In praise of Andrew Bailey

“Britain nearly went bust in March, says Bank of England,” ran a headline in the Guardian this week. “UK finances were close to collapse, says Governor,” ran the equivalent splash in the Daily Telegraph. This was all wrong. Britain was not close to going “bust,” and the governor didn’t say it was.

The stories derive from a Sky News interview with Andrew Bailey, who took up his post as Governor of the Bank of England just as the coronavirus crisis erupted. It’s a mere truism that a country with its own central bank issuing debt in its own currency can't go bankrupt. What happened in March was a temporary liquidity shortage because markets panicked. Hence, as investors were unwilling to buy the debt the government wished to issue, the Bank stepped in as lender of last resort. That’s what it’s supposed to do.

As the economics writer Frances Coppola put it in a forceful blog post: “The Government was not shut out of markets long-term, as an insolvent sovereign would be. It had short-term cash flow problems solely because markets were malfunctioning.” And, indeed, Bailey was explicit in the interview that the issue was one of market instability, not a solvency crisis for the government.

Why was this interview misreported (as it certainly was)? I’m guessing here, but I doubt that it’s solely because my profession has a thirst for an overdramatised story. It perhaps also reflects the preference in British public life over recent years for dogmatism over ability. Mastering the mechanics of being a liquidity provider of last resort requires technical expertise. And, as is well known, some prominent figures in public life believe that the British people have had enough of experts.

I disclose an interest and a bias, as Bailey has been one of my closest friends for well over 30 years. But the government was absolutely right to appoint him as governor, and I suspect that the prime minister (whose decision it was) and the chancellor daily reflect on their narrow escape, for the appointment of such a candidate might not have happened.

British policymaking has been skewed for the past four years by the outcome of the Brexit referendum and the quixotic belief that it can be implemented without lasting disruption. Almost all economists believe that Brexit will constrain growth because of its effect on cross-border flows of goods, services, capital and labour. The only way to mitigate these costs is to accept a high degree of integration with the European single market, which Brexiters object to on principle.

In trying to wish away this brute fact, the Conservative Party sacrificed the contributions of many capable and talented parliamentarians, including ministers. It won a commanding majority not because it had resolved these issues but because it faced a Labour leader who broke polling records for unpopularity. Now we are where we are, with a government that is packed with people who are just not very good, beginning at the top and including also the foreign secretary and home secretary.

It would have been easy for the government to take the same course in appointing a successor to Mark Carney at the Bank. Carney angered some Tories by commenting publicly, and entirely in accord with his statutory responsibility to consider the risks to output, inflation and financial stability, that Brexit risked tipping the economy into recession. Some of the more exotic names suggested in newspaper coverage of the succession appeared to have nothing going for them except that they supported Brexit. Slightly surprisingly, the government went instead for the best candidate. This doesn’t always happen in public service.

Since Bailey’s appointment, the cast of policy has been extraordinary but in principle completely correct. Monetary conditions have been eased, with interest rates at their lowest level in the Bank’s 326-year history and a resumption of the programme of asset purchases. The government’s various schemes to enable businesses and households to pay their bills are designed not to support demand (which can’t be done in lockdown) but to contain the damage to the economy’s long-term productive capacity. That’s how policy ought to work in a crisis born of a huge external shock. And it exemplifies the principle that the Bank has a both a role and a limit, and the governor needs to understand both.

Times have changed radically since the 1960s, when the Bank was commonly and derisively referred to as the East End branch of the Treasury. By design, there is now much greater distance between the central bank and the government: the Bank has, among other responsibilities, operational independence to meet the government’s inflation target.

There’s no definitive answer on how the Bank should perform its functions while being publicly accountable, but it’s made serious mistakes in this respect in the recent past. As governor from 2003 to 2013, Mervyn (now Lord) King devoted much effort to the quality of the Bank’s economic research but was culpably late in grasping the significance of the banking crash. His initial concerns about the moral hazard of bailing out the banks were inappropriate, as was his attack on the Labour government in the wake of the crisis for its supposed fiscal laxity. Neither reflected the truth.

Bailey was the Bank’s point man in rescuing the banks in that crisis. As now the most powerful non-elected official in the country (far more so than, say, the Queen), he affects the lives of all of us. Thank goodness.