The BoE’s Warsh Report on transparency around monetary and financial policy

What a day for BoE watchers, and particularly for ex-BoE people like myself.  At Treasury Committee in March this year, perhaps prompted by media coverage [eg this and this by Mike Bird, and this by Chris Giles] of the revelation that MPC were routinely destroying tape recordings of their meetings, [and at least Granger caused by my blog here], Andrew Tyrie ambushed Mark Carney at the end of his hearing on the topic, and the Bank subsequently promised to review the way it operated.

That review, by Kevin Warsh, was published today, along with the BoE’s response.  The Bank is to publish transcripts of ‘Day 2’ MPC meetings, plus some staff briefing for MPC, after an 8 year lag.  Financial Policy Committee [FPC] and Prudential Regulatory Authority [PRA] Board meetings won’t be subject to the same degree of transparency, yet.

Some reactions.

My first reaction is:  blimey, how much things have changed since Carney took over.    Almost all the Executive Team and above during my 20 years there were vigorously and instinctively against further transparency.  Many of us who worked on transparency issues inside the BoE were subjected to a dispiriting ‘Commission, encourage, dilute, squash, sideline’ cycle during that time.  So changes like this, [and, the improved transparency over the forecast already introduced this year] are a startling break from the past.  So many of the reforms  that the wise birds of the Bank, availed of deeper insights into the political economy of monetary policy, deemed impossible, are now in place.

Digging into the detail a bit…

Transcripts [of Day 2] will be released with a reasonable lag of 8 years.  That sounds like a long time.  But many internal members arriving on the Committee as Executive Director might find themselves in gainful employment on MPC more than 8 years later.  So this is short enough for contributors to realise that they might be confronted with things they said and did while still on the job later.

A distinction is drawn between Day 1 and Day 2 of MPC meetings.  Day 1 is supposed to be when the thinking aloud happens, and MPC get to try out arguments without fear of being skewered either by their colleagues or history.  Not transcribing these discussions is an attempt to preserve that.  [Though the skewering by colleagues, in the constant low-level warfare that is MPC, will continue].

Day 2 is described as ‘decisional’ by Warsh, [an adjective unlikely to be in the Economist style guide].  The implication being that by then everyone will have made their mind up, and will probably be speaking from pre-prepared written statements.

In support of the recommendation not to record, transcribe and release Day 1 deliberations, Warsh makes reference to the academic research on the lower quality of more public deliberations.  This research is intriguing.  But dispiriting.  Monetary policymakers are middle-aged, high-IQ, highly confident, already successful individuals, not 25-year-old interns, who one could understand might need encouraging out of their shells.  But yet the suggestion is thta even those at the top of central banking are incapacitated by this human frailty.  Responding to that, Warsh suggests we should trade off transparency against functionality.

In other spheres, we don’t arrive at the same point in the trade-off.  Parliamentary transcripts are taken and released.  Court transcripts are produced and released.  The nation is in fact replete with important activities requiring debate and argument testing, yet which are transcribed and published.  The presumption is that the people selected for these important jobs have the capacity to debate and think on their feet, and are sufficiently self-confident and able to do it knowing that what they say will eventually be released, and must be released for the state’s legitimacy to be nurtured.  We would not often consider further constraints on publication on grounds that the top people of the state need their debating skills nurtured by privacy.  Why is the argument so much more compelling for  monetary policy?  I hope that in time this decision will be reconsidered.

Briefing related to the policy decisions is also to be released with an 8 year lag.  This is going to raise the stakes for MPC members seeking to go against staff advice;  and for staff members writing briefing that they know will contradict positions held by MPC.  It is going to strain the ‘constitutional’ position of the internal members who also are in the chain of command for staff working on MPC related briefing material.

Staff members will have to be braver, putting aside the worry about risking their careers with advice that goes against the views of their current or potential future employers.  And/or internal members are going to have to try to separate out their roles as performance managers in the Bank, and as individuals voting on the MPC.

Behaviour on both sides was routinely tainted when I was there, even without these new pressures. [I include myself as culpable too.]  Something concrete will have to change in internal processes to make sure that things change under the new regime.  From what I know of Carney, he is every bit as forceful in using what resources he can to get his way as his predecessors.  And a way will have to be found to prevent the interesting and contentious stuff being channelled out of the ‘official’ briefing to be published, and into the depths of the BoE’s email servers, leaving only the ex-post sanitized stuff for posterity to look at.

These changes edge us a tiny bit closer towards having a staff forecast.  Although we will only see the MPC members’ Inflation Forecast, we will eventually get to see what the staff were advising about aspects of it, and therefore be able to infer something about what they would have forecast.  All analysts working on monetary policy in the BoE have their views about policy solicited and discussed in working-level meetings.  The closer people are to the forecast, the more those people have fully articulated alternative forecasts of their own.

Should the BoE go all the way and pull what lies there already into a staff view?  I’m not sure.  On the one hand, there is expertise there that is not being exploited, or, if it is, revealed.  On the other, we have to remember the ultimate objective here, which is to get MPC members themselves to inform their policy vote.  In an economy where it takes time for policy to have its full effect, one has to act ahead of time, so this necessarily means MPC members forming their own forecast.  Question is, is that better done as currently, or via, or in addition to, a staff forecast?

A staff forecast might act as a disciplining device.  It would be harder for the great tradition of forecast reverse-engineering to survive.  (That’s where MPC members used to decide on economic judgements [eg participation, productivity] based on whether it would tweak the forecast towards the policy vote they had already decided on).  But it might also force the staff in on itself, in an attempt to maintain the robustness and coherence of its view, and leave the MPC feeling that it wanted more of its ‘own’ resources, to construct its own forecast.

The Bank chose the 8 year publication delay itself, a fact noted neutrally by Kevin Warsh in his report ‘Ultimately the Bank will choose the delay’.   Well, yes, it will, in the absence of its boss, the Treasury doing that job for it.  I don’t think it’s for the Bank to choose how it itself is held to account.  The Bank chose to employ Kevin Warsh to conduct this review, but that doesn’t seem appropriate either.  The Bank might have expert insight to comment on a decision made by others, but shouldn’t be taking this decision itself.  We are fortunate that the BoE is under such enlightened leadership in these (governance) respects.  And mostly seems to have taken the decisions an impartial observer would have taken.  But the current Governor will be back in Canada in 3.5 years.

The Bank has chosen to continue to make use of a blanket Freedom of Information exemption on monetary policy matters, which I infer from Chris Giles’ FT story  on the release of the Warsh Report.  This is wholly inappropriate in my view.  Old papers on monetary policy are not matters of national security or institutional integrity.  (Though I am glad that my 10 pager from circa 2005 on how the miracle of better risk-management will affect the equilibrium risk free rate is safe).  The Bank can surely come up with a more nuanced use of the FOI Act than it has at present, and perhaps should be forced to.  That catch-all device does not now sit well with the new transparency measures giving further access to specific kinds of material around the forecast and monetary policy process.  I suggest that Treasury Committee looks into find a way to circumscribe the BoE’s use of this FOI exemption.

Warsh excuses FPC from the same transparency reform recommendations as MPC on the grounds that it doesn’t yet know how to use its tools or precisely what it is doing!  Quite extraordinary to read that.  I don’t disagree with his assessment.  (Though I am not sure it’s consistent with how the FPC describes its own progress).   But I think one could argue that this makes scrutiny all the more valuable.  Mere handle-turning in a settled regime involves lower stakes.  But foundational decisions about what the FPC should be doing and what they expect their instruments to be used for are more important.  All the more crucial that we can see, later, that these tasks were being performed well.  Or, if not, that FPC’s successors can use transcripts to figure out why not.

The Warsh Review also excuses the Prudential Regulatory Authority Board meetings from the same transparency standards [as MPC].  One argument, perfectly reasonable, is that those meetings are about individual institutions, and cover information of such commercial import that even an 8 year lag might be insufficient.  Another argument given is that the PRA board operates by ‘consensus’.  What does that mean exactly?  It could mean ‘this committee chooses to debate things to such a degree that eventually all but the single, indisputably correct view falls away and everyone agrees with it’ [unlike with MPC].  Not a very plausible description is it?  What’s so different about the matters that the PRA board deliberates on that unanimity can be reached?  Another interpretation leaves the argument a tautology:  ‘For reasons not specified, the Board chooses not to register dissenting views.  Therefore, dissenting views in the form of votes should not be registered.’

However, these points should not detract from the fact that today is a triumph for the BoE.   Lacking someone to tell it precisely what to do, the BoE decided for itself – albeit under a little pressure from the media and Treasury Committee – to introduce greater scrutiny into the operation of monetary policy.   Good for them.  Even if Carney achieves nothing else, these transparency reforms, and those already introduced around the forecast, will be a commendable legacy.

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One Response to The BoE’s Warsh Report on transparency around monetary and financial policy

  1. A P Webster says:

    The transcipt element is interesting, but some of the other proposed changes might have an impact well before the first transcripts are released. Releasing minutes (and, in relevant months, Inflation Reports) alongside the MPC decision announcement could significantly alter the dynamic of discussion around monetary policy. In particular, market responses (swap rates/etc) to the pronouncements of MPC members in between meetings might happen in a very different way.

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