I have, occasionally, pointed out things that the Bank has done well in this blog. However, it’s fair to say that most of what I have done is to detail things I think could be done differently. But in case you worry that I am not objective on this subject, I thought it was worth stepping back and recapping. It’s far more entertaining to criticise and pick holes. And as a reader, I think I usually find that more fun too. But it’s worth setting out what I think has gone well, so that a proper perspective is not lost, and the criticisms can be seen for what they really are: important points of details.
So, onto 5 triumphs at the Bank of England.
1. Most recently, resisting the UK Treasury’s incursion into operational independence by asking it to review a policy explicitly designed to inject more monetary stimulus (forward guidance), by declaring that it wasn’t injecting more stimulus. However confusingly put, that was the intended outcome. If the cliché ‘what doesn’t beat you makes you stronger’ has any truth in it, then this was a triumph.
2. Absorbing the PRA. This isn’t over yet. But institutional change of this magnitude constitutes a mountain of projects big enough to sink other government departments. But this didn’t happen. Neither has there been any obvious fall-out or chaos within the Bank. Surely this counts as a triumph too. [Their conference room also has very nice seats].
3. Setting up the Financial Policy Committee. Mervyn King once gave a speech under the banner ‘practice ahead of theory’. It was a play on an old real business cycle paper entitled ‘measurement ahead of theory’. He was talking about monetary policy, but you could say exactly the same about the new FPC. From where I sit/sat, it seemed like the reason there was an FPC at all was because of the Bank of England. This new institution got staffed with central banking and financial dignitaries of the appropriate calibre because of the Bank’s long-won reputation for competence and seriousness. The FPC had to be set up amidst the ebb and flow of post-crisis and recurrent crisis management; that it was done relatively smoothly has to go down as a triumph for the senior management in the Financial Stability function of the Bank, and the Treasury. It also had to be done in a sea of ignorance about exactly what the right thing to do was. Setting up the MPC was much easier by comparison. There were role models. And a long history about the single instrument (at that time) it was thought necessary for them to vote on. And there was little difficulty in figuring out what the goals ought to be. Life for the FPC builders was much different. No real role models. Except a deluge of anecdotes from largely emerging market countries who had been intervening in their banks’ lending for decades. And an academic profession studying business cycles that, though rubbing its hands in glee at the interesting new questions opening up, had few practical answers to offer. As an outside observer, I was impressed by two things: the deluge of requests and notes about the ‘big questions’ to do with FPC design, showing a preparedness to think things through from scratch. Combined with the relentless [for me hard to empathise with] grind through the nitty-gritty of the project management side to this. Another potential hazard was the stark philosophical differences between Mervyn King, Paul Tucker and Andy Haldane. This no doubt caused practical headaches for those serving the FPC and made the process feel uncomfortable at times. But, in the same way as the recurrent fights between the doves and hawks on the MPC has, in my view, left it stronger, so the FPC has survived this difficult early phase, and there are now precedents for future FPC members to have these fights without fearing that doing so will wreck the institution. A final obstacle was the fact that the FPC was being grafted into an institution designed to do other things. I’ll bet that when McKinsey take a look at the reporting lines and the organogram, which of course date back to before the FPC’s inception, they will think of plenty ways to wield their practiced bureaucratic chopper. But they should not forget that behind the strange structures and customs is a seething mass of clever and adaptable people throwing themselves at the shifting demands of new and old customers.
4. The Bank’s nimble response to the financial crisis. The resolutions of Bank failures, done on the hoof, at great political and legal risk, without a proper machinery [that we hopefully now have]. The administering of emergency lending assistance [ELA]. The reform of the Bank’s Sterling Monetary Framework, both to accommodate financial distress of Banks, and to adapt to QE. The instigation and winding up of the Special Liquidity Scheme. The devising of the Funding for Lending Scheme [a testament in particular to a small group of phenomenally clever youngsters at the Bank who I am probably not allowed to name]. I have been very critical of the decision to focus monetary policy efforts on quantitative easing. But, given that that was the decision, the effort in the Markets Directorate to set up the ‘reverse auctions’ used to buy the gilts under the QE program must also count as a triumph.
5. Monetary policy through the financial crisis. Hang on, I hear you say, haven’t you spent months getting off your chest all that you hate about monetary policy? Well, yes, but these are details. At least relative to the big picture. Which is that, however described by the Bank, the MPC decided to take a risk and tolerate what was in the history of inflation targeting an unprecedentedly large overshoot in the inflation target, judging that a price worth paying to ensure that the contraction was less painful, and shorter than otherwise. This was not an easy decision, I am sure. And it was not always characterised as this, or as self-consciously acknowledged. But that was its effect. The MPC still had the chattels of a relatively recent bad inflation history. [The equivalent on the side of fiscal policy was part of the reason why the Coalition felt they had to tie themselves up in an austerian straitjacket]. But the crisis prompted them to embrace ‘flexible inflation targeting’ long before their political masters used the term in the recent inflation target review in March. Several years of quite high inflation is, therefore, in my view, a triumph. That it has been pulled off without triggering inflation scares in financial markets or survey data, I think will confer a great benefit on future MPC incumbents. It’s surely much harder and riskier for the first inflation targeters to try out ‘flexibility’. Later flexers can simply point to their forerunners’ wise words and successes.