Transcript of Question & Answer Session Central Bank Independence in Retrospect

We now have an opportunity for questions. I should just put on the record that I'm rather more optimistic about central bank independence and staying on than Andrew was, and partly I think his point about trust is relative. So, it's not for a very good reason, and it's that if you say to people, "Do you want to transfer responsibility for setting interest rates from the Bank of England and the Monetary Policy Committee to politicians?" I think I know what the answer would be, but we'll see. So, Marcus please indicate and use your way. Yes?

Let me pick up on the point Andrew Tyrie ended on, which was the danger of groupthink. Guy Debelle, argued I think the opposite. He said that central bank independence and inflation targeting bore no responsibility for the subsequent crisis. But I think it was true to say that this groupthink idea was that price stability was seen as a guarantee of financial stability, and as evidence in favour of this, I would refer to the adoption of economic models where the financial system is assumed to be perfect, models which in fact, completely failed during the crisis. So I think the point made by Andrew Tyrie has to be addressed. I believe it is in fact being addressed by the Bank of England now, because they're trying to look for completely new models. Thank you.

The point I was making was I think you can separate whether central banks were responsible for the crisis from the framework. So you can have a misapplication of the framework, which is still robust, that can cause the problems rather than the framework itself. I suppose that was the point I was trying to make. It's not obvious to me that central bank independence and inflation targeting per se delivered you a crisis. In a number of countries, including my own, they didn't. So the observation … it's certainly true in a number of large Northern Hemisphere countries, but it's not true of other economies around the world who have both central bank independence and inflation targeting, which includes myself, my mates across the Tasman, and a number of other Asian countries. None of those countries had a crisis. So I would just make the point of separating the framework from the central bank itself. Blame the central bank, not the framework.

Okay. I'm going to try and get as many questions in as possible. Yes?

Just got a question for Guy following on from his excellent presentation. Do you think there would have been and would in the future be any advantage in central banks and monetary policy makers perhaps in particular, articulating more strongly, being more vocal in expressing the limitations of the remit? You said clearly that you didn't think that they should expound on other economic policy issues for fear of losing independence, but might it have been beneficial if they had been more clear about the limitations of what they were being asked to do?

Thank you. Who would like to take that?

Remit is given to them by government. And it was government who told the central bank that they're now going to be responsible for macro-crude, micro-crude and the financial policy committee. It was government who gave the inflation target. I don't think you can blame central banks for the remit, and the central bankers have always stated very, very clearly that they cannot control things like productivity. I don't think central bankers are hesitant in coming out and saying that there are lots of aspects of economic life which monetary policy cannot touch.

But don't you think there has been a kind of culture of - naturally, the question about what, Gus, what people would prefer - politicians or seen as experts? I think at the moment, in terms of the general environment, politicians and experts are both kind of not in favour, as it were. But I think one of the dangers of independence I think was a sense of outsourcing of political responsibility. That because of everything that has happened in the global economy has been amplified. I think there's a very strong point for the Bank of England perhaps speaking more loudly about the limitations of what it is there to do and the remit that it's been given, because I certainly kind of sense, as we've seen with Brexit where civil servants were being blamed for not having prepared for the outcome, rather than politicians taking responsibility for not instructing them to come up with the impact assessments and action plans to deal with that result. I sense that that could be repeated in this area too.

Good points. I can't have all previous members of the MPC come up. I'll try to get another one before we get to Martin. Yes, the lady behind you after …

Yes, I have a question for Guy. What I wanted to ask you, Guy, is that Australia has done remarkably well. You've not had a recession for 27 years. Your rates didn't have to get to the zero lower bound. Now obviously, there are many, many factors that have played a role in that, but I wondered if you could just offer your best guess about whether the fact that the last three governors - Ian, Glenn, and now Philip - all have had sympathy for leaning against the wind and have appeared to allow that to play a role in monetary policy, has contributed to the success in Australia?

Sorry, I just missed the last bit. What skills did Phil, Glenn and Ian have?

Essentially leaning against the wind?

Oh, okay.

He's asking you to say how wonderful Australia is.

Yeah, well, the main reason we … what we've done is something called luck, which if you can have it is always worth having. I'm not so sure it's quite that straightforward … in that, again, partly I think that luck played a role in containing some of the asset price issues we may, or may not, have had. I suppose I do think that the macro framework, which we had has been broadly resilient, I think has been helpful. The one point … as I mentioned during the talk, I would regard … the fact that we've always had a very flexible, or pragmatic approach, to going about this, I think has been helpful. So that would be the point I would emphasise, which means you can take account of things a little more gradually over a longer horizon, rather than a sort of very rigid application of the framework.

And we didn't have a lot of credibility when we started this. As I said, Andy graciously invited us thereto the inflation targeting conference, it wasn't entirely clear that we deserved our place at the table at the time. With hindsight, we certainly did. I think that flexibility, which has always been there, I think, that's actually probably the most important point, and which has been exemplified in the three governors you've talked about, is having that flexibility and that pragmatic approach, which to some extent gets to your point, Frances, about acknowledging the limitations of what you can and can't do and don't overpromise. It's not that the central banks necessarily overpromise. It's just there's too much expectation and being able to push back on, saying, "No actually, there's only so much we can actually do here."

Okay, we're running out of time, so I'm going get three questions and then throw them all at the panel in different ways. Yes? Yeah?

Thank you very much for that very interesting panel. My question is related to how central bank independence may be linked to geopolitical concerns. What I mean by that is the Bank of England, for example, holds Renminbi bonds that I think helped make more Chinese money come into the UK., sticky important institutional money into the UK. Is this a role that central banks can carry on playing to ensure that there is further financial stability with some political support from the Treasury or similar financial institutions? That was my question. Thank you.

Okay, and then we have the strictly star, and then we'll have another MPT.

I guess mine's a question to Guy and it's something which we haven't talked about yet, but actually one of the questions about central bank independence is what impact it has on the Treasury as an institution, as opposed to simply on the central bank. I think there were three things which we thought it would do. Number one was we thought it would free up a lot more time for the Treasury to focus on lots of other aspects of economic policy, not just fiscal but broader economic policy, which I think it certainly did. Whether that's a good thing or a bad thing, people can debate.

The second thing was that it substantially increased the Treasury's leverage within government in terms of control, because it was much easier to be able to say to the Prime Minister, or to other Cabinet ministers, "Well, of course we'd like to agree to that. But you do realise that if we go for x or y, the consequence could be a rise of interest rates from the Bank of England. I'm afraid there's nothing we can do about that anymore." The third thing, which we thought after the late 1980s and the early 1990s, was that it would lead to bad conflicts between the Prime Minister and the Chancellor of the Exchequer. We got that one wrong.

Martin?

We have a question perhaps predominantly for Andrew Tyrie. We've heard quite a lot about individual accountability, what role do you, or do the panel, see for notions of collective responsibility among the committee?

Wonderful point. One thing I would just add to what Ed said there about the impact on the Treasury is, of course, one of the problems was that we made the Bank a much more attractive place for economists to work, which made it harder for them in the Treasury. Andrew, there's one specifically aimed at you there, do you want to go with that? And then I'll ask all of the panel members in question to give us a very, very brief final point. Picking up those questions. Collective responsibility?

Yes, I'm also quite interested in what Ed said about the effects on behaviour in Whitehall, which I think is not to be underestimated, having sat through many PESC rounds, public expenditure control rounds, with chief secretaries. I think there's a lot of strength in that point, rather less than the idea that the Treasury were desperate to find a bit more time to get on with what they should have been getting on with in the beginning. It certainly didn't create less conflict between chancellors and prime ministers and that seems to … now, I certainly don't think that's the case.

Individual accountability versus collective accountability. Okay. Well, the MPC works. People didn't think it would work in the way it should, but it has. The transparency that we now enjoy was not there initially, only a proportion of it. People were very nervous of it. But the very high level of transparency has played a crucial role in delivering that.

Now, let's have a look at the FPC and see what can be transposed. There are several problems. First of all, quite a lot of the information that the FPC might need derives from confidential sources and will have marked effects if it's put in the public domain. Secondly, it's not something that needs necessarily every month or every few months, a decision, a specific decision in a thing. It can often be much more discursive than that, particularly if you're trying to deal with groupthink. Nonetheless, I have argued vigorously and the Treasury Committee argued vigorously that the FPC could now do more to create a sense of public debate and discourse about aspects of financial stability. Why was I so keen on that rather than to have these feuds tucked away behind the scenes in committee? Because of groupthink, because that is the way to stimulate the public debate, which may lead to less groupthink. Gus wants me to stop, I was going to stop anyway at that point. So, over to you Gus.

No, Frances.

I wanted to pick up on that point about is there a case for a different relationship between the Treasury and the Bank that maybe needs to be codified. If we are clearer about roles and responsibilities and the limitations, that interplay of each, then is there a way of codifying that relationship in a different way that could be better? In particular, I liked Ed's point, that one of the objectives was to free up the Treasury to get on with the job, and my goodness me, what a job it ought to have at the moment in terms of investment growth and critically to get wages rising again, because if we are going to have an economy that feels like a success for working people, then we have got to tackle that living standards crisis. And just one last point, Andrew, because I don't think people have forgotten the corrosive impact of inflation. On the contrary, there are 5 million nurses, midwives, and other public servants who know that when inflation is running at 2.9 and they're suffering a pay cap of 1 percent that that has a very corrosive impact on their living standards.

Thanks Frances. Charles?

We were very fortunate in the first MPC on the subject of groupthink, because we had William Boiter, one of our members.

On his own, was he?

Well exactly. But to be a bit more serious, Eddie George was very outspoken from the very start that the MPC was to be individualistic, that each of us was to be responsible for our own judgement about what the best way to achieve the government's remit would be, and we had to speak up for ourselves. It's different in different countries and in different conditions, and … and I and Willam, have sort of various set-tools on this particular subject. I still like the individualistic approach. I think it works and I think it is particularly, a protection against group think.

Thank You. [0:16:04]

I absolutely agree with that. I think the collective responsibility is something that happens in the corporate sector of course, at boards, and essentially in that environment the only thing you could do if you disagree is resign. To force you into the nuclear option, of someone resigning from the MPC, because they couldn't go along with everyone else, is a much worse state of affairs than enabling them to give speeches, talk to the Select committee, and allow a certain flexibility, even encouragement in differing views.

And I'll just say also, in response to the question about the Bank and the Treasury and should one formalise the responsibilities and the divisions, I think that's possible. But, I felt that the system that the US had when Greenspan was there, which if I remember correctly it was a Tuesday morning breakfast with Larry Summers at the time, and I think was the head of the Council of Economic Advisors as well, completely off the record, but just keeping each other informed and involved and able to debate things by themselves, without it appearing to be compromising the independence of one side or the other. Quite often the success of an institution depends on the individuals in the institution and how they behave towards each other, and I think that worked pretty well in the US case.

Thanks. Guy?

I suppose I can just give one perspective on Ed's comment, in that in Australia, the Secretary of the Treasury is still on our Monetary Policy Committee, has been all the time, and so macro-policy making wasn't completely delegated to the central bank, so the Treasury still had to remember how to do macro in Australia. I think part of that is useful for exactly the point of providing a different perspective. You've got your two main policy institutions in the country, it's useful that you do have a bit of, not necessarily tension, but at least different perspectives, to be brought to that.

So I get the point about freeing up resources at the Treasury to do other stuff and the benefit of that, but I think there is also some value in having another institution, who spends a decent amount of time thinking about macro stuff and being able to provide, possibly, or at least challenge the perspective. But to some extent the solution here is exactly the MPC, with its broad membership from different backgrounds, goes some way to doing that here. Though I suppose, and this may raise a slightly touchy point, that always brings up how much resourcing control the independent MPC members have to be able to bring that perspective, so it's not just their perspective, they've got a bit of oomph behind it, otherwise it's somewhat of an unfair contest.

I would just add to what Guy said, that trying to do fiscal policy without understanding macro seems to me kind of, not really a very good way to do things. So I think the Treasury always needs to understand macro. At that point I should say thank you very much to all of you, we've overrun slightly but not as much as Mark did, and I'll be talking to him about it, keep Prime Minister's to time, something I like to do with my time. So there will now be a break and we are due back at 11:45, yes? Thank you very much for your time.