Sep 22 2007
Alistair Darling backs away from legislative reform to save banks
The Chancellor’s interview in the Times today is better than his dreadful pre U turn interview in the Telegraph on 13 September, but it reveals two worrying features of his latest thinking.
The first is, he does not seem to grasp the dangers of the tripartite arrangements put in place ten years ago, splitting responsibilities. His comments are a further nail in the coffin of so-called Bank of England independence, as he is by implication critical of the Governor’s comments and actions. He criticises the regulators’ efforts to find a buyer for Northern Rock, and makes it clear that he will change the regulatory system on the back of this crisis. He is evidently in charge, but he is not addressing the immediate issue of market liquidity which is what this crisis is really all about.
The second is, he is clearly terrified of the idea that he should have to alter EU law and regulation. He backs away from the sensible proposal of the Governor that we need a change to the Market Abuses Directive to make it possible for the Bank of England to act as lender of last resort without the bank concerned having to make that public. Instead he wants to make many banks borrow from the Bank of England from time to time to take away any stigma. This could appear to be an artificial device, and may be seen through by market analysts anyway who would be able to spot the bank that really needed the money.
He is keen to avoid changing domestic and EU rules on takeovers to allow rapid work to be undertaken to permit the takeover of a bank short of liquidity by one with more cash. He seems unaware of the government’s own laws, as he condemns such actions as deals in “smoke filled rooms”. I thought they had banned such smoking in the workplace. The early takeover of Northern Rock before the run on the bank would have been a solution to the problem and I can understand why banks and regulators were looking at such a possibility.
It is hopeless situation if the UK can now no longer adapt law and practise to deal with its hugely important financial services industry because the framework has been dictated by inflexible EU legal rules. It is also worrying that the Chancellor has no proposals to ease the credit crunch and the shortage of liquidiity, which is the very essence of the crisis in markets we are witnessing. He should look at how the actions of the Fed have started to ease the problems in the USA, because the Fed has supplied more funds to a market starved of cash, and has started cutting interest rates.
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John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
He should look at how the actions of the Fed have started to ease the problems in the USA, because the Fed has supplied more funds to a market starved of cash, and has started cutting interest rates.
I can’t agree with that. You rightly criticize Darling for undermining the BoE’s independence, and then suggest he go further in this direction by overruling the Bank’s authority to set interest rates.
The government should not intervene in monetary policy, but should give the BoE more freedom to act as it sees fit–by removing the M.A.D., for example.
Time will tell whether the BoE has been too cautious in cutting interest rates, but I trust their judgement much more than the Chancellor’s (or even a Tory Chancellor’s). It’s well established that the greater the degree of central bank independence, the lower the rate of inflation. Politicians always have the incentive to relax monetary policy come election time, leading to greater instability and higher average inflation.
Reply: The so called independent Bank kept interest rates too low for too long. Now there is the danger they are doing the opposite to over correct.
I agree the BoE kept rates too low for too long, leading to excessive inflation, but the answer is greater independence or a different mandate, such as a price level target or constant money growth rule.
Having the Chancellor intervene would only make matters worse, resulting in longer periods in which monetary policy was too lax (the government being unwilling to risk the unpopularity which results from higher interest rates, thus continually rationalizing low rates, by saying inflation was due to excessive wage demands, the price of oil, etc.) followed by even more excessive tightening as the public gets fed up with the inflation and demands a tougher policy, which in turn will be harder to achieve (i.e., will require higher interest rates) the less credibility (i.e., the less independence) the policy maker has.
There is a danger that monetary policy currently is too tight, but there is also a danger of resurgent inflation central banks overreact to the current credit crunch http://www.aei.org/publications/filter.all,pubID.26811/pub_detail.asp
To balance these risks you need a great central banker like Alan Greenspan, not a mediocre politician like Alistair Darling.
Reply: I agree - my policy recommendations are for a truly independent monetary policy committee. It’s just that at this moment when Darling has effectively taken over and shows no signs of wanting to set up an independent Bank, I am urging him to do something useful!