IT IS one of the most powerful positions in the land, with critical influence on the financial well-being of millions of households and businesses. It propels the incumbent onto the international stage and ensures the familiarity of a household name. And the successful candidate will also have a critical Scottish conundrum to wrestle with.
He – or she – will take up the unenviable post as Governor of the UK’s central bank in 14 months when Sir Mervyn King bows out at the end of his second term.
It is unenviable because even by then it is unlikely the Bank of England will be clear of the emergency regime that has prevailed since the 2007-8 global banking crisis. Indeed, with a general election pending, the southern economies of the eurozone battling with recession, our own economy still likely to be below par and the bulk of the planned government spending reductions still to kick in, the central bank will be under intense pressure to ease up on inflation targeting and maintain a readiness to pump in even more liquidity should the economy remain weak.
And as if all that isn’t enough, there is also the looming Scottish Question. The Bank not only sets interest rates and determines monetary policy but is also now re-charged with the task of banking regulation. How does it see itself discharging these responsibilities in a manner that takes into account the growing aspirations of Scotland’s political class for greater recognition of Scottish conditions and concerns?
Bear in mind that First Minister Alex Salmond has already pronounced that the Bank of England would remain as lender of last resort to an independent Scotland. Quite how that is going to work – if it is workable at all – will ultimately be for the Treasury to determine. The eurozone model – of one central bank operating across politically separate countries and sharply contrasting economic conditions – is not at all reassuring.
So welcome to the job. Already the runners and riders list is filling up. This week brought reports that Mark Carney, the governor of Canada’s central bank, has been informally approached as a potential candidate. Mr Carney has declined to comment, and Bank sources are anxious to stress that no short list has even been drawn up, never mind potential candidates sounded out. But the speculation is a reminder that an end is in sight to Mr King’s tenure and that an orderly process of selection needs to be under way before long.
While he can lay claim to having steered the UK through a financial crisis that threatened in the autumn of 2008 to bring down the entire banking system, he has not been without his critics. There were the blistering sessions in front of John McFall and the Commons Treasury Select Committee. Many accused him of grossly under-estimating the severity of the threat to Britain’s banks when Northern Rock began to founder in late 2007. King’s first reaction was one of distinct coolness to NR’s plight, warning instead of the dangers of moral hazard.
That response, while correct on orthodoxy, was seen to be blind to the scale of the freeze-up in wholesale money markets. And a secret bail-out as some urged would have been in breach of both Take Over Panel and European Commission rules. Such niceties were no obstacle to accusations that senior banking officials were caught asleep on the job. Ironically, the colossal sums to prevent RBS and HBOS from going under were kept a closely guarded secret from parliament and public for almost a year.
King’s fussy and sometimes patronising management style made enemies without – not least with Gordon Brown, while within the Bank, on the account of author Dan Conaghan in his recent book, it caused faction and division. The approach to an outsider, apocryphal or otherwise, may well signal a concern over the potency of those divisions.
Front runner until now has been Paul Tucker, currently one of the Bank’s deputy governors. With broad experience across markets, monetary policy and banking supervision he is widely held to have had a “good” crisis. Other names can arouse strong emotions. There is, for example, Lord Turner, chairman of the Financial Services Authority (not a success) and linked with the Tony Blair era. Another name touted is that of John Varley, previously chief executive of Barclays who kicked off the fateful take-over battle for ABN Amro.
Then there is Lord O’Donnell, chief Treasury mandarin under Blair and Brown, who may be regarded by some as too close to Westminster and to shadow chancellor Ed Balls in particular. Such names might not be favoured by those concerned that a central bank governor needs to studiously separate from and independent of government.
Even before the independence referendum there is a growing doubts as to how the Bank can continue to mediate between existing pressures and dynamics – those of the burgeoning London city state and the rest of the UK.
For some time economic and monetary policy has come to resemble that suited for a dominant metropolitan area, with a problematic piece of hinterland tacked on to the end.
How to reform or restructure the central bank to cater for greater input from the nations and regions of the UK will not be at all easy. Suggestions that there might be a “Scottish” representative on the MPC would immediately open the door to similar demands from other parts of the UK, pushing economic analysis into second place.
Another approach might be a federal-style Court of Governors – but the Court has very little power and it is difficult to see how it could make its already marginal influence felt.
For the moment by far the dominant concern remains the financial crisis and its aftermath. What seemed at first to be a short-term emergency resort to ultra-low levels of interest rates has now become a near permanent feature of the economic landscape. And the Bank has had to resort to successive bouts of Quantitative Easing to avoid a relapse into recession.
The longer this continues, and the more that the Bank adds to its already formidable pile of bought-in government debt, the less this looks like a separate monetary policy but a massive fiscal stimulus by proxy: the government keeps on spending and borrowing – and the Bank conveniently keeps buying up the debt. This can only work so long.
Who will get the job will thus be a big issue in the coming year. My candidate would be DeAnne Julius, a founder member of the MPC and now chairman of Chatham House who has worked with the World Bank, the CIA and Society of Business Economists. But why on earth anyone would want it is something else entirely.