If Andrew Bailey is booted out, the danger is that independence for the Bank of England would effectively be at an end, says RUTH SUNDERLAND
- Those calling for defenestration of Bailey should be careful what they wish for
- If politicians are in charge, they would manipulate rates for their own ends
- Whatever the flaws at the Bank, it is the least worst option
Those calling for the defenestration of governor Andrew Bailey, cruelly caricatured as ‘The Plank of England’, should be careful what they wish for.
The Bank’s mission is often said to be controlling inflation. In fact, its stated purpose is to promote the good of the people of the UK by maintaining monetary and financial stability.
Having helped inflict anxiety and hardship on millions of British citizens, Bailey has failed and he owes us all an apology.
Firing him though could easily do more harm than good. In the short term it would cause even more instability on the markets and in the longer term it would risk fatally undermining the Bank’s independence.
In any case, it is almost impossible to get rid of a governor. Deliberately so, in order to reduce the threats of political interference and because monetary policy is a long game. Governors are given eight-year terms – Bailey is less than half way into his – and he can only be ousted for criminality or insanity.
Food for thought: Those calling for the defenestration of governor Andrew Bailey should be careful what they wish for
He might agree to negotiate a dignified exit at some point before his term expires, but then again, he might not.
Supposing a way can be found to get him out, it would seriously spook the money markets. It would also make it harder to attract high quality candidates in future.
Instead, what the Bank needs is less groupthink and a greater openness to independent thought. The orthodoxy that appears to have seeped into the nine-person Monetary Policy Committee (MPC) that sets interest rates isn’t working.
The MPC should be more diverse, not in the sense of having more women or minorities – though that may also be helpful – but intellectual diversity.
As things stand, the committee is dominated by former Treasury figures and new Keynesian economic ideas. Three MPC members are ex-Treasury men, and so are all four deputy governors.
Arguably, this has led to mistakes in reading the economy, particularly around the money supply, which might have alerted the MPC earlier to the inflation peril.
Monetarism, which was acceptable in the Eighties, became a dirty word. It was associated with the harsher side of Thatcherism, the mass job losses and devastated communities. But the monetarists have made a comeback. They predicted, correctly, that inflation would take off, having observed a surge in the money supply.
The Bank paid little or no heed, insisting that inflation was primarily driven by energy prices and supply chain problems, which it was, but not exclusively.
In the 1980s, the money supply became an obsession, with some harmful consequences. But it is quixotic to go to the opposite extreme and ignore it entirely.
This is not to recommend stuffing the MPC with monetarists: the committee could also benefit from taking on industrial and behavioural economists.
If Bailey is booted out, the danger is that independence for the Bank of England would effectively be at an end.
No-one should want that. If politicians are in charge, they would be unable to resist manipulating rates for their own ends.
The economist Roger Bootle has pointed out there used to be a remarkable tendency for rate cuts to coincide with Tory party conferences. Labour would be just as bad.
Whatever the flaws at the Bank, it is the least worst option.
