Examination of Witnesses (Questions 120-139)|
20 MARCH 2007
Q120 Mr Newmark: But from the point
of view of the public, earnings in real terms are declining.
Lord George: They have been rising
consistently over many years and if there is a setback this year
on certain measures that is the price we pay for keeping the thing
moving ahead as it has been doing up until now.
Q121 Mr Newmark: Interest rates are
a powerful but blunt and untargeted tool. Is there more that the
bank could do either to influence fiscal policy or request additional
powers from the Government to provide a more nuanced response
to changing economic circumstances?
Lord George: I certainly would
not want to put the bank in the position of managing fiscal policy
as well because the considerations go way beyond economics. They
have to balance social as well as economic concerns and that is
the job of elected politicians. It is not a technical job like
that of the Bank of England, so one must have much more input
into that. There was another dimension to your question which
has escaped me.
Q122 Mr Newmark: I am just reflecting
Professor Wren-Lewis's written evidence to us that perhaps there
is room for manoeuvre for some sort of fiscal inputs into decision-making
rather than a focus on monetary policy.
Lord George: I have absolutely
no doubt that tomorrow they will be listening to the Budget and
studying the implications over the next period. The Monetary Policy
Committee and monetary analysts and other permanent staff at the
bank will be taking as much account of all those things as they
can. It is not as if we are operating in ignorance of what is
happening in the rest of the economy; quite the reverse.
Q123 Mr Newmark: As a related question,
do you think that the bank must remain on guard against changes
in fiscal policy that may be detrimental to the smooth functioning
of monetary policy?
Lord George: If that sort of thing
was happening in a significant way I am quite sure that the bank
would draw it to the attention of the Treasury and Chancellor.
The reality is that there are many things going on in the world
that the bank cannot and does not expect to be able to influence
or cause to be different. What the bank must do is take account
of all those things that are happening, for example in the United
States, China and India.
Q124 Mr Newmark: But there is a difference
between taking account of something and trying to have influence
over it. Is there any thinking as to the bank or MPC having some
influence over fiscal policy if needed?
Lord George: It can express its
views to the Treasury.
Q125 Mr Newmark: It is merely a matter
of expressing a view rather than getting hands on any levers with
respect to fiscal policy?
Lord George: I certainly would
not want the bank to have levers over decisions about fiscal policy.
They go much broader than purely the monetary policy objective,
but I think that the kind of advice the bank would give would
be, "If you do this it will cause that to happen and interest
rates will rocket. Is that really what you want?" But it
should certainly not be able to veto decisions or insist that
politicians behave in a certain way. I should like to point out
that we live in a democracy.
Chairman: Professor Wren-Lewis mentioned
that in exceptional circumstances the bank should take responsibility
for some fiscal policies. We questioned him and asked whether
it would include VAT and whatever else. I think I can speak for
Members here in saying that the argument was to some extent demolished.
We entirely agree with you, Lord George.
Q126 Mr Love: Perhaps I may take
you back to the earlier discussion about the role of the bank
in terms of asset prices and possible bubbles. To go back to your
time at the bank, your opposite number in the US, Alan Greenspan,
talked openly about irrational exuberance. We did not say much
on this side of the pond in relation to that. What are the limitations
on the bank in commenting on what is going on in the marketplace
at any time? If you do comment does it make any difference?
Lord George: I do not believe
there are any constraints on bank officials and members of the
MPC expressing concerns about what is happening in financial markets
and questioning whether that is justified in terms of the underlying
situation. As I have already said, the bank takes account of what
is happening because those things can have a powerful influence
on demand and inflation. I think that anybody who claims to know
with great confidence what is happening in the economy, let alone
in financial markets, and what the explanation for that is does
not understand the questions. It is an incredibly difficult thing.
I would be quite surprised to find somebody saying that the exchange
rate against one or other currency is much too high or low. Frankly,
it can be said that it raises a question that is being determined
by financial markets, but to be able to do anything about what
is happening in financial markets is not realistic.
Q127 Mr Love: It just so happens
that one of the current external members of the bank seems very
sure that there is a bubble in terms of house prices. What he
cannot comment on is when that bubble is likely to burst, but
that is a different issue.
Lord George: When I was still
in my day job a lot of people forecast a collapse in house prices
over the next six to eight months. We are still waiting for it.
One must be very cautious about that kind of projection.
Q128 Mr Love: That probably answers
my next question. The odd comment on what is happening in the
marketplace will probably not make any difference. Should the
bank take a specific view and should all its members comment regularly
on matters in order to try to influence markets more than they
are doing at the present time?
Lord George: On the whole, I think
they do comment fairly regularly on what is happening in financial
markets. The side of the bank concerned with financial stability,
not the MPC, produces six-monthly assessments of the risks to
financial stability which is a different concern, although they
are related and interconnected. Like love and marriage, you cannot
have one without the other. I am not conscious of any need to
do more than they do in terms of commenting on developments in
Q129 Mr Love: One of the expert witnesses
suggested that monetary policy might have been overly-restrictive
especially in the early days but that that might have been a temporary
phenomenon as the bank was building up its reputation. Do you
think there was an element of conscious bias in those early days
to establish the reputation of the bank?
Lord George: No, I do not. I was
very conscious of the fact that it was a symmetrical target. That
is terribly important because if it is lopsided it does not reflect
the original intention. It is not the broader objective of balancing
demand with underlying supply. That it is symmetrical is something
that we all understood perfectly well from the beginning. But
when we were undershooting fairly consistently and achieved 1.5%
when the target was 2½% we might have written a letter of
explanation to the Chancellor. I rather wished I had done so because
it would have relieved the pressure on my successor. We did not
have to do that, but fairly consistently we were on the down side.
The reason for that I impliedly explained earlier. That arose
in the period of weak external demand when business investment
was weak because of global recession, so we had to stimulate household
demand. That was the role that we could play in it. We knew that
this was not a sustainable situation, so we were being very careful
not to do more than we felt we absolutely had to in order to keep
the economy moving forward, which we succeeded in doing. It was
that which caused us to be careful on the "stimulus"
side; it was not that we wanted to convince people that we would
always undershoot the inflation target, because that was not what
we were trying to do looking at it over the longer term. Symmetry
was accepted by the MPC from the beginning and was a fundamental
Q130 Mr Love: You think that is a
critical part of it?
Lord George: I do.
Q131 Mr Love: Who should set the
inflation target? At the moment, clearly the Chancellor sets it.
Should it be set every year or on a different timescale?
Lord George: My understanding
is that he has changed it only once and that was when he changed
the index. If the Chancellor tried to set it every year people
would wonder what was going on. I am sure I can imagine a set
of circumstancesI cannot think of any immediatelyin
which it is felt justifiable to say that even 2% inflation is
too high given what is happening in the world as a whole and therefore
the target will be lowered, or that if we try to deliver the 2%
inflation target we will face great weakness and therefore tolerate
for a period a higher rate of inflation. I think that would be
immensely dangerous and highly exceptional. An elected politician
should have the right to take that decision but he would have
a hell of a job explaining why he was doing it unless the argument
was fairly convincing.
Q132 Mr Love: That would be particularly
the case if he wanted to raise it rather than lower it. Should
there be some form of consultation before he made a change of
Lord George: I am sure that he
would consult with all sorts of people because it would be a very
big decision. Although the Chancellor sets the inflation target
I believe that is justifiable because there is still a perception
that there is a short-run trade-off between growth and inflation.
I am dubious about whether that is true, but I believe that is
the perception, so in that sense it is a political decision. I
think that if the MPC set the inflation target it would draw the
bank into a political process. We are very happy to be outside
that political process.
Q133 Mr Love: There has been surprise
about the lack of real discussion about what the inflation target
is. The Chancellor set it 10 years ago and he changed it only
once in relation to the change in the index. There has been very
little comment. Does that surprise you? Should there be more comment?
Should politicians in Parliament and commentators be talking about
whether the 2% symmetrical target is the appropriate measure?
Lord George: No. I believe that
it reflects what I said right at the beginning that there was
a broad consensus on what we were trying to do, namely to keep
underlying demand growing consistently in line with the supply
capacity of the economy. Over the past 15 years we have grown
consistently quarter by quarter and I do not think that has ever
happened before in recorded history. In those circumstances I
believe that the view of the public and across the political spectrumthis
is what I mean by "broad consensus"is that this
is a sensible way of carrying on these matters. But that must
be low inflation and it must be symmetrical; otherwise, it would
just be a doddle. If it was x% or lower one would always
guarantee it by driving the economy into the ground which is not
a sensible approach and is not consistent with the consensus that
has been fundamental to what we have done.
Q134 Mr Gauke: I want to ask about
the transparency of the MPC. Do you think more should be done
to allow the positions of individual MPC members to be made public?
Lord George: It depends on what
you mean. Some people have said that in the minutes of the meetings
the statements of individual MPC members in the debate should
be attributed. I would be very sceptical about that, because when
I was there the characteristic of the discussion, particularly
on Wednesday afternoon before the policy-making session on Thursday
morning, was on the one hand and on the other; that is, lots of
individual members would say that on the one hand a particular
series of data could be interpreted in one way but on the other
hand they could mean something else. If one really attributed
individual comments it would be on the one hand and on the other
and one would get the impression that they did not know what they
were doing. I certainly do not go as far as to say that the minutes
should be verbatim because it would change the character of the
debate, which I thought was fantastic. People could be open-minded.
That is the nature of it. If somebody thinks he knows for certain
what the answer is frankly he does not understand the question
because it is an art, not a science. Beyond a certain point you
know where you are making judgments rather than speaking with
Q135 Mr Gauke: One idea that has
been suggested is that individual MPC members should write their
own personal reports to this Committee. Is that something for
which you would have sympathy?
Lord George: They all participate
in the discussion and the draft of the minutes is seen by the
MPC. There is a meeting to discuss the draft of the minutes. MPC
members are quite free to express their view.
Q136 Mr Gauke: But would you be sympathetic
to the idea of members putting something in their own name as
a formal part of the structure?
Lord George: They can come here
and you can ask them questions and they can answer on their own
behalf. There is no constraint on that. They can make public speeches
and lectures. I believe that it would alter the character of the
meetings if one had attributed minutes or nine different sections
where individuals wrote their own thing and it was not a discussion
of the meeting and interaction but a discussion of the individual
point of view. I do not believe that would be helpful.
Q137 Mr Gauke: What about the idea
of the votes on a particular interest rate decision being revealed
immediately as opposed to a month later? Would you be sympathetic
to that, or do you see difficulties?
Lord George: That would be great
for the newspapers and sensationalism: a hawk voted this way and
somebody else voted another way. I do not believe that that would
convey very much. I believe that to do it in the context of the
minutes is much more informative.
Q138 Mr Gauke: To return to the appointments
process, to paraphrase your evidence you said that you were broadly
satisfied with how it worked in your time, but certainly some
indication has come from the Bank of England about more recent
concerns in that regard. Do you believe that as far as your relationship
with Gordon Brown was concerned there was a spirit of openness
throughout your time as governor?
Lord George: Yes. It took time
for it to build up, and it began before he became Chancellor.
I used to have meeting with him. Ken Clarke encouraged me to do
that and I thought it was terribly sensible. We discussed the
question of the MPC before the decision was announced. It was
important because one needed to develop a rapport and understanding.
I had to persuade him that I could be trusted. I believe that
that kind of relationship is terribly important, and I would encourage
both sides to continue it. As far as I know, they do so.
Q139 Mr Gauke: This morning we see
reports from Lord Turnbull, for example, that Gordon Brown has
played denial of information as an instrument of power. Was that
ever your experience as Governor of the Bank of England? For example,
in relation to the FSA, not specifically the MPC, was that ever
your experience of working with the Chancellor?
Lord George: I accepted that he
had certain decisions to take, but he always gave me the opportunity
to express my opinion. The FSA was different. I was very surprised;
I thought we were going to talk about it, but it was introduced
very soon after the MPC for reasons that you will have to ask