4th May 2012
The Government's solution has been to give additional powers to the UK's central bank to enable them to – theoretically at least – prevent parts of the economy over-heating. But how should the Bank of England look for the new economic era?
Martin Wolf's thoughts on the future of central banks drew significant interest on the FT's site. He says: "(Central banks) will need to balance their old roles as formulators of monetary policy with new roles as guardians of financial stability. Making this still harder will be the dire fiscal legacy of the crisis. The higher levels of public sector debt threaten a return to "fiscal dominance" in which central banks will, willy nilly, be forced to finance the government, however inappropriate that may be.
"The new world of post-crisis central banking will create significant institutional challenges. Domestically, the issue will be how to secure needed co-operation among the fiscal authority and the bodies charged with oversight of individual institutions, oversight of financial stability and management of monetary policy. Even where, as in the UK, the last three responsibilities are all going to be part of the central bank, relationships with the ministry of finance will be crucial. Moreover, the centralisation of authority in one institution carries its own risks of insufficient airing of differences, groupthink and ultimate failure."
Wolf's most contentious point was that central bankers had saved economies from depression, but plenty of commentators had something to say on the role of central bankers in future. Balbis said: "I wonder if the necessary change in the role of national central banks is not even much more complex than indicated by MW – is it possible to reduce the risk of future crisis substantially without moving toward much more ambitious global regulation of financial flows? Is the current nation based governance not going to breed the next crisis if not changed into a new Global Governance Regime of Finance?"
The future of the central bank in the UK has been discussed by Mindful Money's Shaun Richards. He supports a democratically elected central bank and has even put his ideas to Financial Secretary to the Treasury Mark Hoban: "My suggestion for a change is that MPC members should stand for election as they are currently much more powerful than many of our elected representatives.
He bases his views on the additional power soon to be awarded to the central bank. He believes that this will need additional check and balances.
As well as the changing structure of the central bank, there has been widespread speculation as to who might lead it when Mervyn King steps down in 2013. Among the names in the frame has been Goldman Sachs chief economist Jim O'Neill, but this Reuters piece discusses ‘how to solve a problem like Mervyn' and proposes some more mainstream candidates: "The Bank's own deputy governor for financial stability, Paul Tucker, has emerged as the internal candidate, representing continuity. In 156 meetings of the rate-setting Monetary Policy Committee he and King have attended together since 2002, they have disagreed only 8 times, most recently in August 2009 and before that January 2007.
"Other establishment candidates are: Adair Turner, chairman of the Financial Services Authority and Mr Fix-it for both the previous Labour government and the Coalition on pensions and financial reform; Gus O'Donnell, former permanent secretary at the Treasury and head of the civil service, a legendary safe pair of hands; and economist John Vickers, former Bank chief economist, head of the competition watchdog, as well as main author of the recent Independent Commission on Banking report on structural reform of the UK financial sector."
But it is difficult to disagree with Wolf' conclusion: "Nobody can be confident that the propensity of the financial system towards huge crises can be halted. Indeed, the longer that success is achieved, the greater will be the complacency and the bigger may be the crisis. Yet the regulators, central banks foremost among them, are doomed to try. The price of past failures is their present increase in responsibility. It really is a strange and eventful history." Any new incumbent truly has their work cut out.
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