Who will watch the Bank of England?
A year ago Rupert Murdoch was probably the most powerful unelected person operating in Britain. The media baron could seemingly choose prime ministers. Then came the phone hacking and police bribery scandal, after which politicians sought to distance themselves from him.
The title of most powerful unelected Briton now probably belongs to Mervyn King, the governor of the Bank of England. Witness the way he dispatched Barclaysâ€™ chief executive Bob Diamond two weeks ago in connection with the Libor rate-rigging scandal. Whoever succeeds King next year will have even greater powers. After all, responsibility for financial stability and banking supervision is about to be added to the central bankâ€™s main task of running monetary policy. Itâ€™s vital for democracy that this authority is exercised effectively, transparently and fairly.
Who will be Kingâ€™s successor when he steps down? And how will the new governor be made accountable? These questions have been brought into sharp relief by the Libor scandal. The front runner for Kingâ€™s job has seen his chances knocked, while doubts have been raised about the central bankâ€™s effectiveness and transparency.
The next governor will need to be something of a superman. Expertise in how to manage financial crises is probably the top requirement given that the euro could blow up and there wouldnâ€™t be time for on-the-job learning. Strong management skills are also important as failure to delegate effectively would lead the incumbent to be swamped. Finally, the governor will have to be a good communicator.
Until the Libor scandal broke, Paul Tucker, one of the BoEâ€™s deputy governors, was the favourite. He has a strong track record as a crisis manager. But his apparent failure to recognise early warnings that the Libor interest rate was being rigged has made him look naive.
Another candidate is Adair Turner, chairman of the Financial Services Authority, a large chunk of whose functions are about to be merged into the central bank. Although the FSA hasnâ€™t covered itself with glory in investigating the Libor affair, most of the abuses occurred before Turner took the helm.
Both men will be grilled by members of parliament this week, Tucker for the second time. If neither impresses, the field will be wide open for other candidates like Gus Oâ€™Donnell, formerly Britainâ€™s top civil servant, and Mark Carney, governor of the Bank of Canada.
Holding the next governor accountable will be as important as choosing one. The Bank of England was rightly given considerable independence in 1997 to prevent politicians meddling in monetary policy in order to advance their electoral interests. But the institution and its leader have slipped up on enough occasions that leaving them entirely to their own devices isnâ€™t a good option either.
For example, King didnâ€™t sound the alarm loudly enough during the credit bubble and was slow to act when there was a run on Northern Rock, the mortgage bank, in 2007. He then long resisted any investigations into the Bank of Englandâ€™s own failings in managing the crisis. Now its hands-off approach to the Libor scandal is being revealed.
Based purely on its record, the central bank wouldnâ€™t be receiving extra powers. However, the Conservative-led government has tried to pin the blame for the credit crunch on the previous Labour governmentâ€™s policies – in particular, its decision to take away the central bankâ€™s responsibility for banking supervision. Hence, it has become politically convenient to reverse that move.
Given this, the priority should be to enhance the Bank of Englandâ€™s accountability. Under the current system, the government sets inflation targets and picks the governor. It also chooses the deputy governors and members of two committees: the monetary policy committee which sets interest rates; and the financial policy committee which will soon be responsible for financial stability. Their independent members help prevent the governor becoming too dominant.
The Bank of England also has a board, called the Court. But this has been largely ineffective. Though it has recently stepped up its scrutiny of the central bankâ€™s executives, it is hamstrung because it rightly has no say over policy or who is the governor.
Meanwhile, parliament can call the governor and other senior officials in to give evidence. Although this is a potentially important check to the central bankâ€™s power, MPs havenâ€™t yet used this tool effectively. Take the ongoing hearings over the Libor scandal. They did a poor job of interrogating Diamond, failing to coordinate their questions and seeming more intent on grabbing headlines than getting to the truth. While the subsequent sessions were better planned, they were still not penetrating enough.
MPs have a chance to raise their game in this weekâ€™s hearings. A key line of questioning ought to be how exactly King managed to persuade Barclays to get rid of Diamond. Few people will shed tears at Diamondâ€™s departure given that he epitomised the City of Londonâ€™s greed. But the FSA – not the central bank – is still Barclaysâ€™ primary regulator. Parliamentarians should satisfy themselves that the governor did not overstep his authority.
One way of improving democratic control would be to give MPs the right to hold nomination hearings and, in extremis, reject the governmentâ€™s choice for governor and other top positions. Indeed, thatâ€™s what parliamentarians want. But the government is resisting. If MPs are to change its mind, they must first show they are up to the job.
It wonâ€™t just be the Bank of England on trial this week. Parliament too will be in the dock.