The politics of Northern Rock
When Chancellor, one of Gordon Brown’s first initiatives in 1997 was to make the Bank of England operationally independent of the Government. Depoliticising the setting of interest rates was widely praised at the time as both politically astute and technically sensible, and generally still is. The Government of the day was still responsible for defining the Bank’s remit. But Labour’s initial remit, which never changed, was extraordinarily focused on the problem of the past: to keep inflation within a narrow band of explicit targets. The Bank then still had its regulatory responsibilities for supervising banks but in 2002 Labour’s Financial Services and Markets Act moved supervision from the Bank to the FSA, marking a highly unusual separation of powers.
In both respects, PM Brown is likely to want to deflect responsibility for the institutional context of the failure of Northern Rock to meet its liabilities to other banks, even though he was significantly involved as its architect. He will have to work hard to blame the Bank for not preventing a debt-fuelled housing boom: it was never in its remit – unless the boom caused inflation to breach its limits. Whether delegating or not, the Treasury is responsible for prudent management of a sustainable, well-balanced economy. It was quick enough to claim credit for this when it looked superficially like we had one. It should not lightly be let off the hook when it turns out we had precisely the opposite.