Disasters happen when the last man who can remember what happened last time has retired. Now is the time for new thinking
My law of banking says that disasters happen when the last man who can remember what happened last time has retired. Ten years on, you might think that the last one was cataclysmic enough to be etched on our memories, but they fade. Now is the time for new thinking.
Ten years ago, Paul Tucker was in the thick of it. As Deputy Governor of the Bank of England he was Mervyn King’s right hand and, to City minds, his natural successor. That did not happen. The Chancellor of the day preferred to import Mark Carney from Canada, and Tucker retired to Harvard to teach and to write. Now, with his book Unelected Power (Princeton University Press, £27.95), he sets out to nudge our thinking in an unfamiliar direction.
He wants to make the Bank (and central banking in general) safe for democracy. It is just one, though perhaps the weightiest, of the independent authorities and regulators that now have wide powers and no evident constituency. His watchword would be: “No regulation without representation.” Otherwise, when something goes wrong — and, as he says, in the end something will — and we find ourselves let down by these unelected rulers, there is going to be trouble.
To be feared as one of them would, at least, for the Bank, make a change. The Chancellor who formally nationalised the Bank referred to it as his creature. Subsequent Chancellors took to setting Bank rate, and to cutting it in nice time for their party conferences. When Nigel Lawson, an imperious Chancellor, first proposed giving the Bank independence, it was (so I felt) as if Cromwell had offered Dominion status to Connaught.
Independence, when it came from Gordon Brown, set the Bank to hit a target for inflation. This, as Tucker says, was thought to be sexier than keeping an eye on the banks, which now acquired a watcher of their own, with the Treasury holding the ring. In the end, shaky banks fell between the hands of the three “tripartite” powers, and there could be no answer to the question pitched in Parliament: “Who was in charge?”
A subsequent round of reforms set out to answer that question — at least until the next crisis comes along to test it — but it does not tackle the question that Tucker poses, or establish the link between regulation and representation. That link would have to be forged by trust. Tucker argues that the judges have it (though it needs to be respected) and that an independent central bank would need to earn it. Easier said than done.
He sets out a long list or flight of steps in the right direction, to be taken by any such independent authority. It must not (for instance) bring prosecutions or impose ruinous fines. Its decisions should be made in committee, and the members would need to know that doing nothing is doing something. (This, for today’s Bank, would represent a change of policy.) Like the judges, the central bankers should not be looking over their shoulders to the next job somewhere else.
Most significantly, Tucker warns, central banks must be planning for the next crisis. They may not be required to identify it or see it coming, but when it comes they will need to do something exceptional, and they need to be ready for that. Last time round was exceptionally exceptional.
In a year’s time, Governor Carney will be on his way. Candidates to succeed him — the betting is open — should work their way through Unelected Power. They will then have some thinking to do.