that the policy of setting the Bank of England free has failed, resoundingly.
What next? Well, first you have to admit your mistake. And that's going to be a massive obstacle to progress, not least to Labour. After all, this was Ed Balls' idea. Which is also the only reason why the Tories might be tempted to address it.
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Richard,
I agree with your observation that BoE so-called independence has resulted in “a bankrupt policy of market friendliness and no room for economic manoeuvre on monetary policy.”
However, doing something about it falls foul of Article 130 of the Lisbon Treaty on the independence of the European Central Bank and EU member states’ national central banks http://www.lisbon-treaty.org/wcm/the-lisbon-treaty/treaty-on-the-functioning-of-the-european-union-and-comments/part-3-union-policies-and-internal-actions/title-viii-economic-and-monetary-policy/chapter-2-monetary-policy/398-article-130.html
Article 130 says that neither the ECB nor a national central bank, nor any member of their decision-making bodies, shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a member state or from any other body.
Yet again, your completely correct criticism of the failure of neoliberal institutional policy-making and your insight that markets should be accountable to democratic institutions, not the other way round, runs into the reality, that EU membership binds Britain precisely to ensure the dictatorship of the markets. The only way to pursue the alternative economic and monetary (broadly socialist) policies that you espouse is for Britain to repudiate EU founding treaties, to leave and develop cooperative and peaceful trading relationships with other countries. This is what the “pin-striped mafia” that you decry fear above all, since it would permit future British governments to hold them to account.
I can remember having a school debate about the EU back in 1975-6(?) and Tony benn was warning against the emergence of an EU ‘elite’ bunch of kleptocrats -we got’em!
The EU Treaty is a Pirate Code.
They’re not so much rules as guidelines.
Something the French have understood since day one.
First Labour would have to abandon their addiction to smoke and mirrors and other cheap parlour tricks.
The ‘independence’ of any central bank in any sovereign nation is merely an illusion.
Some would say a delusion.
There seems to be a bit of confusion here about the nature of forward guidance. It’s “guidance” not a “commitment”.
All Carney originally said was that at 7% the BoE might start thinking about raising rates.
Simon Wren-Lewis has a good post on this today:
http://mainlymacro.blogspot.co.uk/2014/01/adapting-forward-guidance.html
I know exactly what guidance was
I know what changing it at political behest is too
Richard
There is only a change if you think that BoE would have been bound to increase base rate under the existing formulation.
Do you think that they would/should have done so with the economy still in a parlous state?
TP
Markets did
And that was why Carney had to say they wouldn’t
I rest my case
Markets (at least initially) misunderstood the guidance. What does that prove?
The first version of the guidance could be paraphrased as “We’re not going to raise rates for quite some time until we are sure that the recovery is safe. And certainly not until the unemployment rate falls to 7%”.
Some people, I don’t know why, read that as a commitment to raise rates at 7%.
The current version is “We really mean it. No rise for quite some time. Even then only slowly and don’t make the mistake of focusing on a single index”.
How do you turn that into Carney bowing to government pressure? Unless you think Carney wanted the MPC to raise rates? In which case, where’s the evidence?
You may be naive
I am not
Richard
I was politely asking a question as I was genuinely interested in your view. It would be very interesting if you could show that the Bank was caving in to government pressure (not something that posts from Simon Wren-Lewis, Martin Wolf or Tony Yates have suggested for example). I might well be naive. That’s not an answer to my question though.
TP
I can’t show it
I think it
Do you honestly think Carney would go against the man who appointed him 6 months in?
Richard
I honestly don’t know! If I was Carney I’d be anticipating a change of Treasury team come 2015 so I’m not sure I’d care what they said especially if my career plans were Canadian politics.
But, if Osborne wants rates to stay low then he’s right for a change. I imagine that Carney and the rest of the MPC also think they should be low for some time. And many many others. So, for now, I think the Bank is completely happy with the rate as it is and is not being influenced.
The interesting question to ask is what the MPC would be doing if Osborne were arguing for a rate rise.
Richard, Mark Carney also holds senior roles at Bank for International Settlements, Basel, where he has access to all the world’s most senior bankers and is in a better position to measure the overall view than our Treasury alone can. The fact that he holds these appointments and is ex Goldman Sachs will have given him access to his role at BoE rather than his work as governor of Canada’s central bank.
Dubious statistics have shown a fall in our unemployment figures to 7.1% but are these just people who have been forced to stop receiving unemployment benefits with perhaps some taking part-time work or are these proper jobs paying the full-time living wage?
http://www.youtube.com/watch?v=JHQOX8EVNmE
For those interested, this video explains the position in which the Canadian banking system finds itself, through the eyes of an astute 12 year old Canadian girl.
Nobody is ever ex Goldman. The only way they leave is in a wooden box. Carney isn’t in a box!