The Bank of England has a new boss. What should his top priorities be?
We asked eight leading economists to give advice to the man replacing Mark Carney at the top of the central bank. Here's what they said.
This week Andrew Bailey took over as the governor of the Bank of England, replacing Mark Carney after eight years at the helm.
His appointment comes during the worst economic crisis since the financial crisis of 2008, as the coronavirus sweeps the world and fears of a global recession rise. At the same time, challenges such as inequality and climate change have led many to call on central banks to play a more active role in the economy.
In collaboration with the New Economics Foundation, we asked eight leading economists to outline what Bailey’s top priorities should be in his new role. Here’s what they had to say:
Dr Linda Yueh – economist at Oxford, LBS and LSE, and author of The Great Economists
Two events over the past few years stand out as posing a challenge to the conduct of monetary policy: coronavirus and Brexit. Both raise the prospect that the economy faces a “supply shock,” which is challenging for central banks.
Supply shocks generate inflation and also dampen demand. A central bank would normally raise interest rates to control inflation but would cut rates to boost demand.
It is not straightforward to determine the nature of a “shock.” The supply and demand parts are likely intertwined. But in the current environment, ensuring that the economy is supported is the priority. Should the coronavirus lead to longer term supply chain disruptions that raise costs and potentially lead to shortages, then this will all need to be revisited again.
So, it’s a tough first task. But, by the same token, getting it right would make quite a mark for a new governor.
Miatta Fahnbulleh – Chief Executive, New Economics Foundation
Andrew Bailey begins his new role at a time when the people of this country face a number of unprecedented challenges. When addressing these challenges, I would encourage him to come back to more fundamental questions: How do we create policy responses that work for everyone? What is finance for? Who does it serve?
We need to ensure that finance is the servant to economy it is supposed to be, rather than the master it has often threatened to become. A key lesson from the 2008 global financial crisis, was that people who did not cause the crisis have paid the highest price. And today, people on average are still poorer than they were in 2008.
Policy responses cannot return to business as usual. We need innovative and bold solutions that harness the benefits of finance to help sustain our planet and enable all of us to thrive. The Bank will need to upgrade its toolkit and consider things like credit guidance, helicopter money, and aligning monetary and prudential policy with the low carbon transition.
But the Bank can’t go at it alone. It will require unparalleled cooperation not just with the government, but with civil society. In this regard, the Bank always count on our support.
Dr Carolina Alves – Joan Robinson Research Fellow in Heterodox Economics, University of Cambridge
The 121st Bank of England governor is another establishment figure. Now, let's ignore the Treasury’s trite claim to be open to diversity. Only two out of twenty-three applicants were female economists. This reflects the lack of women in economics and macroeconomics in particular.
Difficulties for female economists range from gendered institutional practices, implicit bias in promotion to an aggressive intellectual culture that patronises female economists, and the profession's male-oriented image. The issue does not get any better when considering black, Asian and minority ethnic individuals. Mr Bailey is now in a position to lead the change. He should do everything to ensure that the Bank of England’s environment is supportive and fair by removing discriminatory obstacles, so to have a more diverse group of applicants for the Bank’s upper ranks in the future.
Diversity is needed to call out blind spots and shed light on the same old way of doing things. We wish the new governor all success and recognise his experience, but this is a critical historical moment and he needs to be bold and creative when thinking about the Bank’s role in society. This can only be done with both a diverse work force and a conception of the Bank’s mandate that is more aware and realistic about the efficiency and implications of its monetary policy.
Frances Coppola – finance and economics commentator and author
Andrew Bailey is taking over as Bank of England governor at an extraordinarily difficult time. The coronavirus pandemic threatens the UK with a deep recession just as it tries to adjust to an new, post-Brexit trade regime. Interest rates are at their lower bound, and the QE purchases from the last crisis remain on the Bank’s balance sheet. With yields on government bonds at historic lows, there is a widespread belief that central banks are out of ammunition.
But a courageous Bank of England governor can always find ways to support the economy. And there is much that can still be done. Other central banks may tinker with negative rates and cheap funds for banks, but Bailey can be bolder. He can give money to households and firms to stimulate aggregate demand, and help to boost private and public investment in the economy. Last week’s coordinated action with the Treasury was welcome, but not enough. The time has come for “People’s QE.”
Professor Daniela Gabor – Professor of Economics and Macro-Finance at University of West England
The Bank of England should accelerate its pioneering work on climate-aligning central banks under its financial stability mandate. For this, beside the valuable Task Force on Climate-related Financial Disclosures (TCFD) risks framework, the Bank of England should take two additional steps.
1. Adopt and upgrade the European Union Sustainable Finance taxonomy. The UK taxonomy should provide a stricter definition of green, in parallel with introducing a ‘shades of brown’ approach. Green activities should be defined to include only those activities that are already low-carbon or support low-carbon investments. This would exclude the activities that contribute to the transition to a zero net emissions economy in 2050 but do not operate currently at this level. Only green activities should be identified as Taxonomy-eligible. In parallel, non-green activities should be assigned a degree of brownness. Transition and enabling activities would qualify as ‘low-brown’, with the remaining activities ‘high brown’.
2. Climate-align the collateral framework/regulatory regimes: the Bank of England should recognise the implicit carbon bias of its collateral framework. To correct it, it should treat collateral according to the green/brown taxonomy, in particular prioritising a brown-penalising regime that is calibrated according to the degree of browns. In parallel it should introduce and advocate sustainable finance regulations that penalise brown and support green assets.
Ann Pettifor – Director, Policy Research in Macroeconomics (PRIME)
In a speech in 2009, Mark Carney in outlined the deficiencies of the International Monetary and Financial System (IMFS).
The IMFS was cobbled together after the collapse of Bretton Woods and the 1971 Nixon Shock, and is governed effectively by Wall Street and the City of London – ‘citizens of nowhere’. They use financial firepower to influence the law, technocratic policy-making, exchange rates, taxation and market interest rates. The Bank of England uses its powers to accommodate these interests, and monetise the liabilities of shadow banking markets. The public authority to do so is a power that technocrats and civil servants derive from Britain’s 30 million taxpayers that provide the Bank with valuable ‘collateral.’
As the IMFS is of vital importance to the prosperity and stability of the British economy there is an urgent need, in the words of governor Carney for the Bank to use its public authority to “change the game.”
My advice to Andrew Bailey is to make “changing the game” the central mission of his governorship.
Professor Anastasia Nesvetailova – Director, City Political Economy Research Centre (CITYPERC)
It is quite trivial to say that the main priority for Mr Bailey should be learning the lessons of the 2007-09 crisis, and especially, the mistakes committed when dealing with it. A few of such mistakes stand out.
1. It is not enough to rely on the banks to transfer demand into the economy. The legacy of the 2007-09 crisis proves that this mechanism has not worked, and instead facilitated asset inflation.
2. It is dangerous to give too much discretion to financial institutions and rely on the consciousness of individual financiers. Recent history suggests that there is there is, simply, too little of it around.
3. While encouraging messages may help calm the markets in the short run, in the longer term, the Bank of England should adopt a much more interventionist stance, and interfere in the economy with concrete and tangible measures, including using the de facto nationalised banks, to boost the credit flow- something that the Bank of England was not prepared to do in 2007-09. The current situation and the likely economic malaise will require a more proactive response from all the central banks, including the Bank of England.
Fran Boait – Executive Director, Positive Money UK
The Bank of England’s own stated purpose is to ‘promote the good of the people’, but our central bank seems more focused on serving the City of London, even after big finance crashed the economy on the Bank’s watch in 2008.
The Bank has prioritised the wellbeing of property and financial markets over the rest of the economy with its policies, such as quantitative easing, which turbocharged the wealth of the top 10% while pushing homes out of reach for the asset-poor. Andrew Bailey’s responses to the huge challenges of the next eight years, from coronavirus to climate collapse, must instead be geared towards the common good.
A new governor should be an opportunity for a rethink of the role of our central bank and who it works for. Andrew Bailey must meet these questions with an open mind, not seek to preserve the status quo.
Get our weekly email