Haldane on how to get firms to do what we want them to do

Andrew Haldane, BoE chief economist, was interviewed by Newsnight’s Duncan Weldon, and he makes many interesting remarks.  Including comments that firms are too short-termist, are not spending enough on investment, are returning far too much money to  shareholders [this is presumably bad], and that we should consider alternative forms of corporate governance to make sure that the wider social good is served.

Such an occasion cannot pass without the customary reflex reaction pointing out that Mr Haldane is again talking on topics a long way from an already wide-ranging BoE remit.  Unless he can draw a connection between the BoE’s ability to hit its monetary policy and financial stability goals, and corporate governance, I don’t think he should be making these comments, however intriguing an antidote they are to run of the mill argument that businesses are best left to run themselves.

AGH does attempt to draw a connection, when Duncan reminds him of the Bank’s remit.  But it doesn’t work.  Paraphrasing the response, it’s that short-termism and speculation was the cause of the financial crisis.  That’s fine as a part-diagnosis of the problems with banks, which the BoE is charged with regulating but not as a description of the role of non-banks in the crisis. It also implies that the current toolkit to deal with bank shareholder mischief are not adequate, somewhat at odds with the official line coming from the Bank.  To the extent we can take this argument at face value it’s also self contradicting.  The crisis was caused in part by the private sector over-extending itself, failing to price risk properly and therefore undertaking projects that should not be undertaken.  Yet at the same time, collectively, according to Mr H, it under-invested.

Many might complain that restricting a free-thinking mind such as his to the pedestrian matters for which he was appointed means missing out, and wasting talent.  But, to those I would say the following.

First, off-remit freelancing carries with it risks.  In particular, risks that the next round of appointments will be vetted to make sure that the candidate’s off-remit opinions, [read, essentially, ‘politics’], are acceptable.  Personally, I don’t want senior BoE staff selected on the basis of whether they share the government’s current inclinations regarding interventionism.

But if the Treasury come to expect that new appointments will assume the role of informal economic commissar, with a brief to reflect on pretty much anything, they are going to have an interest in making sure that those reflections don’t complicate the general business of economic policy-making.

Second, the remit the BoE has is already extremely large, and the tools it has to pursue them are powerful and invasive.  Especially in the early phase of sitting atop such a powerful remit, the BoE has to be sensitive to the risk of becoming suspected of regulatory overreach or empire and influence-seeking.

All this is without getting much into the substance of this issue, which is, to say the least, controversial.

To paraphrase Nigel Lawson, the governance of business IS the business of government, and not the central bank.

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