We cannot afford a row at the Bank
Banking is a confidence trick: once people lose confidence in a bank it is exposed as nothing more than a highly-greed and potentially unstable business. And if that is true for retail banks it is even more true for the central banks under which they operate.
The Bank of England has survived for 300 years on that principle. An elevation of the Governor’s eyebrow has been a powerful signal because the banks at whom it was aimed have confidence in their central bank. It is thus important that the Bank does nothing to damage that confidence, yet a row is brewing that threatens to undermine its position.
The row is over who should be the next deputy governor under Mervyn King when Rachel Lomax retires in June 2008. King would like one of his protégés to fill the role; the Chancellor of the Exchequer wants another insider.
It might sound a petty dispute but any external sign of tension between Bank and Treasury is dangerous. Debate on succession is healthy but when the difference is aired in public one side has to be the loser - and the confidence of central banking relies on an impression of unison between Bank and Government. If the governor is defeated on this issue then every pronouncement he makes becomes potentially reversible.
The Bank’s assumed infallibility has already been brought into question because of Northern Rock. King, a theoretical economist, opposed an early rescue because of the precedent it would set but the delay made rescue not only inevitable but expensive.
And it is because of the Bank’s failings on Northern Rock that the dispute over the deputy arises. King’s other deputy, former civil servant Sir John Gieve, should have been monitoring the mortgage bank but admitted he had not even read its accounts during the crisis.
There is no talk of sacking him but the Tories have suggested switching him from his financial stability role to Lomax’s monetary policy job - a public announcement that itself undermines confidence in the Bank. Chancellor Alistair Darling wants to promote the Bank’s head of markets, Paul Tucker, to the vacant position because he has City experience as well as monetary skills; King favours the Bank’s chief economist, Charles Bean.
Even if two economists and no City nous was a workable combination at the top of the bank, the real threat is the row. Having appointed Adair Turner to head the Financial Services Authority Darling now needs to act decisively in ending the Bank dispute - and he needs to do it before it escalates into a resigning issue for King so that the Bank loses its boss as well as the confidence.
