Proposals for a stronger Bank of England

14 July 2009

Rupert Read, our spokesperson on public services, and the Green Party's candidate in the Norwich North parliamentary by-election, talks about the need to re-establish democratic control over our banking sector:

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The Conservatives' call for the Bank of England to become more powerful, in effect by taking over crucial functions of the Financial Services Authority, has brought the question of how we control our financial system near to the top of the political agenda again - and rightly so.

But is it really feasible - and indeed, is it right - to create an ultra-powerful Bank of England while that Bank remains politically independent and not democratically accountable?

Let me take an indirect route toward answering that question, by beginning instead with the state of play as regards the commercial banks in this country that had in effect to be taken over by the government, when the financial crisis engulfed them.

Nationalisation means making something the property of the nation. Owned by and run for the good of the nation. Not merely bailed out and run at arms length so as to be returned to the "casino" that our financial system has become after a decent interval.

As John Lanchester makes brutally clear, the real motive of the refusal of Government properly to nationalise the banks that the government now owns most of is simply that then it could be blamed for their decisions. But this is clearly not a good enough reason to outweigh the overwhelmingly powerful case for key banks to be run by the government in the public interest (for example and also here) - so that the utter chaos and venal failure to which our financial system has been reduced can never occur again.

Most of the "nationalised" banks need to be broken up into smaller, more responsive and democratically controlled local banks, banks that are clearly not "too big to fail."

And these banks need to be subject, clearly, to a much stronger regime of regulation. This task should fall to the Bank of England. The Green Party vision is for the Bank of England to continue to be the institution for the regulation of the national currency and the setting of base interest rates. However, it would not focus on narrow economic indicators such as the rate of inflation, but instead would take a broader view on the impact of its decisions on the economy as a whole. Final decisions on the setting of base interest rates ought to be made by a democratically-accountable committee made up of representatives selected from different regions of the country. And such an institution - i.e. the Bank of England - ought surely to have a key role in prudential regulation of our finances and our economy, and in the prevention of further financial disasters: for that is crucial to any serious thinking for and taking care of the economy as a whole, as our society has recently learnt... Such a concentration of power is unavoidably political in its direction and its effects. A powerful Bank of England ought in short to be democratically-controlled.

In other words: the Tories' plans for the BofE are a hopeless bodge. For starters, they leave out the international dimension: In our recent European election manifesto, we called for European regulation of the sector, as international banking is too big for one country to control. But even within Britain, if the Bank is to become significantly more powerful relative to other institutions, to help prevent a future financial meltdown - and this certainly makes a lot of sense- then it needs to be democratically-accountable, and operated in the public good. There is absolutely no guarantee of that, while it remains at arms-length from government and from the public, and works hand-in-glove with the financial system, caring more about inflation than about quality of life, and more about greasing the wheels of the economy and an easy life than about preventing another banking collapse.

So this argument matters. At present, I am running as the Green Party candidate in the Norwich North byelection, where the Conservatives are the favourites to win the seat. If their candidate gets elected, she will presumably pursue the policy I have criticised here. In the event that we were to pull off an amazing shock, and I were to be elected instead, then we would instead have a clear Green voice for real change in Westminster. And one of the first places where that voice should and would be felt is: in arguing for real and radical reform of the banking system, including a much-enhanced role for a democratically-controlled Bank of England.






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