Given the poor track record of the UK economy since 1997, I'm surprised more people have't been questioning whether an independent Bank of England was a great idea. I've been addressing that in my Money Week column this week. Here's a taster....
All of sudden, everyone seems to want to claim credit for giving the Bank of England its independence in 1997. In his memoirs, Tony Blair rather surprisingly said it was his idea all along. Until then, Gordon Brown had always insisted he thought of it. In response to Blair, the Labour leadership candidate Ed Balls popped up to say that he had the idea before anyone else.
The debate is fairly infantile. The idea of an independent central bank had been around for decades, so there was never anything very original about it. The interesting point is how they all assume it was a triumph, a move of such brilliance that the only real debate is about is authorship, not about its effectiveness. But that isn’t nearly as clear as they seem to think.
In reality, thirteen years on, the record is, to put it mildly, mixed. The independent Bank has presided over catastrophic period of British economic management. Growth was disappointing. A debt bubble built up. The housing market went crazy. The banking system collapsed. The inflation target has barely ever been met. It has hardly been an unqualified success.
That hasn’t stopped the Labour tribe squabbling over it. “When I suggested it, he readily agreed,” Blair writes his memoir “A Journey,” published last week, of the decision to give the Bank sole control over interest rates. “I allowed Gordon to make the statement and indeed gave him every paean of praise and status in becoming the major economic figure of the government. In truth, too, as with the Bank of England independence, the broad framework of the economy, never mind anything else, was set by me.”
Gordon Brown has on countless occasions claimed credit for Bank independence as one of the triumphs of his ten years as Chancellor. And Ed Balls has been just as keen to claim it was all his idea right from the start. He points to a pamphlet he wrote in 1992 advocating independence for the Bank. "When I presented detailed proposals to Gordon and Tony in 1995, they both agreed in principle it was the right thing to do," he said in an interview with the Sunday Times last weekend.
In reality, there was never anything particularly original about the idea. Independent central banks had worked very well for a long time in the US, Germany and elsewhere. You could argue the UK already had one in the late 1980s when the then Chancellor Nigel Lawson was shadowing the deutschemark – it just happened to be the Bundesbank rather than Bank of England. Ken Clarke as Chancellor under John Major had increased its powers over interest rates. The decision was part of an evolving policy, rather than a sudden and brilliant innovation.
And yet the fact that suddenly in 2010 Blair was to take credit for the Bank’s independence is, in truth, confirmation that the man knows nothing about economics. After all, looking back at the last thirteen years, it is hard to conclude that Bank independence has been a great success.
Growth has been fairly modest. Over the years 1997 to 2009, the British economy grew at an average annual rate of 2%, according to calculations by the National Institute of Economic and Social Research. Under the previous period of Conservative rule, from 1979 to 1997, it grew by 2.2%. Between 1960 and 1973 it grew by an average of 2.9%. So it’s only compared to the chaotic years of the mid-1970s that the growth figures for the years of Bank independence look good. Judged by the whole of the post-war period, 2% is a slightly disappointing rate.
An enormous debt bubble built up. According to McKinsey data, over the last decade the UK saw the largest increase in the ratio of debt to GDP of any developed economy. Total public and private debts rose from 350% of GDP at the start of the decade to 449% at its end.
The hosing market went crazy. Admittedly, the UK has always had a fairly bonkers property market. But the problem got worse under an independent Bank. Between 1979 and 1997, house prices grew by 146%, according to Nationwide figures. Between 1997 and 2009, they grew by 230%. Housing was already very expensive. On the Bank’s watch, it turned into a bubble.
The Bank didn’t have control of the financial system – that was hived off to the Financial Services Authority. Even so, the fact that the UK saw the most catastrophic series of banking collapse in more than a century since it was granted its independence is hardly a great advert for its role.
Nor has the Bank even been particularly successful at meeting its inflation target. It is mandated to maintain inflation at 2%, with no more than a 1% deviation in either direction. But it has consistently failed to deliver that. This year, for example, inflation has been above 3% for more than seven months in a row, and shows little sign of coming down. Few ordinary people looking at their household bills would conclude the record on rising prices had been great over the last thirteen years.
Naturally, it is unfair to blame the whole of that record on the Bank. The growth rate has more to do with the overall thrust of government policy than just interest rates. Against steadily rising taxes, and more and more regulation, the UK was always going to struggle to grow. The credit bubble was part of a global trend, even if the UK took part in it with even more enthusiasm than any other country. It is hard to disentangle where responsibility lies for the economic mismanagement of the last thirteen years between the government and the Bank.
But it is certainly possible that the Bank could have done better. Interest rates look to have been held too low for too long for the health of the economy. It fretted publicly about house prices, but shied away from doing anything about them. True, it’s hard to prick asset bubbles: but lots of things in life are hard, and that’s not really an adequate excuse for not trying.
Indeed, given the generally disappointing record of the British economy since the Bank was given its independence, it’s surprising that more people haven’t started to question whether it was really a good idea.
And it is even more surprising that so many politicians are so keen to claim credit for it.