There was also the whole matter, when it came to assessing QE, of unintended consequences. ‘QE’, declared Ros Altmann (pension expert and director general of Saga) in November 2010, ‘is the worst thing that could happen to pensions, it is devaluing and destroying pensioners’ income’; and the following autumn, Tucker felt compelled to argue not only that pension assets would have been ‘potentially worth much less’ if the Bank had not acted, but also – in response to complaints from savers generally – that ‘to have allowed the economy to lurch down into a spiral or vortex would have been hugely destructive for savers’. Particularly outspoken was Nassim Taleb, author of the bestselling Black Swan. ‘Quantitative easing is a transfer of wealth from the poor to the rich,’ he asserted in February 2012. ‘It floods banks with money, which they use to pay themselves bonuses. The banks have money, and assets, so they can borrow easily. The poor guy, who is unemployed and can’t borrow, is not going to benefit from it. The state is subsidising the rich. It is the top 1 per cent who benefit from quantitative easing, not the 99 per cent.’ Indeed, that same year the Bank itself estimated that 40 per cent of the £600 billion increase in the value of stocks and bonds since 2009 had accrued to the richest 5 per cent of households. Or as Magnus would note, ‘QE has been called welfare for the rich.’33 At the least, that uncomfortable fact made it a policy with an uncertain future.
A further source of uneasiness during these last four years of King’s governorship was the Bank’s somewhat erratic forecasting record – usually underestimating inflation and overestimating growth. It was, moreover, that short-term relationship between those two concerns, inflation and growth, that provided perhaps the hardest judgement calls for King and his MPC colleagues. The early months of 2011 were especially testing. Commentators on the whole backed their decision to keep interest rates at the record low of 0.5 per cent, even as inflation pushed towards 4 per cent. ‘What would be absolutely disastrous,’ argued for instance Anthony Hilton, ‘would be for King and the other rate-setters to give in to the pressure from many who should know better, including the Prime Minister [David Cameron], and lift interest rates to try to stop the current round of price rises. Such an act would be more likely to stifle the economy.’ Even so, as The Times’s Sam Fleming pointed out, ‘the Bank is still living dangerously’:
For 20 years governments and central banks have been basing anti-inflation policy not on a backward-looking model of the economy that reacts to reported trends, but by looking forward. Shaping public and market inflation expectations so that prices do not spiral out of control has defined their strategy. So the suggestion that the credibility of the Bank of England is under question because of persistent inflation overshoots is not an academic debating point, it is a dagger aimed at the heart of monetary policy. Put simply, the longer that inflation exceeds the Bank’s 2 per cent target [reduced in 2003 from the original 2.5 per cent], the harder it becomes for Mervyn King and his committee to argue that that target has relevance. This could ‘de-anchor’ inflation expectations and undermine monetary stability.
Inside the MPC, the most hawkish noises came from an external member, Andrew Sentance, who from summer 2010 consistently voted for higher rates and in February 2011 publicly argued, with a nod to sterling’s declining external value and a 1973 Genesis album, that ‘by raising interest rates sooner rather than later to help offset global inflationary pressures, the MPC can help reassure the financial markets and the great British public that we remain true to our inflation target remit and are not intent on “Selling England by the Pound”’. King, equally publicly, disagreed. With his own cultural nod (to the Battle of Britain sketch in Beyond the Fringe), he declared that to put up interest rates too soon would be a comparable ‘futile gesture’. Or as he explained in June in his annual Mansion Speech: ‘We could have raised Bank rate significantly so that inflation today would be closer to the target. But that would not have prevented the squeeze on living standards arising from higher oil and commodity prices and the measures necessary to reduce our twin deficits. And it would have meant a weaker recovery, or even further falls in output, despite our having experienced the worst downturn in output and spending since the Depression.’ Two years later, on the eve of the governor’s departure, the Economist paid a notable tribute:
He has responded adeptly to a nasty combination of economic weakness and price pressures. Oil and regulated prices (things like VAT and university fees) have pushed inflation as high as 5%. Bringing inflation back to the 2% target by raising interest rates would kill Britain’s feeble recovery. Some brands of monetary policy, notably the European Central Bank’s, have been too hawkish. Sir Mervyn’s is more subtle. He has allowed inflation to remain above target for the past four years while frequently confirming his commitment to that target. Somehow this has worked. The Bank’s credibility as an inflation targeter is intact: firms and workers still expect inflation to be close to 2%.
All that said, the paper fully conceded that the next governor would find it ‘a difficult line to tread’.34
Would it be helpful, some wondered, to change the MPC’s remit? David Wighton offered in December 2012 a helpful commentary:
When the Bank of England got control of monetary policy in 1997, it was given a simple goal. It was to set interest rates to meet a 2 per cent target for inflation [in fact 2.5 per cent in 1997]. The arrangement arguably worked pretty well for the first decade. But now the problems facing the economy are so severe that there are increasing calls to change the goal from a simple focus on the control of inflation to one that includes growth.
While Sir Mervyn is against changing the target, the suspicion is that the Bank has already done so without telling anyone. Over the past three years inflation has been more than 3 per cent for 80 per cent of the time but the Bank has seemed more concerned about growth. At times it has appeared that the Bank’s target is not inflation but growth plus inflation, or in the jargon, nominal GDP growth. This is just what some top economists think it should do explicitly.
The governor was indeed opposed, telling a Belfast audience in January 2013 that ‘to drop the objective of low inflation would be to forget a lesson from our post-war history’, reminding them of how ‘the painful experience of the 1970s’ revealed the ‘illusion’ of the policy-makers of the 1960s in ‘trying to target an unrealistic growth rate for the economy as a whole, while pretending that its pursuit was consistent with stable inflation’. And he asserted unambiguously: ‘Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. So a long-run target of 2% inflation should be an essential part of our macroeconomic framework.’ Two months later, shortly before the March budget, King was still making similar noises – ‘I’m not sure there is any call for major change in the remit,’ he told ITV News, adding that ‘most important is the commitment to the [inflation] target of 2%’ – but the chancellor (whether or not influenced by the governor in waiting is impossible to know) decided otherwise, at least to a degree. ‘As we’ve seen over the past five years,’ observed Osborne in his budget speech, ‘low and stable inflation is a necessary but not sufficient condition for prosperity. The new remit explicitly tasks the MPC with setting out clearly the trade-offs it has made in deciding how long it will be before inflation returns to target.’ It was undeniably a change – but it was not as dramatic a change as some had expected, keeping as it did the 2 per cent inflation target and refraining from nominal GDP targeting in order to prioritise growth over inflation.35 In short, the cherished 1990s dispensation was still alive, if not exactly well.
Broadly speaking, the post-1997 Bank became not only a leaner organisation (well under 2,000 staff by 2006), but also a less paternalistic and less balanced organisation. In 1997 itself, that autumn saw the closure of the branches in Manchester, Birmingham, Bristol and Newcastle, with only the Leeds branch – becoming the Bank’s North of England cash centre – remaining; while the Bank’s dozen agents now con
centrated on assessing the economy in their own areas, via a range of some 8,000 business contacts across the UK, and in turn reporting direct to the MPC. Six years later, marking the end in 2003 of George’s governorship, Elizabeth Hennessy noted some other domestic developments: the printing of banknotes had recently been contracted out (to De La Rue, leasing the Printing Works at Debden for an initial period of seven years); the registrar’s department, having moved to Gloucester, was under threat of closure (which duly happened in 2004, its work being outsourced to a normal registrar’s company called Computershare); and there was a significantly different daily environment:
While many of the outposts of the Bank have been closed or, like the staff dining rooms which used to be housed in a building in nearby King’s Arms Yard, brought back into Threadneedle Street, the physical workplace has been much improved for the decreasing numbers of staff. Many of the warrens of small offices housing clerks in strict hierarchies have been thrown open into large, light workspaces – no mean achievement considering the feet-thick walls which have to be demolished or penetrated by cabling.
Paternalism had of course been in decline for quite a time, but it now almost vanished. Indicators included the closure in 1998 of the Staff Library; the end around the turn of the century of such key perks as assistance with mortgages and school fees; and in December 2007 the final issue of the Old Lady, still loyally read by pensioners but of relatively little interest to current employees. The imbalance, meanwhile, came partly from the loss of banking supervision and debt management, partly from what felt to some like the almost complete dominance of Monetary Analysis. ‘I recognise that there are morale issues in Banking Services,’ observed in 2004 the new chief cashier, Andrew Bailey. ‘Job insecurity has followed from the perception that Banking Services is a declining, fringe area that has suffered from attritional cutting and cutting.’ He also reflected that ‘the Bank has not served its non-graduate staff well – we have not invested in them as we should have done’. Two years later, an outside consultant, Valerie Hamilton, recorded a telling episode:
I had been leading a workshop on change management for a group of workers who were confronted with a significant increase in the use of technology in their jobs and a huge shift in the nature of their relationship with the Economists they supported. They were resisting, angry and hostile. When I eventually managed to engage them, one woman thumped the table and declared in opposition to something I had said regarding the needs of ‘the Bank’, ‘We are the Bank, not the graduates who come and go, get Bank of England on their c.v. and then disappear. We are the Bank.’ She of course had a point.36
In fact, on the domestic front, there were some positive signs during King’s governorship. The Banking Department started to return more to the centre of the Bank; more systematic attention began to be paid to the careers of non-graduates, including career planning for secretaries and a new induction programme; and there was even an apprenticeship scheme for engineers working in the Bank’s power plant. As for the economists, they were not exactly returned to the ranks as a result of the crisis, but it was undoubtedly a salutary experience.
What about the thorny issue of diversity? Merlyn Lowther was appointed in 1998 as the twenty-ninth chief cashier – the first woman to fill that time-honoured if no longer so powerful position; while Rachel Lomax in 2003 became deputy governor, the most senior woman yet in the Bank’s history. Across the board, however, there was an undeniably long way still to go. ‘There aren’t enough women at the top; nor are we well represented among the ethnic minorities,’ the HR director, Louise Redmond, told the Old Lady in 2006. And she explained how a staff consultation survey had highlighted two problems: ‘a long-hours culture’ and inadequate ‘career opportunities and development for our A-level entrants’. Two years later she presented to NedCo the latest staff survey, which to judge by the discussion had produced mixed results. Not so good in terms of recruitment from ethnic minorities (with possible factors including ‘some resistance within the British Asian community about entering the public sector in view of the lower earnings potential’ and ‘the low proportion of Afro-Caribbean students at UK universities’); but greater optimism ‘about progress around gender, where the new flexible working programme was due to be launched’. Change then did seem to speed up. ‘I recently met with the 2012 new recruits at the Bank of England, and noticed that almost half the people in the room were women and many were also non-white,’ noted Gillian Tett in 2013. ‘Strikingly,’ she added, ‘there was also a large number of people who had not studied economics.’ Even so, as of late 2012, the facts were that all nine members of the MPC were men; ditto all eleven members of the FPC; of the Bank’s three governors (that is, King and two deputies) and ten other executive directors, only one was a woman, and predictably she was in charge of HR; while on the twelve-strong Court the sole non-male was Lady Rice. There was also the much publicised matter of the £5 note and who would replace Elizabeth Fry, herself one of only two women on banknotes since historical figures had been introduced over forty years earlier. By the early summer of 2013 a brilliantly effective feminist campaign, led by Caroline Criado-Perez, was under way protesting about the choice of yet another man – admittedly Winston Churchill – as Fry’s successor. Ultimately, a compromise was achieved: Churchill stayed, but that July it was announced that Jane Austen would become the new face of the £10 note. ‘Without this campaign, without the 35,000 people who signed our Change.org petition,’ responded Criado-Perez, ‘the Bank of England would have unthinkingly airbrushed women out of history. We warmly welcome this move from the Bank …’37
A direct consequence of independence in 1997 was a sustained attempt to become significantly more outward facing, not least through the MPC’s members. ‘Slowing down demand by raising interest rates involves costs,’ Willem Buiter told the Old Lady in 1998. ‘People are going to be adversely affected, they’re going to have bear the costs – and they have a right to complain. We have to be capable of answering their complaints. You cannot just give a “mind your own business, we’re looking after the good of the economy, we feel your pain” kind of answer. You have to take these things very seriously and be ready to stand up and explain and defend yourselves.’ Ten years later, the outgoing director in charge of communications, Peter Rodgers, summarised for NedCo the broadly encouraging bigger picture since those early days of independence:
It was notable that understanding about monetary policy had increased significantly amongst market and media commentators. In 1998, the MPC had faced intense criticism about its response to the threat of recession. That contrasted with the present debate which, although often critical, was centred on an understanding about the dilemma facing the MPC. The fact that the MPC had undertaken visits around the UK for over a decade had helped establish that it was setting policy for the country as a whole, and was not an ivory tower or representing the City.
The direction of travel was more or less one way. ‘A transformation in the Bank’s approach to external communications and transparency,’ was how Andy Haldane would put it in a 2012 speech:
Think back twenty years. Then, there were no quarterly Inflation Reports, no six-monthly Financial Stability Reports and certainly no press conferences to accompany both. Twenty years ago, there were no minutes of the deliberations of the Bank’s policy committees. Back then, press interviews were rare and scripted to within an inch of their life. In the past year, Bank officials gave around 65 speeches and over 200 press interviews. In Montagu Norman’s day, the combined total was one … Earlier this year, the Governor gave the Bank’s first live peacetime radio address to the nation for 73 years. The Bank tweets, fortunately with rather less vigour than your average premiership footballer. Soon we will have, for the first time in history, published minutes of the Bank’s Court of Directors … In 2011, a word search of ‘Mervyn King’ in the press revealed more hits than ‘Kylie Minogue’ …38
King himself took the third word – England �
� of the Bank’s name very seriously, undertaking more frequent engagements in the provinces (and of course Scotland, Wales and Northern Ireland) than any of his predecessors, not to mention speaking at the TUC and appearing on Test Match Special. Almost certainly, and accentuated by the crisis, there had been no previous governor as well known to the public at large, with perhaps Norman and George in their very different ways having run him closest.
Central to the repositioning of the Bank was, as Rodgers mentioned, the new distance from the City – the refusal to continue to be identified as the financial sector’s invariably protective, sometimes one-eyed ‘mother hen’. The key announcement, although to King’s subsequent regret not quite spelling out how the Bank was moving away more generally from its ‘third’ core purpose (essentially interventionist) as established in the early 1990s, came in June 2004 in his first Mansion House speech. After reflecting on how the loss of banking supervision in 1997 had ‘inevitably changed the Bank’s relationship with the City and the financial sector more generally’, he argued that the opportunity now existed to ‘restate’ how the Bank saw that relationship:
Since Big Bang in 1986, the City has changed beyond all recognition. The so-called ‘Wimbledonisation’ of the City – hosting a successful tournament where most of the winners come from overseas – has proceeded apace. Some have blamed the Bank, among others, for failing to engineer the promotion of more British institutions to the top ranks of global financial institutions. But in fact there are now some home players in the top ten in the world. And there is little evidence that it makes sense for the public sector to try to identify national champions, as opposed to creating an environment which encourages innovation and provides first-rate infrastructure.
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