Why Reeves would do best to bank on Bailey

Yahoo

5 days ago

Rachel Reeves is fighting on too many fronts. She remains wedded to her 'iron clad' fiscal rules when even the traditionally hawkish German government is relaxing its budgetary rules to make provision for extra defence spending.
Moreover, the chancellor has moved into potentially dangerous territory by antagonising the Bank of England. She is in open conflict with governor Andrew Bailey over her extraordinary scheme to relax the financial regulation that was brought in after the 2007-2009 banking crisis to ringfence retail banking – a service for business and the general public – from the excesses of investment banking.
This is all supposed to be in the interests of the faster economic growth on which she has rashly staked her reputation.
But the UK's financial sector is quite big enough already. It is there to serve the interests of the wider manufacturing, innovative and service economy, as well as us 'consumers'; it is not supposed to be an object of growth in itself.
Bailey is rightly worried about the threat to the financial system of governments playing fast and loose with the rules. The chancellor used to go on about the brief period she spent as a junior Bank of England official, but that hardly bears comparison with Bailey's experience there.
After a 40-year career on Threadneedle Street, Bailey knows the City in general – and the banking system in particular – inside out. One of the great governors of the past 40 years was 'Steady' Eddie George (1993 to 2003). Bailey ran George's private office for a time and learned at the feet of the master.
Alas, George's successor, Mervyn King, was not as interested in the City as most Bank governors are, and, sadly, the Bank took its eye off the ball in the run-up to the 2007-09 banking crisis.
Bailey must be well aware of this. It shows not only in his opposition to Reeves's advocacy of deregulation, but also in a more parochial dispute he is having with the chancellor over the granting of banking licences to Revolut, the challenger fintech firm.
Actually the relationship between governments and central banks is a hot topic at present, not least on account of the abuse being levelled at Jay Powell, chair of the United States central bank, the Federal Reserve, by Donald Trump – still president of the US at the time of writing.
While Trump does his best to disrupt the trading relationships of the world economy, the Federal Reserve is concerned about the domestic inflationary threat from his tariff policies.
Powell has, understandably, been refusing to bow to Trump's repeated requests for the Fed to lower interest rates. The president has called this distinguished central banker a 'numbskull' for doing his job and refusing to kowtow.
When the Bank of England was granted operational independence to decide on interest rates policy – by chancellor Gordon Brown and his economic adviser Ed Balls in 1997 – I was concerned about the consequences of transferring such policy decisions from a democratically elected government to non-elected officials.
However, I prefer the judgment of Powell to that of Trump; and I prefer the judgment of Bailey to that of Reeves.
Both Bailey and his immediate predecessor, Mark Carney, saw through the tissue of lies produced by the Brexiters in the runup to 2016. We are continuing to live with the consequences of Brexit.
It is about time that prime minister Keir Starmer and his chancellor woke up to the need to adopt the most obvious growth policy: a return to the customs union and single market.
Photograph by Getty