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In general I welcome the Bill, but we are merely legalising what has already happened. We therefore have little choice in relation to amending the Bill, except for the next round of monetary policy, and I have no intention of saying anything on that. This is a Bill which
In that regard let me say one thing. As the noble Lord, Lord Mackay of Ardbrecknish, said, in a sense in the last regime under Mr. Kenneth Clarke we already had the beginnings of transparency in the conduct of monetary policy. Though people used to mock it and call it the "Ken and Eddie Show", it was a significant innovation when the meetings between the Chancellor and the Governor were open and the minutes published and so forth. That transparency was a good first step in the context of monetary policy. Upon election, the Labour Government went one step further and the Ken and Eddie Show did not become the Gordon and Eddie Show: we reverted to the monetary policy committee.
In a sense, the transparency continues. Indeed, as the latest set of monetary policy minutes shows, we even learnt of differences between members of the monetary policy committee. I believe that to be an extremely good thing. One of the things that gave a mystique to monetary policy--quite unjustifiably in my opinion--was the secrecy which surrounded it. People never admitted to holding rival views in relation to monetary policy. Now we know--it is healthy knowledge--that there are genuine differences of opinion among people who have a lot of experience and who are looking at the same evidence but arriving at different results.
One thing I have learnt over the course of my career as a professional economist is that economics, especially when it comes to policy making, is more a matter of judgment and less a matter of technique. Therefore we require judgment. It is good to know that there exists a heterogeneity of views among the members of the monetary policy committee and it will be for the markets to judge how much to take that on board.
The first time we have a decision in which, let us say, four people are for raising interest rates and three are against, and interest rates rise, there will be much more trouble than when three people say raise the interest rates and the rates do not have to rise. At least we have some experience of that.
I am not a signed-up member of the independent central bank school. If we have to have it, it is a good way of having it, but I do not believe it is a magic formula. The independent central bank doctrine arises from an excessive admiration for the Bundesbank. I do not share that excessive admiration for the Bundesbank, certainly not from the way the German economy has developed over the past five years--nobody could have excessive admiration for the Bundesbank.
Be that as it may. Let me turn to the parts of the Bill in which I am interested; that is, Part II--monetary policy--and Part III. The noble Lord, Lord Mackay, invited me to comment on why it was, as my noble friend Lord Eatwell said, that the truths of yesteryear are the fallacies of today and how therefore we can rely on academics to run our monetary policy. I have always believed in the adage that academics are the worst people to run monetary policy because there is nobody better.
Various things have happened over the past 20 years which have caused this major change in the way we think about macro economic policy. One material change is due to the fact that, following the breakdown of the Bretton Woods agreement and the development of various technological innovations, economies are much more open than they used to be. Capital movements are now perfectly legal--they were not legal under Bretton Woods--and therefore every national economy is subject to much more international fluctuations than before.
An analogy we used to use was a hydraulic analogy--pumping things up and down, or driving cars along highways. Now it is more like steering a ship. We are subject to wind, tide and waves. We have some control, but we are not completely sure where we are going. We may have to change our course and tack here and there, but we are much more subject to forces beyond our control which we must take into account when steering the ship forward. It is not like driving down a highway.
That is the first change. The second change is that, because of that change and partly because of a change in thinking, we have much less faith in policy as such than we used to have. When my noble friend Lord Peston was a student and in his first few years of teaching, economists had much greater faith. We knew about models; we knew about policy; we knew which policies we were able to change and what would happen as a result. Again, the analogy is that of the motor car. Now we know that, when the policy maker changes something, the people out there are not stupid. They can anticipate the change; they can take action which will counter the intention of the policy maker. Therefore, the effectiveness of policy as such is much less when markets are intelligent and international.
Whatever we do in terms of policy making, the first objective must be not to make things worse than they already are; just do not make a mess; indeed, set up a framework within which people know how you will function. People want a stable framework rather than a stable policy. Even as you may change from one day to the next, as long as people know the framework of decision making and that is laid down, your policy will not be thwarted by the market as much as it would be if you had not told it the story.
I say to the noble Lord, Lord Mackay, that those are two reasons why things change in economics. I am glad that when things change economists change their views. It would be much worse if economists did not change their views when things changed. However, it still remains the case that the co-ordination of monetary and fiscal policy is required for good policy. But, as many noble Lords have already remarked, it is not clear right now where the institutions of co-ordination of fiscal and monetary policy are in the present system.
Perhaps I may make an analogy with the European Central Bank. As noble Lords may be aware, Sub-Committee A of the European Communities Committee is taking evidence on the working of the European Central Bank. Whenever the question of the accountability of the European Central Bank is brought up the answer is given that there will be a great deal of
In the present system there is a good deal of co-ordination. I have no doubt that the Chancellor can talk to the governor and so on. But it is not clear, post-Bill and the present arrangements, where the co-ordinating institutions in monetary and fiscal policy will be. It would be good over the next few months for my right honourable friend and the Government to clarify for us either by practice or by an announcement that these institutions exist and that we will benefit from them.
This is one of the reasons for the problem with the exchange rate. I have said before in the House and outside that we missed a chance in last July's Budget to have a much greater deflationary bite. That would have left an easier atmosphere for the Bank of England, which would not have had to rely so much on interest rates. This is a matter of judgment and people may disagree. It is said that fiscal policy is a blunt instrument and monetary policy is a smooth instrument for fine tuning. I do not believe a word of it. I still think that had the Chancellor done that when the economy was booming we would have had fewer rises in interest rates. I could be wrong and he could be right, but it remains true that the lack of co-ordination of monetary and fiscal policy shows up in an over-valued exchange rate. The over-valuation of the exchange rate is partly due to interest rate rises and partly due to the fact that sterling is a safe haven in the context of oncoming EMU, as people are very nervous about the Italians and the Spaniards joining the EMU, so they are all buying sterling and we are suffering a little from that.
From that point of view, price stability is the dominating objective of monetary policy. Price stability in a closed economy is sufficient to get growth or whatever else one wants. But price stability alone in an open economy does not take care of the exchange rate fluctuations. Therefore, we need something somewhere else to try to get the exchange rate down to a level which yields stability. The Government have already forecast a slow-down in the growth rate in the next calendar year and I am sure that my right honourable friend, when he presents the Budget on 17th March, will take the necessary counter-cyclical measures.
I am worried, although the noble Lord, Lord Roll of Ipsden, approved of it, about the division of responsibility as to lender of last resort and banking supervision. If you are going to be the lender of last resort, and if you are in charge of avoiding systemic risk in the banking system, as you have to be as the Bank of England, not having banking supervisory powers or the information banking supervision may give you requires that you have other open and transparently laid down sources of information. For example, how quickly will