IN 2008, an elderly lady asked a killer question about the credit crunch which left the so-called economic experts red-faced. During a briefing by academics at the London School of Economics on chaos in the international markets, the Queen asked: “Why did nobody notice it?”
Another Old Lady – she of Threadneedle Street – had certainly failed to spot that Britain’s debt-fuelled boom would end in financial crisis. Throughout the good years, the Bank of England had been running a lax monetary policy, printing notes and coins bearing the Queen’s head with abandon. The irony cannot have been lost on the Queen: the subsequent credit crunch personally cost her an estimated £25m.
Ten years earlier, the Bank of England had been given its independence by Gordon Brown and Ed Balls, when Labour came to office in 1997. The Bank’s job was to keep retail price index inflation (RPI) at 2.5 per cent. After a year in which the Bank missed its target in every month but one, Gordon Brown reacted by changing the inflation target to the consumer price index (CPI) at 2 per cent. This target has been comfortably missed in all but 12 months over the past seven years. Prices are still rising too fast, at 2.4 per cent on CPI and 2.8 per cent on RPI per annum. This is a truly poor performance, given that the economy is so flat. As real incomes continue to fall, savers are getting poorer.
The Bank of England has reacted to this headache like an alcoholic with a hangover. Printing even more money in the form of a third round of quantitative easing, announced just a few weeks ago, will probably lead to more inflation. But the question we should be asking is why Sir Mervyn King, as governor of the Bank of England, was given the remit of using monetary policy as a tool to generate growth.
His job is to keep inflation down – to provide monetary stability and to allow wealth-creating firms to generate growth. He should not be printing money in the vain hope that new liquidity might do the trick. The chancellor knows, for he has repeated it often enough, that the only way we will get our economy back on track is to control the deficit and reform the supply side of the economy to get firms investing again. That is why recent cuts to corporation tax are so welcome.
In many ways, King is culpable for our economic woes. His Bank has almost complete operational independence, yet he has failed to control inflation. He acts as if he is King of the City, arbitrarily calling for the heads of top bankers as if they were his courtiers.
So here is a suggestion. When King retires next year, the new governor should be handed a new employment contract by the chancellor, requiring him or her to hit the inflation target within 12 months of taking office or resign. And the new governor, like all bankers, should be paid in line with performance. It is time to take the Old Lady in hand.
Syed Kamall is a Conservative member of the European Parliament for London.