Speaking at the same dinner, Bank of England governor Andrew Bailey swerved from a direct confrontation and talked only about monetary policy and the challenges ahead. But the bank has pushed back against political interference.
At its heart, this is a fight over political influence in central banking and financial regulation. But it is no quick scrap between superficial caricatures to be watched over popcorn.
The more Britain departs from European standards, the more it will reduce its access to European sources of capital, clients and trade.
Some regulatory changes could be useful, but they must happen in a deliberate and cautious way. There are no quick fixes and no free lunches. I have written before about why there is no Brexit bonanza in overhauling insurance regulation and about how focusing regulators on competitiveness and growth has caused problems in the past.
There is a bigger economic and political picture. Brexit has done two things to UK financial services: it gave Britain the freedom to do what it wants with its own regulation, but it also threw up a wall between Britain and one of its biggest markets. And the more Britain departs from European standards, the more it will reduce its access to European sources of capital, clients and trade. That is just a fact, and has been so since before the 2016 vote.
Yes, the UK can simplify its current EU-influenced legislation, but this is mostly very unexciting stuff, like deleting unused apps or defragging your computer hard drive. The UK can ensure its capital markets standards for prospectuses and share listings are as simple and user-friendly as other markets, like New York or Amsterdam. But it shouldn’t try to become the global centre of the next misguided craze for something like blank-cheque companies, nor repeat the errors of the previous rush for Russian listings, for example.
There are other facts to be faced, too. Within the global economy, Britain’s finance industry has blossomed internationally under two trends: globalisation and the free movement of capital and liquidity; and financial deepening, or the process of extending more financial products to more people and companies.
The first trend is going into reverse with greater protectionism and the second is very well advanced in the UK, so future growth is more likely to be in line with gross domestic product and demographics.
Lastly, perhaps the most important narrative arc goes back to Britain, the US and others conquering the last great inflation in the 1970s and ’80s. That was the end of an era when central banks were slaves to political whim: government spending and interest rates were geared more to electoral cycles than inflation targets.
Gordon Brown, the Labour chancellor of the late 1990s, was ultimately mocked for claiming that Bank of England independence and his fiscal rules had brought an end to boom and bust. The light-touch regulation he also helped create sowed the seeds for the financial crisis.
But Brown’s changes were part of a pattern among advanced economies to reduce political interference in what mostly works better as longer-term policymaking.
The low-inflation global growth of the two decades before 2008 was partly founded on these changes. But a decade after the financial crisis, Paul Tucker, a former deputy governor at the Bank of England, wrote about how this went too far and left central bankers as the bearers of too much “unelected power” as the title of his book had it.
The institutional set-up doesn’t deserve the full blame. The excess of technocratic power reflected politicians abdicating responsibility after the financial crisis and hoping monetary policy alone would bail us all out. All this created an impersonal, managerial form of government that in turn helped to foment a populist backlash, which brought us president Donald Trump and Brexit.
Risk of error in changing financial rules
We’re still living in a transitional time trying to find a new balance between democratic accountability and responsiveness on the one hand, and management of a highly complex economy and financial system by experts with long-term stability and soundness in mind on the other.
A UK Conservative government in a bitter leadership battle and reeling from scandals, still desperate to show any kind of benefits from its biggest project in a generation – quitting the European Union – presents a risk of impetuous error in changing financial rules.
The bill for such mistakes only ever comes due years down the line when ordinary people – as policyholders, pensioners or investors – find themselves carrying the can for another crisis.
When changing regulation, countries must guard against making bad decisions, either because they’re opportunistic and ill-informed, or because they are at the will of powerful industry lobbying.
Britain gives its regulators a lot of power to write financial rules. The process to challenge their choices should be transparent and involve proper scrutiny. Call-in powers are a dangerous shortcut for a future electioneering chancellor to wield over financial regulators.
Regulation is hard: it shouldn’t be left entirely to technocratic experts with no democratic constraints, but it should only be changed cautiously and with all the due diligence it is possible to muster.