A former policy maker at the Bank of England has attacked the management and culture of the bank, saying its directors “abdicated responsibility” for reining in a governor who had become far too powerful.
Adam Posen, a former member of the BoE Monetary Policy Committee, also accused the Treasury for its lack of will to take on the BoE’s top officials and warned that the broadening of the central bank’s mandate risked worsening the problems he saw during his three-year stint there.
Mr. Posen’s attack on the BoE follows concerns raised by the Treasury Committee that widening of the central bank’s remit will make governors too powerful – including the incoming governor, Mark Carney, currently governor of the Bank of Canada, who takes over from Sir Mervyn King in June.
Mr. Posen, who left the MPC in August 2012, on Tuesday described an institution in which the executive team, which includes the governor and two deputies, were free to act without fear of reprimand from either the bank’s court of directors or the Treasury.
“[The] court has been excessively weak and has let the governor get away with whatever …” Mr. Posen told the Treasury select committee of MPs.
Referring to the decision of top management to buy mainly gilts for the bank’s quantitative easing program despite objections from other MPC members, Mr. Posen said: “Supervision of the executive was very lax and there was a very strong culture and precedent that, if the governor or the broader bank executive made a decision to do something … then it was seen [that] there was no point in challenging them.”
Mr. Posen said he had complained directly to some court members about what he viewed as a recurring problem, but was told they “couldn’t do anything about that until the governor leaves.”
“I said to those members of court that I thought that was an abdication of what court should be doing and that no individual should have that sway, and I was told ‘Sorry that’s the way it is,’” he said.
Mr. Posen attacked the Treasury for being unwilling “to take on the governor in either an internal or public fight.”
He also discussed what he termed “poor communication” between bank insiders and external MPC members – Mr. Posen was one of the four on the committee – over the Funding for Lending scheme, a government initiative to kick-start lending launched in the summer.
Mr. Posen said: “There were all these incredible machinations going on between Treasury and the bank executive to get this through, since it was clearly going to involve a perceived reversal of policy on the part of the governor and we couldn’t all know about it in case we ganged up on him.
“I was quite furious at the time. Not at the governor – the governor was just advocating what he thought was right – but at the people around [the governor], and at the Treasury and in court – who let him get away with that.”
He added: “It was a failing of the governance of the bank and the will of the Treasury.”
The former MPC member said the governor and his deputies were “resentful of being harassed by outside opinions” largely because they were overworked. This problem was “just going to get worse” when banking supervision was added to the BoE’s list of responsibilities this year.
He said the Treasury Committee was right to push for a stronger court that was more able to challenge the BoE’s executive. “A key thing [for the committee] to tell court is that the governor should conceive his job as that of a chairman not as an executive for parts of the job,” he said.
He added: “The current formulation of the governor of the Bank of England would [make them] the most powerful single central banker … And it is not clear that a lack of centralized power at the Bank of England was the cause of any problems in the past.”