MPC veteran Kate Barker attacks regulatory reform, saying greater role for ‘unelected officials’ is undemocratic
Treasury plans to hand the Bank of England extra powers to oversee the banking system will give unelected officials too much power, one of the central bank’s longest-serving advisers has warned.
Kate Barker said on Wednesday that the steady erosion of democratic control over regulation of the financial system would accelerate under proposals by the coalition government to create a super-watchdog in Threadneedle Street.
She said oversight should be the job of the Treasury, based on advice from the Bank of England and other bodies involved in banking regulation.
Echoing fears among many MPs that Bank of England governor Sir Mervyn King and his successors will control an unwieldy empire of regulatory committees that could challenge the Treasury’s democratic mandate, Barker criticised government plans to create a financial policy committee (FPC) alongside the Bank’s monetary policy committee (MPC), which sets interest rates.
“More policy decisions should be left in the hands of the chancellor, rather than unelected officials at the Bank of England. Mervyn King’s successor will be appointed to an unduly powerful role for an unprecedented eight-year term,” she said.
The FPC differs from the work previously carried out at the Financial Services Authority because it aims to “assess and steer the financial system as a whole, rather than focusing on individual organisations, which will now become the responsibility of the Prudential Regulatory Authority”, she says. For example, FPC members will have the power to restrict mortgage lending if there are concerns about a possible credit bubble, as there was before the 2007 banking crisis.
Barker criticises the Treasury for delegating unpopular decisions to the FPC that should be made by parliament.
In a report for the thinktank CentreForum, which has strong links to the Liberal Democrats, the long-standing MPC member warns that the MPC’s remit is also flawed, because it failed to spot the looming banking crisis in the early part of the last decade. She says the MPC needs to take a broader view of the economy and have a more flexible inflation target of 1%-3%. At the moment, the central bank aims to limit inflation to 2% over a two-year cycle.
Proposals to shift most City regulation to the Bank of England has also been criticised by the all-party Treasury select committee, which questioned the democratic processes inside the Bank of England in a report earlier this year.
“The coalition government has certainly sought to be radical in its approach to macroeconomic policy. But it has invented too many different bodies and not looked hard enough at what went wrong in the lead-up to the crisis. Most significantly, it has delegated too much to the Bank of England, which next year will for the first time have a governor appointed for an eight-year term, into a very powerful unelected role,” Barker said.
Barker’s report pays tribute to the coalition for creating the Office for Budget Responsibility, suggesting it has increased the credibility of government tax and spending figures, but urges the chancellor to rethink deficit reduction if “self-defeating” austerity is to be avoided.
Barker’s criticism follows a call by outgoing MPC member Adam Posen for the Bank of England to take extra measures to ease credit conditions in the UK and encourage lending.
Posen told the BBC Hardtalk programme that the double-dip recession was “entirely predictable” after the coalition accelerated the austerity measures adopted by the previous Labour administration. He repeated his condemnation of the Bank’s governor for giving public support to the policy change at the time of the last election, though he praised him for reacting quickly to deteriorating economic conditions, especially after the collapse of Lehman Brothers in the US, which precipitated the banking crisis in 2008.
Posen, who denied that the MPC’s remit had created a barrier to bold action, has lobbied for an increase in the Bank’s quantitative easing policy, which he said had been under-used in 2010 and 2011. He argued that an earlier expansion of QE, which involves creating money to encourage bank lending, alongside more direct efforts to promote lending to small and medium-sized businesses, would have increased consumer demand, investment and economic growth.
In a sweeping criticism of the limited measures taken by the Bank, he said it should buy up mortgages and the debts of non-banking lenders to free the financial system from overwhelming debt burdens.
Too often, the MPC had focused on persuading high street banks to lend more rather than considering setting up new banks with a mandate to lend, he warned.
“We should be buying things other than just gilts, such as bundles of private-sector debt and special bonds to finance infrastructure,” Posen said.
“The funding for lending scheme set up by the Bank is a step in the right direction but I think the central bank should do more to go around the existing banking system.”