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An “independent Bank” is not necessarily a wise Bank

Friday, October 7, 2016 22:36
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The myth of Bank of England independence is not just wrong, but it is also damaging.

By calling the Bank independent, people want to endow it with an authority and wisdom that it often does not possess. The false narrative implies that all politicians and the Treasury some of them lead is by definition biased, foolish, unable to make good judgements. In contrast the politics free Bank as an independent can make accurate and uncluttered judgements for the greater good.
The underlying assumption is the Bank employs special experts who are uniquely qualified to predict the future course of the economy and to make well informed and well intentioned judgements about it. Every one of these assumptions should be subject to challenge, as they are all wrong.

The Bank has been “independent” since 1997. Over that time period its economic forecasting record has been no better than the typical private sector average, which it often sticks close to. Like most professional forecasters the Bank completely missed the banking crash and great recession until it was in full swing. The Bank on the way to “independence” in the later 1980s was similarly unable to forecast the devastating consequences of joining the European Exchange Rate Mechanism, a policy it actively promoted.

It is difficult to see the Bank is politics free. It shares many of the assumptions of the governing elite and the general economics profession. It plays politics all the time, operating day to day with regular exchanges with the Treasury and wider government. It holds news conferences and intervenes in the political debate, as it did notably in the run up to the EU referendum when it decided to support the losing side. The Bank relies heavily on a concept of capacity utilisation influencing inflation and expectations in a way which is difficult to measure. It is tortured by trying to define the cycle in an age of huge technical changes to products and buying patterns.

I find it difficult to distinguish most of the time between the Treasury view and the Bank view. They usually forecast similar outcomes, and usually agree about the direction of policy. That is a good thing when they get it right, but a bad thing when they make one of their periodic large collective errors of judgement. Where the Treasury and the Bank have disagreed, as over rate cuts during the banking crash, the Treasury was on the right side of the argument.

The truth is there is no magic expertise held by the Bank that makes them uniquely able to set interest rates well. It is a judgement. It helps to study what has happened, and to have some knowledge and experience of what is likely to happen for given changes of policy. The Treasury is as able to do that as the Bank, and an private sector forecaster or economically literate business can do it as well. Better policy making results from a clash of views and from open minded study of what a range of experts are saying.

Bank “independence” has coincided with the worst banking crash since the 1930s, with a great recession, and a long period of depressed rates and slowish growth. Is that the best we can settle for?


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