Saturday, 28 March 2009

Democracy and the Bank of England

In 1997 the New Labour government trumpeted their flagship policy of giving the Bank of England (monetary policy committee) the independent powers to set interest rates in the UK economy. I could see why they did this. They were worried that the City of London would be panicked by the election of a Labour government, and this would cause the price of shares to fall, and possibly a run on the pound. The policy was spun as ‘radical’, but it was really a deeply conservative move aimed at signalling that Labour would continue pursuing a neo liberal economic agenda.

Not only that. It also sounded the death knell of democratic control over one of the most important levers of economic policy, by giving this power to unelected officials at the Bank of England. I thought at the time, that in principle this was wrong, since the people who would be affected by the decisions of the monetary policy committee, did not have the chance to vote for, or indeed dismiss the members of the committee. Still, all went well whilst the economy boomed, with low inflation and low interest rates, and Gordon Brown boasted of ‘an end to boom and bust economics’.

The Bank has the remit to control inflation in the economy, by raising base interest rates when the government’s inflation target is in jeopardy. It is clear now, that interest rates were kept too high (and were rising) at a time when the economy was on the brink of the biggest crash since the great depression of the 1930’s. But the blinkered view of the bankers stuck rigidly to seeing inflation as the danger and now we all have to deal with the consequences of their mismanagement of the situation.

Does the Bank of England feel any shame that they got things so disastrously wrong? Not a bit of it. This week has seen Mervyn King, governor of the Bank, lecturing the government on the contents of the next Budget. He said that there is no room for a (further) fiscal stimulant to the economy, because of the already huge level of debt accrued, mainly due to the public bail out of the high street banks. Given the dire state of the British economy under his stewardship, Mr King is lucky he is still in a job, a situation that increasing numbers people are not. This apparent admonishment of the government’s current and future economic policies, has been seized upon by the Conservative opposition, as evidence of a difference of opinion between the Bank and the government. Of course the Tories would have done little different to Labour, perhaps deregulated even more. What a cardinal sin, to disagree with the governor of the Bank of England on economic (and social) policy, whatever next?

Well, I’m no big fan of this government, but they are elected by the people, albeit within the confines of our rather undemocratic electoral system. Who the hell elected Mervyn King?

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