Since no FT journalists were at the Leveson inquiry yesterday, this off-hand comment has gone unreported. But it is interesting and further than a Secretary of State has gone before in questioning Bank of England independence.
What powers should politicians have? Are politicians by necessity too partial to decide on media ownership? Or is media ownership, and should it be, a political question? This was the line of questioning Lord Leveson put to Mr Cable. Here is Vince’s reply:
I know this is taking the conversation in a slightly different direction, but the major area where I’ve had to confront the dilemmas you describe is in terms of economic policy and whether or not the Bank of England should be an independent body, separate from politicians, determining interest rates, and I was one of the people who argued for that independence when it was established 12 years ago.
But I think what we are now discovering is that there [is] – you know, a very different economic environment, that there are very big decisions which probably are political rather than technical, which the politicians are no longer able to make, because they have handed over decision-making to an independent arbiter constrained with rules, which were devised, as you say, to reflect the policy environment of that time.
This is the furthest Vince has gone. Mr Cable has always maintained that the government should not compromise Bank of England independence: he said so in 2008, and it is Lib Dem policy.
But since the downturn, he has started questioning orthodox Bank opinion. In October 2008, he urged the Chancellor to call on the Bank to cut rates on an emergency basis. In a leaked letter to David Cameron, he called for state banks. In March, he said he was in favour of redefining the Bank of England’s mandate. He said he was “attracted by” targeting money GDP, over the Bank’s current inflation-targeting policy. When Observer columnist Will Hutton put the benefits to him, he replied:
One of the boring things being a cabinet minister is that the following day the Guardian says, “Minister instructs Governor of Bank of England to do X or Y”. […] The economic logic you set out is impeccable, let’s leave it at that.
Vince has turned from a sensible, tutting bank clerk of an economic pundit to a free-thinking druid tied back by a Witenagemot of fusty statesmen. Day by day he is realising, like King Cnut, there is not much he can do. The tide of financial wreckage is rising by the day, and he must sit in his throne and watch. It is no wonder he has started mining the depths of economic possibility.
The market, temporarily, has failed. Banks are not lending. Shoppers are not buying. Money printing has served only to better the balance sheets of the banks. The purses of Whitehall are empty. What can be done? Create state banks? Ignore inflation targets? Anything, Mr Cable would like to say, to get banks lending to businesses again.
It is in his frustration, in his impotence, that Cable has turned on the Bank of England. I have argued before that power has drifted from the politicians in Whitehall to central bankers across the world. Cable clearly agrees. The ECB is preventing recovery in Europe and the Bank of England has more levers of control than any cash-strapped government department.
Giving the Bank independence was broadly for the best. It was the last stage in Mrs Thatcher’s quest to conquer inflation. Inflation and its volatility have come down with no cost to employment or growth. But to ignore that this came with a surrender of political power is self-delusion. King is still King.