Tories Start a Bank Brawl

in that committee at all. That was then Chancellor Gordon Brown at his first Treasury news conference back in he stunned the City and Westminster by hand and control of Britain's interest rates to an independent Bank of England. Well, this week the old Lady of Threadneedle Street turns three hundred and twenty eight, so we thought it would be a good time to reflect both of the history of the bank's independence and why it is now coming under

question thanks to the Conservative leadership candidates taking aim. I'm David Merritt in the London studio and this is in the City Blimber Podcasts, connecting you to the stories at the heart of the City of London. And joining me this week we have Bloomberg's senior economics reporter Phil Aldrich and Bloomberg Television and Radio economics and government correspondent for E. M. E A. Lizzie Burden, phil could you talk us a little bit about the history and how the bank was created.

It started in six and it was a bunch of city merchants, where a lot of them were French Huguenot Protestants who left France and they wanted to help the government finance their wars. So they said, look, give will raise one point two million pounds, which obviously was a lot of money back then sixt and and you can use it to finance your your wars. And the quid pro quo was that they would be able to issue money.

So they were the first sort of official issuer of bank notes because of you know, banks were at this point we're issuing their own money, and they would be the sole banker to the government. And because of this status that it gave them this credibility within the city and so they sort of effectively amassed power over over time as a smaller banks would use them, and slowly came this kind of central bank inasmuch as it was a supporter of the financial system and other banks in

the city. I know that originally the bank notes were handwritten, and that did evolve because from twenty five they then started issuing bank notes in increments of ten pounds from twenty to ninety and then when France declared war on Britain in people started flocking to the bank to try and swap these bank notes into gold, which was possible at the time because and it was until the end of the gold standard, and the amount of gold that was held from the bank at that time dropped from

sixteen million pounds to two million pounds, so it was a big problem. The Prime Minister at the time, William Pitt the Younger, put a Privy Council order on the Bank of England. He ordered it to stop paying notes on gold. And because of this cartoon of pit trying to woo the gold off an old lady who represented the Bank of England to help fund the war in France, the Bank of England got its nickname the Old Lady

of thread Needle Street. At the big moment in our kind of recent memory, of course, was the brand new labor government of Tony Blair and Gordon Brown, and Brown surprised everyone, didn't he by announcing independence. We kind of assume now that central bank independence is this given this orthodoxy, but it wasn't always like that, and as recently as

before the government was actually setting interest rates. Right, and you've both been covering the bank for a while, how significant was that moment, and you describe what it was like for the city or for the markets as well. To hear that, I have to say I was not covering it in but I hear that it absolutely stunned the financial markets. The headlines read set the old Lady set free and it was days after Gordon Brown took office.

So it absolutely transformed monetary policy in the UK because it took the politics out of rate setting, which is different to budgets, right, because there's likely to be this spending spree in the run up to an election where

you couldn't do the same with interest rates anymore. And former Bank of England Governor Mervin King said that it actually helped to improve the relationships between the Bank of England and the Treasury, though given the state of the relationship at the moment that might not be the case. If it's trust in number ten right exactly. The process

of independence had been coming for a long time. The shock really was was the fact that it happened so quickly, and Gordon Brown was the first thing he did, but it was pretty much the first thing he did well. First, we have to remember that this was, as we were just saying, it was a private bank and it was nationalized after the Second World War effectively, and then it was a nationalized sort of institution right up until we

had this. We had Black Wednesday in the e r M crisis in the UK and that was the moment we shifted to inflation targeting. After that, there was always the plan to one day give the bank independence, to separate the politics from interest rate setting, which is what course inflation. Back then, as when our remembering was the biggest threat to the economy, and so they wanted an institution which could control inflation. But the bank just wasn't in a position where it could it had the resources.

At that point. The treasury was full of the brains and the bank was sort of thin on them. Nowadays, you know, it's the bank that is the is the sort of intellectual reserve of the UK economy and the treasury is much thinner on the ground. And the things that there was this shift and by they were ready effectively, and then from then on in it became the idea that actually we needed this institution to target inflation. But

so the banks built up a brain trusts. Gradually the government split the Financial Services Authority out, so the prudential regulation of the banks was removed from the Bank of England, which obviously then became this catastrophic crisis in two thousand and eight with the financial crisis, because the bank had not had oversight of the financial system to the degree that it it needed to have done. And obviously what

happened was the FSAY came back into the bank. But but in that in those interfining years between two thousand and the Bank built up a huge brain trust under largely under Irvin King as governor and as as previously as the Deputy Government the head of the sort of monetary analysis. People accused him of neglecting the financial stability side of the bank, but in that in the process of doing so he did he did build up the sort of economic expertise and that was one of his

strongest legacies. Actually, So the two thousand eight crisis you've mentioned, that was obviously a huge test for the Bank and central banks all around the world. Irvin King is at the helm here in London trying to save the financial system this idea of quantitative easing, of course, you know, a new tool to try to stave off financial armageddon. How did the Bank do throughout that process? Were they kind of leading the world? Were they following the pack?

What was the kind of the scorecard of how they managed to steer Britain through that? Amazingly, you didn't get the inflation levels of the nineteen seventies that we're seeing now. The independence of the Bank of England enabled it to have this coordinated rate cup with the Fed in October two thousand and eight that they wouldn't have been able to do if the Bank hadn't been independent. And even now critics of the Bank of England aren't calling for

its independence. But every time you listened to Andrew Bailey come on the Treasury Select Committee and talk about how the Bank of England's doing, he will refer back to the financial crisis and how much the Bank has come on in terms of ensuring financial stability, because that really is a proud moment for him because he was running that before he was the governor. So it's the kind of finest hour was it If you go right back to that's all the Bank of England did it ended

up being a sort of financial stability crisis. Yeah, the backstopping the crisis because it was big enough and it had that sort of core customer, which is the government, and so it still had that role, but it hadn't got the powers to supervise the bank. So it was a bizarre separation of powers, which meant there was this disjunction and then the financial crisis. Obviously we saw the

consequences of that. But then when Mervin King stepped down or came to end of his turn, the bank looked outside of Britain for the first time and they found a certain Mark Arney, a very different sort of personality. How did it go down? The bank became under him a much sort of leaner business like operation. Of course, one of the accusations at Mark Ny is that he

got way too political. He talked about Brexit in ways which aggravated a lot of people within the Tory Party of Brexit is causing short term volatility in the economic data, and more fundamentally, it's creating a series of tensions in the economy, tensions for business. And I guess one of the legacies is there is this kind of lingering sense that the Central Bank has overstepped because Mark Karney thought it was his right and his duty to tell everyone

that breaks it was a terrible idea. There was this huge tension with Mervin King and Gordon Brown previously because

Mervyn King had done something similar. He'd said that after the financial crisis and there needed to be austerity and obviously Gordon Brown had effectively felt like he was being bounced to an austerity budget at some point because of what Irvin King was saying, and he was he was livid in private, but he couldn't say anything in public against the Governor Markimland because this independent setup was his creation,

so he didn't want to undermine his own creation. He then later did once he left, and once Mark Arnie was there and he felt like he could free, he was free, he could feel like he could write about it. But and then you had Mark Connie was he was just this sort of uber chief, exact type of manager who not as intellectual on economics as Irvin King, but a smooth operator. But the difference as well between Mark Carney and Andrew Bailey is, yes, Mark Carney has been

was outspoken on Brexit and other issues. Andrew Bailey doesn't seem to me to have been that outspoken, but he does draw media attention for his communications because he tends to you. He called for the restraint in wage bargaining, so controversially he forgot how much he earns, and it's more than half a million pounds. What was your play over the same period, what was it? Um? That's somewhere over five hundred and I can't tell you it's luckly what it was. I didn't carry that around in my head.

I think including pension five hundred and seventy five, you never got. With Carney, there would never be a gaff. He has always went in super prepared. His team were permanently exhausted because of the amount the demands that he would put on them, so that he was briefed incredibly thoroughly. That's not happening under barely. It's a more relaxed environment.

I saw him coming out obviously, were just right opposite the Bank of England here and I walked past the door the other evening and out he trotted with his briefcase. And what I thought was remarkable is that no one in the crowd batters an elix. He's been very anonymous.

You know Mark Carney emerged, there'd probably be sort of paparazzi, but he was just just another city guy in his seat, tottering off to the I often see him and I'm stood in front of the Bank of England covering previewing the decision at four am, and he'll not at quite four am. He'll wander in at six maybe on b O E day and no one bats an Island people. But the best thing is a print journalist not covering Mark Harney anymore? Is that Actually Andrew Bailey just speaks

in sentences instead of ever dividing subclauses. And it was impossible cover Markney. You both those press conferences you can't quite follow At the point is but what about now? So they're getting it in the neck, aren't they? For all sorts of things. We've got a spiraling inflation backdrop here in the UK. Was Bailey late to raise interest rates? I mean we've got ministers being critical, We've got former Trade Secretary Lean Fox is called for an investigation, saying

it's consistently underestimated the threat of inflation. The Bank of England persisted beyond any rational interpretation of the data to tell us that inflation was transient, then it would pick up five. They have consistently underestimate to the level of

the threat. Is that fair, phil and I did an interview with Jagit Chater, the director of the National Institute for Economic and Social Research, and I think he summed up the view that we get from economists all around, which is that the bank was strategically right but tactically wrong in that it should have raised interest rates. Perhaps it did it a month or too late, but had

it gone much sooner, it risked sparking a recession. And it didn't know what the impact on unemployment would be at the end of the furlough scheme because we've never had a furlough scheme in the UK. So really, when Conservative ministers are coming out and criticizing the Bank of England for failing to do its job on inflation targeting, it does seem politically convenient for them because it was at the same moment when the government was being criticized

for not doing enough fiscally. But now in the Tory leadership contest you have Rishi soon Like standing up for the Bank of England, which seems a little ironic. I mean, and you know, listening to Liz try to talk about smashing up the economic orthodoxy, I mean, it's hard not to read into that that what she means might be the mandate of the Bank of England, the relationship the independence. Do you think that's sending shivers down the spines of

everyone at thread Needle Street. Yeah, it's definitely unnerving them because you don't know who you're I mean, ultimately, the Treasury makes these decisions and you don't know what to

decisions theyre going to make. There is a sort of separate argument going on in the financial regulation sphere, where you know, the Treasury wants to have these call in powers as it were, it seems, and which would give them the right perhaps even in secret lires and even issues about transparency about some of these potential powers which they're talking about, to tell the regulator to change its

regulations just because it might suit some politicians. That is absolutely the kind of thing which the banking and would dread because it would have to be making policies, had to be acting on policies which would be counter to what it needs to do to maintain regulatory stability, and it may not even be able to disclose the fact that actually it's making stupid decisions because that's what the

politicians wanted to do. There are these real issues. And again with monetary policy, if they changed the mandate, it's hard to imagine that they would tear out the mandate and we do something completely uniquely idiotic and in the Western world. But conceivably it's possible. I don't think even those trust knows how she would like to change the

Bank of England's mandate. You know, she referred to the Bank of Japan is perhaps a source of inspiration, But I think we need to look at the best practice around the world, the countries who have been most successful at controlling inflation, for example, the Bank of Japan. Does she realize that deflation has been a problem in Japan? I was going to ask about that. I mean, what's she trying to do by drawing analogies between Britain and Japan. I think that she's trying to pump up her impression

of Margaret Thatcher by referring to a monitorist theory. That's the unforgiving view. The generous view would be that perhaps she could change the target to nominal GDP, which is not necessarily so radical. Even former Treasury Minister Jim O'Neill

was suggesting that. But when I speak to analysts macro strategists, they say, changing the Bank of England's mandate in the middle of a crisis, an inflation crisis, is only going to add to the problem because of the instability, which is just on the point of the political interference of where it comes from. It's not really about should they

have raised rates a few months earlier? Is it's actually I think more about the quantity of easing program because they doubled the size of the Bank's que program um. And so the criticism is probably a lesson should you have raised rates in July? And like we were talking about with and more too much money? Did you just

print too much money? Um? And I think it's the criticisms are coalescing around that and as we go for its depending on who I suppose is sitting in Downing Street from September and who the Chancellor is and what the mandate it continues to be the Bank of England, What do you expect Bailey to do as the year pans out with the backdrop of the inflation spiraling that we've got with the economic head where with this huge balance sheet that the bank's got to deal with, how's

it going to play this in the coming months. They are obviously going to be raising rates this This is supposedly going to be the first ever half point interest rate hike in early August. They're also going to be the potentially the first central bank in the world to do active quantitative tightening, So active quantity of tightenings where you actively sell the guilt that you brought through the quantity of using program rather than just letting the mature

and just sort of drop off the balance sheet. Rather interferes with the process of the government raising debt to pay for whatever this trust might want to raise debt for. But they have emphasized that that is not the active tool, So don't read too much into the active quantitative tightening.

It is another mechanism by which you raise interest rates alongside the more traditional and their ahead of the pack on this, you say central bank in the world to consider if the yeah, yeah, they've got to actually do it to be the first and it is the guilt

market ready for it. It's actually gonna be quite complicated because the last thing you want to do is completely mess up markets and then cause borrowing costs to us if you, yeah, by doing it at the Bank of England and then really annoying your paymasters at the Treasury, that's only going to encourage them to say this mandate needs to be changed and these guys need to be pulled into line. Say it's it's a very tricky times, the first time since they got independence where they actually

are working against the politicians. So the politicians are going to in terms of the economy is going to be actively tightened. They may actively have to cause unemployment, name may actively have to tip the economy into recession to control inflation. And everything they've done since has been relatively easy. This is the first time that there is a real tension and if if they do do that, or if the fingers are blaming can be pointed at them for

increasing unemployment. I mean, you can imagine certainly if there's trusses in Downing Street from September that the noises get more intense, right, that they're going to be blamed for all the economic problems of the government's Yeah, but it's an easy goal to score for people who don't understand economics. I think that you asked, how would the Bank of England be responding to the next Prime minister. We're assuming that the next Prime Minister is going to be Lows.

Trust If it's Riscie sooner, I think things will move along quite comfortably because she has been defending the Bank of England not just in terms of the need for independence, not to change the mandate, but also on its inflation fighting record, because he's worked so closely with them through the pandemic crisis. Liz called him a bean counter. That was interesting, insulting a former Conservative chancellor. That's the politics that we're in at the moment, isn't it insult What

is it now? I failed my Matt's ailable trust me with the nation's finances. Thanks for listening to this week's In the City. We'll be back next week for a look at what's in store for the City of London's job market. But in the meantime, if you like our show, please head on over to Apple Podcasts or wherever you listen to your podcasts and rate, review and subscribe. This episode was host did by me David Merritt and produced

by Summersadi and Elena Ganatra. Special thanks to Phil Audrick and Lizzie Burden h