No longer just rate-setters: how top Bank officials are set to take control
IN an almost austere office, buried in one of the less glamorous corners of the Bank of England, Paul Fisher performs his tasks as the Bank’s executive director of markets.
The room suits Fisher, a mild mannered central banker with a PhD in macroeconomic modelling. Yet the modest surroundings are not what one expects for a man about to assume one of the most powerful positions in the financial world.
As well as sitting on the Bank’s nine-strong interest rate setting panel, the Monetary Policy Committee, Fisher is also a leading member of its Financial Policy Committee (FPC) – the new decision-making body set up in the wake of the devastating credit crunch of 2008, and tasked with preventing any such future crises.
“I do not feel daunted,” Fisher says, but “it is a big challenge”. “We are going down a direction further and faster than other countries – other countries are doing similar sorts of things, but nobody has quite gone to the situation of having a committee like this with statutory powers to make independent changes,” he says. “So it’s a great challenge to see if we can make it work.”
The FPC meets next month to make a final decision on which powers it believes it should hold. Its proposals will go back to Westminster, where the Bank has recently faced criticism from MPs calling for greater oversight and accountability.
The new regulator could also see its powers limited by European regulations, which have become increasingly important, although Fisher remains optimistic the FPC will have enough leeway. “We are getting reassuring noises that the regulations won’t prevent us from…[setting] requirements over and above the minimum level specified in the Basel arrangements”.
The group will continue to call for the right to gold-plate new capital requirements, he says. But Fisher also admits to potential limitations in the FPC’s plan to guide the banking system. “I think we can make a bank hold more capital. Can we make it hold less capital? It’s a bit harder.”
“You can say to the bank ‘your capital requirements are now two per cent lower’ – you can’t necessarily make them use the capital up.”
Nonetheless, Fisher remains upbeat, albeit modest: “We won’t abolish credit cycles through macro-prudential policy,” he concedes. “Maybe we can lean against the wind a bit, but really what we are trying to make the system more resilient to shocks – that is the main purpose.”
And despite opposition from various corners of the City, and some economists who don’t believe this approach is the right one, Fisher strongly defends the new set-up.
“Everybody’s focusing on the costs of regulation, the costs of holding more capital, the costs of holding more liquidity,” he said. “And they can’t quite see what the benefits will be once we get to a level where everyone can perceive that the banking system is safer, there’s less chance of public money being used to bail people out.
“The nature of a business model of a bank is that you have to take risks, and there is always some level of risk which would sink the best financial institution in the world.”
The need to avoid taxpayer money bailing out the financial system is the leading driver for policy decision throughout the world, Fisher says – yet refuses to blame regulators for failing to ensure that large, complex financial institutions would be resolvable in the event of a crisis, and to produce special bankruptcy and resolution procedures for the sector.
“People had thought about it but it was never top of the priority list to actually fix – people were doing other things,” Fisher says.
“The FSA, who had come under a lot of criticism, they were being put under huge political pressure on consumer protection and mis-selling stuff, or enforcement issues. They weren’t under political pressure to improve supervision or resolution regimes, and so we have a chance now.”
Fisher also remains calmly optimistic over prospects for long term economic growth, despite endorsing billions more pounds in asset purchases. “There is no reason to think that the trend rate of growth is any different,” he adds.
“Trend growth depends on productivity and population growth, and we aren’t suffering a slow-down in population growth that some other countries are … and there’s no real reason to think that technology growth and multi-factor productivity growth should have changed.”
He isn’t too concerned either about the slight dip in the money supply in the fourth quarter. “All sorts of funny things can happen on a single quarter; transfers between two particular types of institution either inside or outside monetary statistics can affect that, so I’m not too worried at the moment.
“If that were to continue for several quarters then I would start to get very worried but at the moment it’s just one quarter’s fluctuation.”
Fisher takes an equally long term view over measurements of growth, arguing that “small movements” in quarterly figures should not be given too much attention.
“We try not to give running commentary on quarter by quarter,” he says. “The underlying position seems to be that the economy is flat to small-positive at the moment, and we expect it to stay that way really until the consumer gets going again. A lot of recovery will be dependent on consumption growth returning.”
Yet across the pond Fisher shares the fears of Federal Reserve chief Ben Bernanke, who has repeatedly stressed the dangers of long-term unemployment. “There is still a big debate to be had about what equilibrium levels of employment and growth are in the US,” Fisher believes. “They thought initially that they would be able to return to the same tread-path of growth as they had pre-recession – I think that is less certain now.”
When asked whether the Bank is now behaving more like the Fed, putting greater emphasis on the second part of its mandate – not to create undue instability in the economy while pursuing the inflation target – he replies that the Bank actually behaves in a “remarkably similar” way to other leading central banks. The difference, he argues, is that the Bank’s remit is a better-worded version.
“In the long run we know we can control the inflation rate… [yet] in the long run monetary policy doesn’t affect output and employment, it only does in the short run – and so to have a policy which gives them equal weight and ignores the time dimension is for me a bit of a muddle,” he says.
Like the Fed, Fisher gives a loyal defence of quantitative easing (QE) as a means of preventing downward jars in output which cause long term harm to the economy.
“We know for example that if young people are out of work for a long time it makes it difficult for them to get back into the labour force,” Fisher says. “We know that very sharp contractions can make even quite good businesses end up going bust – so that’s the sort of collateral damage you’re trying to avoid.”
However, the Bank is unlikely to attempt forms of QE other than the snapping up of UK gilts.
“If we buy gilts we will affect the prices of all our other assets in the economy, so what’s the particular reason for buying other assets?” Fisher asks, while appearing to rule out other forms of stimulus.
“It is amazing how people have, on one hand complained about the bank having too much power, and on the other hand wanted us to take responsibility for things which are clearly outside our remit,” he complains.
“We have had a very precise idea of where those boundaries lay, and what point something should pass over from the government.”
The latter will remain a key battle ground in the coming weeks and months, with Bank chief Sir Mervyn King taking on Westminster in an intriguing power-battle over financial regulation. The feud seems a million miles away from Fisher’s plain office and measured economist’s verdicts.
“I think it’s important we stick to what it is our job to do and do not try and exceed our powers,” he says. Whether exceeded or not, the establishment of the FPC will grant Fisher and his colleagues significantly greater influence.
CV | PAUL FISHER
Age: 53
Work: Long-standing employee at the Bank of England, which he joined in 1990. Worked under the late Sir Eddie George. In the decade before joining the Bank, he specialised in research on macroeconomic models at Warwick University.
Education: Graduated from Bristol in 1980, having studied economics and statistics. Headed straight to Warwick for his PhD.
Family: Married, two children.