It is government's duty to govern

I was on my way to another meeting. Having read the Independent I picked up a Daily Telegraph left behind by someone.

On page B2 there is an article about the division of roles between Reserve Banks and government. It is titled “No. 11 must take some responsibility”.

“….. Legislation is passing through Westminster that will usher in a Bank Governor with too much power and not enough accountability.

Sir Mervyn King, and his successor, may be called governor, but it is not their job to govern. Baker’s report should prove useful to MPs trying to reverse some of the Chancellor’s plans which will delegate yet more authority to the Bank – authority which should stay within the remit of politicians.

The problem is acute when it comes to macro prudential supervision – basically controlling the economy’s safety valve to stop it overheating. It’s proposed this is done by yet another Bank of England committee – the Financial Policy Committee, which is every policy wonk’s fantasy come true. By outsourcing the economy’s credit control to the FPC Osborne also risks the same “underlap” that cursed the financial system to failure under Labour’s failed tripartite system. Sitting on both the FPC and the interest rate-setting Monetary Policy Committee gives the Governor yet more power.

Rather than the FPC, Barker proposes a group that will advise the Chancellor who would, and should, take responsibility for the final decisions. Such a group is more likely to attract diverse members, including from the economy’s coal face.

Far from giving the Bank more power to run the economy, we should be insisting on No 11 taking that responsibility. The resident of that address is accountable to Parliament and removable every five years, rather than a Governor who changes every eight years and then by an opaque selection process.”

Page B2 The Daily Telegraph, August 23, 2012

Sounds like an endorsement of the direction of the changes proposed by Labour to monetary policy:

• Broadening the objectives of the Reserve Bank to include not just inflation but the interests of full employment, the economy and exports
• Having the interest rate decision taken by the board rather than the Governor
• Broadening the membership of the board to better represent the real economy, including more representatives of both exporters and labour
• Complementary tools to take weight off the interest rate lever (ie capital gains tax, which helps push against asset price bubbles)
• Use of macroprudential tools for monetary policy objectives, rather than just financial stability reasons

This article, and the Baker analysis that lies behind it, is yet more confirmation that the general direction we propose is correct. We do need to consider whether the macroprudential tools that affect liquidity control in the economy should be set in a way which ensures Ministerial responsibility, rather than devolution to the Reserve Bank or its Governor.

The cries of “voodoo economics” from Steven Joyce look increasingly silly.