Unelected Power: Finding Legitimacy in Central Banking and the Regulatory State

Adam Ward

There we are. Excellent. Well, good afternoon, everyone. Welcome to Chatham House. My name’s Adam Ward. I’m the Deputy Director of the Institute, and we’re very pleased to have Sir Paul Tucker with us to discuss his book, which is going to be available later for purchase, you’ll be pleased to hear, Paul. Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State, which was published, I think, in May of this year?

Sir Paul Tucker

Yes.

Adam Ward

And, I think it’s fair to say that the book is part meditation and part manifesto. The – at the heart of it is this tension between the independence and the political accountability of central banks and other regulatory institutions, as they go about discharging their various functions. And this matters, as the book argues, because of the very large powers these bodies have, in many cases, been invested with and because of the discretionary nature of some of those powers. Those powers are exercised on economic grounds, but they have wide-ranging effects and to that extent, are not strictly apolitical. So, the question that Sir Paul seeks to answer is, what’s the formula for ensuring that institutions are protected from undue political interference, but are also written – underwritten, I should say, by political accountability and the legitimacy that comes from that and the sustainability, ultimately, that comes from that. And of course, it’s an analysis that’s all the more intriguing and compelling because it’s made by a central bank insider. As you know, Sir Paul was Deputy Governor of the Bank of England, after the 2008 crisis, and so he saw, at very close quarters indeed, how central banks and other institutions globally, reacted under that immense pressure, but also, what legacies their actions have produced and left us to wrestle with. So, this discussion is on the record, it’s also been livestreamed.

Sir Paul’s going to be speaking to us, from the lectern, for about 15/20 minutes or so and then we’ll enter into a conversation together. So, Paul, thank you very much for being here.

Sir Paul Tucker

And thank you very much.

Adam Ward

I look forward to hearing what you’ve got to say.

Sir Paul Tucker

Thank you. Thank you all very much for giving up your lunchtime or part of your lunchtime and thank you very much to Chatham House for inviting me to speak about it. The book’s got a very long title, subtitle about central banking, but really, the subtitle, if I’d have had the courage of my convictions, the subtitle would’ve been, Why Technocracy Should Retreat to Preserve Our System of Government. The book is borne out of a concern that most of us, who are of a certain age, that during our adult lifetimes, perhaps a little bit before, an extraordinary amount of power has been given to unelected people.

Now, in the United States, that started the end of the 19^th Century, with a great boost in the 1930s, the ‘New Deal’ period, but really here, it comes from the 1990s, and it’s associated here, with two things. First of all, the rather idiosyncratic debate about the Bank of England and whether it should be independent and then secondly, a fashion for the so-called new public management, which came from New Zealand, was embraced by the top mandarins here. So what we really need to do is give functions to agencies, get them out of their hair – get them off Ministers’ desks and structure these agencies like public companies, with a Chief Executive and a Board, and so on.

And I’m going to be blunter than I am in the book. I mean, I think all of that’s absolutely dreadful, actually, for reasons that I will describe. So it’s a contribution to the debate about popularism versus technocracy, and envisaged, as such, well before Trump was elected, but certainly influenced by the financial crisis, in the sense of the inevitability of failure, in any part of Government, and when the responsibility lies with unelected people, as I think largely, it did on both sides of the Atlantic. What a different world we live in where you can’t elect out the people that have let you down so badly. So, the book starts – the central belief of the book is that representative democracy is special and that we have become careless about it.

I think it’s special in lots of respects, but I think the relevant sense for me in which it’s special, is that it sep – it brilliantly separates how we, as citizens, feel about the system of Government, from how we feel about the Government of the day. Because if, as I assert, every part of the Government eventually messes up and sometimes messes up in a massive way, it is absolutely marvellous that we can blame the people we’ve elected, vote them out, try the other side, and without our allegiance to the system of Government being necessarily threatened at all. Except that you couldn’t vote me out or the leaders of the FSA or the leaders of Ofcom.

The book was also prompted by my own experience in the last, well, quite a few years of my career, with the new powers coming to the Bank of England. The Bank of England is – even amongst central banks it is an especially powerful central bank, and with Matt Hancock who is the current Health Secretary, the truth is that I’m the main architect of that. Much of it dreamt up in Julie’s Wine Bar in Holland Park, over many years. He’d been my Private Secretary, in the early zeros, and as I say in the Preface, we, I lent against certain functions that people wanted to give us, and very – not Ministers, but people who are hugely influential in the Tory Party wanted the Bank of England to have even more functions, and I, with murmuring support, said, “No.” And when, sometime after I’d left, they were plainly reconsidering this. They – I was phoned by somebody and they said, “Why did you say no to that?” I said, “Oh, because you’d be too powerful. You’d just be too powerful. Too powerful for your own good and too powerful for the country’s good.”

The other thing, during the same period, is we wanted the different functions of the Bank of England to be delegated to separate statutory committees. As well as a Monetary Policy Committee, there’s a Financial Policy Committee, there’s a Prudential Regulatory Committee or Authority, and each of them – I hope it’s still like this – each of them has a majority of members, who is only on that committee. So, this was addressing the problem of when an agency or a business has more than one function, or mission it’s leadership will tend to make most effort in – on the mission that is most salient with the people. And monetary policy is more salient with the people, most of the time, than regulation because you’re doing it all of the time and it affects people’s mortgage payments and savings rates, and there’s a terrific economics literature and political science literature on that. It’s – you can model that and the facts bear out what I’ve just said.

And what I wanted to do, when I went to Harvard, was write down what lay behind this focus on accountability or legitimacy and constraining power, and it ended up being, inevitably, I think, an exercise in constitutionalism. A really peculiar thing, away from the kind of surface phenomena of independent agencies, there is a, kind of, deep thing which is really strange and disturbing because if you think about the great thinkers of the 18^th Century and before the 17^th Century into the 19^th Century, who shaped the constitutional world on which we lived, they had no conception of agencies of any kind. I mean, the three-branch state is a product of the world in which they lived, and that’s fine, but we have moved into this world ,without anybody asking the question, well, how do these things fit with our values of constitutionalism? And if you need persuading of that, I would encourage you, next time you go into a bookshop with a Law section and Constitutional Law and books on British Constitutionalism, and the chap that t – they were all – there are quite a few such books, over the last 20 years, because there have been big constitutional changes in this country, and they will be about the EU and devolution and moving the Supreme Court into – out of the House of Lords and human rights, and there’s sometimes ones – in the most famous person’s textbook, there’s on sentence about the Bank of England, and I’m not sure there’s even a sentence about the agencies, and yet, I will make an assertion. I’m not absolutely true of the UK, it’s true of the US. The marginal lawmaker in the United States, and I think in the UK, is an unelected regulatory official. How about that? Imagine John Locke writing about that. Your lawmakers were not elected.

And this mattered a lot for the central bank and the Bank of England, because once you’re – we tend to think that regulations are kind of, all techy, funny, obscure stuff. What it is, is it’s writing laws that you can enforce with the coercive power, the monopoly coercive power of the state. So, what that means is that the standard arguments for monetary policy independence, central bank independence, which pre-occupied people in Economics Departments, which you want to get away from business cycles that go wer, wer, not that we completely succeeded in doing that, they don’t carry over, in a completely straightforward way, to oh, now we’ll let these people write our laws, as well. So, that – so, it is an exercise in trying to see how you could fill out or apply our constitutional values. I don’t want to subs – d for reasons I’ll explain, I don’t want to inject my own constitutional values, but taking what I discern to be our constitutional values, how would this bear on this world of independent agencies?

So, here’s a fascinating thing. For those countries, and I’m only interested in healthy democracies, so advanced economy, healthy democracies, for those countries that have a written constitution, which basically all of them, other than us, none of them, with the exception of Germany, make any provision at all for the administrative state. And Germany does and it’s because it’s after the Second World War, it’s the most recent written constitution of an advanced economy. It does make provision for the administrative state and it is absolutely unambiguous on the matter.

All administration agencies, impliedly also the Bundesbank, shall be under Ministerial control. So, I say this because I’m not going to talk about it further today, but Germany has a completely different problem from the United States, the UK, and France, and it – that it has a deeply embedded, entrenched constitutional provision about the administrative state and its problem is that the facts on the ground don’t actually match the de jure position, because I can assure you that I – and quite a way from the Bundesbank, which is a special case, I have known, I have worked with German administrative agencies, which were not under day-to-day Ministerial control, but were pursuing the policies devised by unelected officials.

Let me, at this point – excuse me – say how I define an independent agency. Say something about a few agencies here and then say something about what I think the shape of the solution looks like. So, by an independent agency, and this matters a lot more in the United States than here because they use the expression independent agency in a really weird way. By an independent agency, I mean an agency that is insulated day-to-day from the politics of both the Executive Branch and the Legislative Branch. US Legal Scholars use it only to mean the President can’t sack you if he doesn’t like what you look like, and they have very few independent agencies, on my definition. We have lots and lots and there are some, kind of, peculiar facts about them. For example, the Financial Conduct Authority and before that, the Financial – what was it called? Services Authority formally more independent than the Bank of England, of which there was no debate whatsoever when the legislation went through Parliament. All of the Ofs, Ofcom and the various energy, the utility regulators, they all have high degrees of formal independence, but typically, with override powers and actually, in one case, the Ofgem, the Governments have taken to re-legislating their objectives quite frequently, which does kind of rather undermine the point of the delegation. But the interesting one, the one I want to say something about is Ofcom.

So, 25 to 30 years ago there was a debate in France about whether or not it was safe, in terms of our deep political values, to have the independent agency that regulated the economics of the media and telecom, also being the agency that regulated content and they decided, after quite a debate, that that would not be safe and that therefore, you should have them separate. Here, we have them together, and the interesting point for me is that there was no debate about that point. So including, amazingly, when the BBC governance was reformed, a couple of years ago, what happened a couple of years ago was discussed and consulted on before that, following a report by David Clemente, and the debate was all around, can we trust the BBC to carry on self-regulating? No, was the consensus, whether that’s right or not, I don’t care, for my purposes, but no was the answer. Therefore, we need an independent. We don’t want Ministers doing that. Oh, absolutely not. Therefore, we need and independent regulator, yes. Shall we set up a new independent regulator or shall we have Ofcom? Oh, terribly cumbersome to set up a new independent regulator, let’s use Ofcom.

And what’s amazing about it, the debate, is at no point, at no point in the debate, and someone challenged me on this and I said, “Oh, send me all the submissions,” which I’d actually already read, but I reread them to check. At no point in the debate did anyone say, “Is Ofcom fit for purpose to be the regulator of all of this, given that it’s structure is of a Chief Executive and then a part-time Board.” So, I want to say something about these oversight boards, at this point, and this applies not only to Ofcom, but to the other Ofs. So, I would – I mean, I know – I’ve had a privileged adult life. I know many of these people that sit on these boards and I said to them, “So are you involved in policy or is there only one policymaker at Of X?” They’d say, “Oh, we’re involved.” And I’d say, “Well, that’s interesting. Did you have a Confirmation Hearing, in front of the relevant Select Committee?” “No.” “Are your votes on the decisions published and do you give speeches on your votes?” “No and no.” “Do you regularly testify or testify at all, ever, on the policy decisions that you have made as a Member of the Board?” “No.” So then I – being very privileged, in truth, of course I know a few Cabinet Ministers, who have had the responsibility, under the current Government and the previous one and the previous one, and I said, “Who is the policymaker at X?” I’m not going to name the agency, and they would always name a person, and it would always be the Director General.

Now, you know, no-one – during the period when Mervyn was in a minority on the Monetary Policy Committee, no-one thought that Mervyn was the sole monetary policymaker. Indeed, when he was in the minority, he wasn’t the policymaker. He’d – we’d cast him into some penumbra of attempted policymaking, and it is amazing that this doesn’t get debated. Whereas, you know, in ministries, you have Junior Ministers have some clout and Cabinet, you have lots of people sitting around the table. In Parliament, you have – if you pass a law in Parliament, by definition, everybody in the House of Commons and in the second chamber can vote. How is it that we have ended up without much public debate having law-making under the control, de facto control of single people? I just think it’s great, a great mistake and a violation of our values. So, I’ll say one more thing, and I’ll say something about the shape of the solution, and I think, by the way, this goes for the FSA and the FCA. I was on – I was ex-officio on the Board of the FCA and as an oversight board, in terms of management, it was not bad. Not great, but there weren’t many experts on financial regulation, kind of like, real experts that you’d want to decide policy with and you think, but they were lawmakers and if they’re not going to be expert, why not have the House of Commons do it, which is not where I want to end up?

So, why would you delegate, to an independent agency at all, given what I was just saying, it sounds absolutely – they’re already crazy, but terrible? Well, the argument that has tended to dominate the debate, in the United States since the 1940s, and here, up to a point, and by here, I mean, on the continent as well, is around expertise, and the fuss about Michael Gove’s comments about experts, kind of, resonates with that. It’s all about expertise, and James Landis, who was one of the big architects of the administrative state and the regulatory state in the United States, the architect of the SCC, early Commissioner of the FTC, later Dean at the Harvard Law School, he wrote a book, defending it more or less entirely, in terms of expertise. And this just doesn’t wash because you could – you can have independent committees of experts, who give published expert advice, to political decision takers.

It’s delegating – expertise, of course it matters and you want to frame the issue and the range of options, with expertise that is recognisably expert to a body of people outside the agency. But that doesn’t mean that they need to decide, and the US have used that structure, and they used it – Congress used it to help them decide which military bases to shut, about 20 years ago, because they couldn’t coalesce. No-one wanted to close a military base in their own district or state, so they had a separate agent. They set up a Commission to advise them, and then [inaudible – 21:04] effectively took the advice. But here, more pertinently, our monetary policy was run on that basis, until 1997. From 1991 to 1997 and the OBR, the Office of Budget Responsibility, operates on that basis and has changed the course of fiscal policy. And the OBR, by the way, is living evidence that you can get really good people to serve in advisory agencies, even if they don’t take decisions. The line-up, the current line-up and the previous line-up in the OBR is good.

I mean – so, the argument that good people will only do it if you give them decision-making power isn’t right. The – what I think is, what I think independent agencies, giving them decision-making power can do, is it can help make the commitment to a policy objective credible, and this is, of course, is the motivation, the high-level motivation for monetary policy independence, and the same thing affects utility regulation, and it’s why we have courts. The reason the court system is independent is, we want to commit to fair adjudication and consistent adjudication, over time and over different cases. That’s an important commitment. Courts and the independent judiciary is a solution to a problem of commitment, and that – and the idea of credible commitment is completely central to the book. But it obviously can’t be all there is to be said because commitment problems run through the whole of Government. On that basis, we delegate absolutely everything to people like me, God help us. And, instinctively, we know that we don’t want to delegate big distributional questions, and we don’t want to delegate questions of our values, and of all countries in the world, we know this, because this is why Simon de Montfort, and people in the centuries that followed, wanted a Parliament. That the King should not be able to decide taxation on his or her own.

So, where I ended up, and I’ll mention three criteria that I think are terribly important, and how they can be a bit of a problem. One is, that you need a consensus around the purpose of the delegation. It’s not good if there isn’t a fairly deep consensus around that, so environmental policy is a good example where there isn’t a consensus. I mean, in the United States, lots of people have been incredibly angry with the current Environmental Protection Agency, but the truth is, there are a load of people that are really pleased that the policies of the Obama administration are being diluted and even abandoned. Whereas, there is not a constituency, anywhere I would say for high and volatile inflation. Well, other than a few hedge fund guys, but who cares about them, and there is not a constituency out there, can we have more financial crisis or when we have them, can they please be deeper. I mean, there is a consensus, you know, we want a stable financial system. We want stability in the value of our money, but then, crucially, I think you want to set these agencies an objective, that is – that can be monitored and not just monitored by the cognoscenti, but that people – the newspapers, and commentators and Parliament can monitor whether or not you’re achieving what you have been given to do. And that drive, that’s quite restrictive.

The other thing is, whether it’s our Liberal political values or our Republican political values, we should want these bodies to be committees. I think, partly because you’ll get better debate and so, get better results, but it’s partly also, so that you don’t concentrate power in one person’s hands. I mean, it’s – the idea, and I’ve gone over this with Ofcom, but I think there’s a kind of deeper thing here about, it’s kind of Madisonian value about fragmenting power and we should want to fragment power in our independent agencies. So, I was dismayed, for example, recently, when I saw that one of the big agencies, happened to be the one I worked in, has set up an Enforcement Committee, so as to – without siders, so as to establish a separation from the investigation of a problem, from the decision on a problem, I think that’s good, and then they appointed to this Enforcement Agency a Member of the House of Lords, who’s a Legislature. I mean, this is absolutely crazy. I mean, not on that feminine point, I mean, she’s great, but it’s absolutely – well, imagine if there was legislation about regulation or the Bank of England going through Parliament while a case was coming up. This is the kind of thing they do in the States and actually, in Germany, something that the courts absolutely immediately say, “We’re going to strike this out as a, kind of, conflicted procedure.”

And the final thing I’ll mention is oversight by Select Committees, Committees of Congress, on behalf of the public and – but this actually, is a bit of a constraint. A few years ago here, quite a few years ago the Chair of the Agriculture Committee, when asked about this, so, you know, we have more bodies to oversee than it is possible for us to do properly, to which my response is, “Well, we should not have more independent agencies than Parliamentary Committees are capable of overseeing.” And if that means that in the short-run policy is done less well because it is under the control of Ministers, by my lights, not everyone would agree with this, by my lights that is better than having an agency that decides that the relevant Select Committee has no time to oversee them and no time to have hearings, until something eventually goes wrong. The – but what are those Select Committees for? I will end with an anecdote, which forms the quote at the top of one of the chapters. So, Mervyn and I were testifying on – I guess, on monetary policy, and George Moody, who was the ranking Labour Member, he was great actually, although you could never say that to them. I mean, he was quite scary, but he said, “Mr King,” or, “Governor, Mr Tucker, you come here and we ask you these questions and you give these eloquent, elegant answers and then you go back to your building and I don’t know if it makes any difference whatsoever. I mean what is the point? What is the point of all of this?”

It sounds funny now. I tell you, it wasn’t bloody funny sitting there. He said, “What is the reason?” I mean, this – and the reason is, what we said, what we each said was, “You, Parliament, made us independent. So long as you leave that law in place, it is our duty to go back and decide what we each think is right, and what these hearings are for is, so that you can decide whether the system should be sustained or whether to change it, whether to get rid of it or to amend it in some way, and it’s our duty,” I’m now adding this next bit, “it’s our duty to tumble out, as much as we possibly can, of our thought process, so that you can see whether this was, indeed, what you intended.” And that doesn’t always work well. So, I’m going to say one other thing, which is the debate about quantitative easing. I think we, as I then was, we were slow to talk in public about the distributional effects. We were slow to talk to ourselves about the distribution effects. In 2012, the Select Committee said, rather pointedly in public, “Go and write a paper on that,” and although I feel, “God, you know, we should’ve got there first,” how terrific that they made the Bank of England do that, and before it happened in the States and before it happened in the ECB.

Actually, the quality of the Treasury Select Committee of the Bank of England, monetary policy, at least, is pretty good. Much better than Congress of the Fed, but it relies on bodies like this, think tanks and the media to ensure that the Politicians oversee the system well, and if they don’t, we shouldn’t have it. Thank you.

Adam Ward

Great, thank you very much [applause]. So, you set out quite a number of what you think are the necessary ingredients for getting into, you know, a better formula. I think another one that you allude to in the book is this notion of judicial self-restraint, by the independent agencies themselves.

Sir Paul Tucker

Yes, yes.

Adam Ward

Now a lot of your recommendations are terms of reference, formal structural recommendations, this one seems to be almost more psychological or a cultural one.

Sir Paul Tucker

Yeah, yeah.

Adam Ward

How do you go about instilling that judicial self-restraint?

Sir Paul Tucker

So, this is – it’s brilliant that you’ve picked that up because you’re absolutely right that the book is – it’s not quite about hard law, but it is about something you could codify, and then it gets to the last couple of chapters and then it says, “Oh, but actually, even that’s not going to be enough. You need these people to exercise self-restraint and that can only be a norm. A norm that is, kind of, deeply embedded in the community,” and our Judges are good on that. I mean, I think if one of our Judges intervened in an election, in the way that Justice Ginsburg intervened in the last US Presidential Election, I think there would be a real uproar here. I mean Lady Hale is now the President of the Supreme Court, had a bit of a hard time just because she’d given a speech about Europe in Southeast Asia.

The – I think by talking about it actually, by think tanks and Parliamentarians and the media, talking about it, I give a few examples of where Central Bankers have talked, I think out of turn, but it doesn’t matter that I think they talked out of turn, their societies did. When Janet Yelland first became Chair of the Federal Reserve, she went up to Boston and gave a speech on inequality and in the speech, she didn’t really talk about how Fed policy bore on that or how it affected the Federal Reserve, and actually she could’ve done that, but – and I think it’s sad she didn’t. The effect of it in Washington was, you know, it just shows they are a Democrat institution and we’ve always known, and there was a certain amount of private hair-pulling by some of the most sober, senior Fed Officials I’d known. Raghuram Rajan, who was Governor of the Central Bank of India for a while, he started giving speeches about the importance of tolerance, which were taken to be, and I think were intended to be, not very coded messages about Hindus should be nice to Muslims. Well, you know, and the – part of the Hindu Nationalist elite were outraged and he wasn’t reappointed and he wasn’t reappointed because they thought that he had stepped beyond the bounds, and part of what I want to say is, if you – it’s a very peculiar thing.

If you occupy these offices, you are given this power and you are given a platform, and we need a culture that you won’t use the platform. You won’t use it for things, except that what’s clearly relevant to what you do and I use – haven’t got time now, but I draw on examples from the Military and the Judiciary, to try and chart how central banking’s a bit like one and a bit like the other.

Adam Ward

But you make your argument obviously, on grounds of political values and our constitutionalism, but you’ve also, clearly, got some regard for questions of efficiency.

Sir Paul Tucker

Oh yeah.

Adam Ward

So, we’re ten years on from the financial crisis, do you think that this particular setup entails specific or specifically heightened systemic risk, or…?

Sir Paul Tucker

In the UK or around the world?

Adam Ward

Well, either.

Sir Paul Tucker

In the UK, I mean, I would – I mean, this is – I mean, we shouldn’t take any notice of anything I say, but in particular this because I, as I said, I’m the architect. I think the Bank of England power, as an architecture, are reasonably well-designed. I have one concern about them, which is that the Financial Policy Committee has voted unanimously on everything over, and I’ve said – I said at event there that I found it implausible that they had agreed on everything for seven years. I might or might not be right about that. What I am more confident of, normatively is, the unanimity has made it harder for the Select Committee to oversee them. One of the things I realised, not immediately, but quite quickly about the MPC is that what minority votes do is, they help the public understand where the debate is and you go along, you and I go along to the Select Committee and somebody says, “Well, what do you think about that, Mr King?” And you’d say your thing and then they’d say, “Do you agree with that, Mr Tucker? It doesn’t seem to fit with your vote at all or the reason you gave for your vote,” and suddenly, they’ve got something that they – the Members of the Select Committee know more than most Parliamentarians and more than most members of the public, but they’re not specialists and voting and disagreement helps them hone in on where the debate is, and that has not been happening on finance. If, you know, nine of you turn up and, “Oh yes, we all agree, it’s all” – and it’s much harder for them to create the kind of debate that’s needed.

Adam Ward

So, unanimity undermines precisely the credibility that independent agencies are meant to amplify through their work?

Sir Paul Tucker

I think it does, yeah. I think it does. I think disagreement is – helps accountability.

Adam Ward

And then, have you seen a model internationally, the setup that you like? Is there a country out there that’s got a good template, in terms of striking these various balances?

Sir Paul Tucker

For agencies in general, I think the country that has been most thoughtful about this, in recent years, is France. And then, you know, and one of the nice things about getting old is that you discover you’ve got prejudices that you’re still shedding. So this is not what I expected. They’ve – let me mention three or four things about France that I think are quite striking. First of all, whether or not independent agencies fitted into their Constitution. Their Constitution provides for the delegation of regulation-making power to the Prime Minister and other Ministers and a case went to the Constitutional Court about whether or not you could have independent agencies. And the answer was that you could, but if they were going to be independent, they really were going to be independent. So, there are no override powers in France of the kind, whereas, override powers have been the solution to everything. I mean, you know, every sponsoring Minister wants a whole battery of override powers. Yeah, I’m being slightly unfair, but that’s the shape of it, whereas, the Constitutional Court they said, “No, no, this is quite good, in terms of the incentives, you know, don’t Assembly President create an independent agency, only to, kind of, give yourself backdoor controls. If you make them independent, you will mean it.”

[Inaudible – 37:00] ‘cause, as you know, they have a separate system, the top administrative law court, they said things that were quite constraining as well. But none of that stood in the way of the French Senate, a few years ago, getting really fed-up about the independent agencies and wrote a report. Had a semi, completely, slightly over the top, saying they’re abomination and there were far too many of them and this, that and the other. When the dust had settled, the Assembly, which is more powerful than their setup and the Executive, came up with a new Framework Law for independent agencies, including some criteria for what kind of – the circumstances in which an agency could reasonably be independent, and the consequence of that was, I can’t remember whether it was five or six agencies had their independence taken away. Because when examined against these criteria, as part of their – of course, it was co-terminus these things, it was, well, these people shouldn’t be independent and actually, some of the Senate complaints had been right, and I thought, my goodness, we haven’t been through anything like that here.

The Institute for Government has issued a few reports that get into this space and everyone said, “Oh, those are really interesting and important,” but no-one has picked it up in Whitehall or Westminster in the way that I – from a distance, I observe in France. I think America has got worse problems than us, but of a slightly different nature.

Adam Ward

Good, we’ll open it up to the floor. If you’d like to wait until the microphone reaches you and then, for the benefit of the speaker, just introduce yourself.

Robert Foster

Hello, Robert Foster. I used to work at the then, Competition Commission, as CE there, and I was wondering if you could say what you think is the value of the role of, say, the Appeals System, there it’s the Competition Appeal Tribunal. Now, the interesting thing, you know, vis-á-vis you mentioned Ofcom is that as well as a, sort of, judicial review function, it’s possible to get specialist, say, economic input from the CMA, as part of the knowledge base of the Tribunal and is that, sort of, approach do you think something that could be used more widely for so-called independent agencies?

Sir Paul Tucker

So, I’ll try to speak while I’m sifting through for something. I’m looking for a quote from one of the former Heads of the Tribunal. I have a slight concern about the Tribunal system. Let me say – let me back-up a bit and I – the Competition Authority should be independent because you want to commit to fair adjudication of competition disputes, and I think the Treasury were instrumental, under Labour actually, of pushing for an independent Competition Authority. I think there is a sad story, in the Western world, about the framing of objectives for Competition Authorities, where the driving force was the United State. But the rest of us have inhaled, and you will know this better than me, but the language of the Sherman Act and the Claymon Act, Clayton Act, but I think it was the Sherman Act, in this case, that really mattered, are vague and doctrine in the FTC and the Department of Justice Anti-Trust Division and courts, more generally in the United States, for a long time turned on a whole of per se rules, which I’m going to – and this is going to be a caricature.

If A merges with B and they’re going to have a market share of over X it’s per se illegal. So, the burden of proof was the other way around, and the Chicago, the great Chicago School Debate, and starting from the 60s, going into the 80s, why Robert Bork didn’t get confirmed as – one of the reasons he didn’t get confirmed, as a Supreme Court Justice, was he said, “Well, all this is absolutely nonsense.” Instead, it ought to be about welfare and in particular, will this merger of A and B, will it push prices down and volumes up, which is actually pretty good and then, the generation of John Vickers and your generation has improved on that further. What bothers me about that is it happened entirely via the court system. There is no consultative paper that comes out of the Executive Branch of Government. There is no debate in Congress about this and yet, did this change the course of competition policy in the States? I mean absolutely, fundamentally. Frankly, did it change the shape of American business? Yeah, absolutely, fundamentally. You wouldn’t have as many big businesses in the States if they had stuck with the Harvard School Rule.

I am not – I am, in terms of my own project, I am not – I am less interested in the merits of the substantive policy than that was this a change in high-level policy? Vague term, but I think this was a shift in high-level policy and the high-level policy should’ve had a democratic imprimatur on it and it didn’t, and much the sa – a kind of diluted version of that happened in Europe. I talked to some of the people, and who’d been in the Commission at the time that pushed this through and they said, “Oh yes, yes, we pushed that. We pushed that through,” and I said, “Well, you – shouldn’t you’ve kind of ensured that there was, kind of, broad support for it?” Now, wasn’t quite as bad because they did consult on it. On the Tribunal, I have a concern, which is a few people, I talked to, or quite a few people I talked to, both around CMA and some of the other agencies, more or less said, “Well, of course, really, it’s the Tribunal that decides policy because once a case has gone up to them, we, you know, we – the principal in it, we wouldn’t want to go against.” So here’s the quote I was looking for, “Where Parliament has established such a specialist Appellate Tribunal, in a particular field, it’s expertise should be used to be best effect,” I’m going to read slowly now, “to shape and direct the development of law and practice in that field.”

Well, I know what a policymaker sounds like ‘cause I was one. That’s what a policymaker sounds like. Now, is that a bad thing? Well, the thing is, the thing that’s interesting about it and I think uncomfortable is that because – partly because this country made the choice that the Tribunal Members would be Judges. Australia, as I’m sure you know, decided that they wouldn’t be Judges. Partly because they are Judges, there’s no question of them testifying to a Select Committee on their policy and I think, well, why should I testify on regulatory policy and the Members of the Tribunal don’t have to testify on the way they shape competition policy, and so, I do think – actually, I think America has got this better.

The appeal is within the agencies in the United States and then, there can only be – and there can be judicial review, and as you all know, there are periods where judicial review in the States, the hard luck approach gets more into substantive merits. But normally it gets pulled back from that and the Supreme Court has tended to slap down the DC Appeals Court, when they’ve got too far on the merits, and I would rather have the Judges do the integrity of processes and substance, merits, policy done by people that can be brought in front of Congress or the Commons, not overruled but, you know, “Bloody hell, why’s that your policy?” “Oh, I see, alright.” Or, you know, “We’re going to have to make a change.”

I think the effect of the Tribunal system being judicial and being protected by you can’t really challenge them is that it takes out of public debate, things that in a democracy should be part of public debate. Not the individual decisions and not the adjudicatory decisions, but the general policy that develops over time.

Adam Ward

Yes, please, and we have about ten minutes more, I think, for Q&A. If anybody else wants to get my attention, please raise your hand.

Richard Sanders

And my name is Richard Sanders and I’m a Member of Chatham House. I might be wrong here, but I seem to remember that the independence, at least setting interest rates to the Bank of England was given to the Bank of England by Gordon Brown, when he was Chancellor of the Exchequer…

Sir Paul Tucker

Yes, correct.

Richard Sanders

…under a Labour Government, which, in some senses, is perhaps slightly counterintuitive. Do you think – and as far as I understand it, that situation’s not changed that still the Monetary Policy Committee has independence over the setting of interest rates.

Sir Paul Tucker

Hope so.

Richard Sanders

And so, could you explain pre – the mindset of Gordon Brown at the time for doing so?

Sir Paul Tucker

Yeah, yeah. Divorce.

Richard Sanders

And do you think it was a good idea and should – and do you think that there might be some change, subsequent to maybe a different Government could be elected?

Sir Paul Tucker

Yeah. Yeah, it’s very interesting what you say about somehow, that’s counterintuitive and what you said is absolutely the orthodoxy in political science. The political science orthodoxy is you – that what Politicians do, depend upon who their Constituency is, their backers, who pays for them, the United States and therefore, you’d expect a conservative Government, a small c, conservative Government to favour central bank independence, and a more left-leaning Government not to. And the argument is well, and a Conservative Government will do this because they want to lock-in their policy. Chile is an example of this at the level of constitutional politics, and it’s very, very interesting ‘cause the political side is these people study politics, and they’ve got the richness of politics completely wrong, which is politics, certainly in a Parliamentary system, but even in the state system, it’s competition. You basically want to beat the other side and you don’t expect to win all the time. So, actually, the valuation is, so, yes, this isn’t a good system, we’re going to mess it up, but the question is, are we going to mess it up more than the other side or are they going to mess it more than us. So, if you’re a Conservative, you do not want to make the Bank of England independent because you know that eventually, damn it, you’ll get voted out and Labour will get voted in, but they’re bound to spend too much and tax too little and borrow too much and let inflation get out of control. And in fact, that’s the corrective device that will bring you back into power.

In those circumstances, the Party that will grant central bank independence is a Party that – from the Left, that knows they – that their broader movement faces that hazard. So, then the interesting question is, well, if that’s the right way round, why, when the Conservatives get back in, here or elsewhere, why don’t they undo it? And that depends upon whether there were really benefits to monetary independence, and at least, as measured by the yield curve and for the Finance Economists amongst you, this was not – there was a fall in risk premia of about 25 bases points, which is about 10% of the real rate of interest, which ginormous. I mean, absolutely ginormous, in terms of the public finance. Listen, this is a benefit whoever’s in Government. If you’re on the right, you can have tax cuts. If you’re on the left, you can spend more, but it means that if, when Labour go in and grant independence, the Tories have got very little incentive to remove it when they get back in because, crudely, in terms of day-to-day newspapers, when they – if they do that, bond yields will go back up and immediately, people are saying, “Damn, there’s going to have to be a tax rise.” And our view, certainly Eddie George’s view, from the moment that Gordon Brown and Tony Blair did that, was that central bank independence in this country would not be embedded until there was a Tory Government and they opposed – in 1997, they opposed Bank of England independence and voted against it. And Peter Lilley who was the then Shadow Chancellor gave speeches in the House saying, you know, “Fire people down at Threadneedle Street,” and all of that, but actually, Bank of England independence was a violation of our deep political values because there couldn’t be accountability. There is a debate now – I don’t want to say too much about this because I don’t know enough about it. There is a debate now about giving the Bank of England lots more functions, targeting productivity growth, etc.

One of my criteria that I didn’t highlight is, you should only delegate functions with powers where the instrument you’ve delegated can be reliably expected to achieve its target. So, they want – you know, setting a target for productivity growth, you can monitor against that. Well, was productivity growth X% or not? The question in that case is, have you actually got instruments that could reliably be expected to achieve the target? That’s where that’s – apparently, they were asked about this in the Select Committee last week and I hope they – I hope that’s the answer that they gave.

Adam Ward

Yes, please.

John Bishop

John Bishop, Chatham House Member. Can’t resist, on following-up by asking how, going back to the grant of independence to the central bank, but at the same time, hiving off banking supervision into what seemed to be a much less experienced agency, fits into your general thesis or doesn’t, because it seemed that practically, it would’ve been better to have left that with the Bank of England, at least from a macro standpoint, but that was not done and arguably, you’d be more in favour of separating these things.

Sir Paul Tucker

Well, that’s a very great question and so, in a sense, there’s – I’ve spent some time on this in the book because you can make a question of – if you start off concerned about concentrations of power, you’d say we don’t want this in the central bank ‘cause it’d make them too powerful. The FSA, by the way, had too many – it would fail that test too, ‘cause it was the – it had a, kind of, supreme power and everything financial and that, you know, didn’t go so well. The – I actually think central banks should be involved in banking supervision. I don’t think one can make a completely compelling case that they should be the only body that’s involved in banking supervision and regulation. But I think it’s incredibly difficult to take them out of it, for this reason, because of their monetary powers, they’re inevitably, the lender of last resort, which means that they will be at the scene of almost any financial disaster, and lending to firms or not lending or whatever, and they need to know something, really know something about the firms to whom they’re lending and how to do all of that. So, a complete separation where they’re – where the central bank becomes completely isolated from supervision and regulation, frankly, leads to the kind of disaster that we had with Northern Rock in 2007. And all I can say is that had the crises come ten years later, it would – this country would’ve been even less equipped to cope.

Initially, in the Bank of England, the only people that were useful were over 45 or maybe over 40 and that all of them had been involved in supervision in the past, and we got some people out of retirement. All the clever young people learnt quickly, it’s a very talented place. So, I don’t think that you can take the central bank out of banking stability and supervision, so long as they’re the lender of last resort.

Now, very interestingly, and this is probably the only occasion I’ll say this and seeing Ian in the room. Very interestingly, the Chief Ideologist of the FSA, in the last 1990s, who’d been, I suppose, my great friend and rival, in my generation of the Bank of England and people, he wrote papers under Howard’s encouragement saying, “Although the Bank of England should implement lender of last resort, the decision – it should actually be a decision of Treasury Ministers, on recommendation from the FSA.” So they had thought through this. I mean, I’m not surprised that Clive had thought through this point. It was a disgrace of an argument actually, because it says – and for another reason, because it says that the governing – “The people who had governed the Bank of England shouldn’t be responsible for the risks on their balance sheet,” which I think would be a terrible mistake.

So I think the UK, people criticise – I want to say something personal at this point. People criticise Mervyn a lot about reducing the Bank of England’s involvement in financial stability, and things like that, and he and I are friends. We’ve had bigger disagreements that anyone will ever know about, but it is true that he played that down, relative to Eddie, and I believe he made a mistake. What is rarely said is, there is also, no doubt, that the FSA leadership were trying to push the Bank of England out of that territory and also, that the Treasury were perfectly happy with the Bank of England to pullback and the Treasury to, kind of, push and raising it.

I went to a Deputy Governor once and said, “This is all a mess,” and I was told to grow up, you know, this was the zeitgeist was, you know, that if he turns it into a monetary institute, that is what is wanted and the – and that was to be blind to the fact that the central bank is the lender of last resort and can’t be bereft of human capital and information and skill, when it comes to it. It also, turned out to be rather ambitious to try and – I think the FSA, it could’ve been a mistake, if they had merged fewer organisations into it. I think they got greedy. That will upset some of my friends saying that, but it’s what I’ve believed, since it happened, and I – one day I had to say it and I just did.

Adam Ward

Well, thank you very much, indeed. We covered a huge amount of ground and I’m sure you’ll be happy to continue the conversation at the book table.

Sir Paul Tucker

Absolutely.

Adam Ward

But now, please join me in thanking Sir Paul for the talk.

Sir Paul Tucker

Thank you for coming [applause].