Balls to the Bank

Following up on intemperate twitter feuds seems to have become a theme around here. I had a lengthy set-to with Pawel Morski about voting for Ken Livingstone, in which I pointed out that Ken was right about Iraq, that in general being right about Iraq should be rewarded, and being wrong about Iraq should be punished.

This may seem like ancient history to some readers, but it is true that Iraq was an important issue, there was no profit in being right, and powerful people were insistent in bullying and cajoling people who were right and promoting people who were wrong. People who manage to be right in situations like that are worth electing.

To which he responded that I don't have any objection to Ed Balls being Chancellor. I'm actually quite a Balls fan - he was right about austerity in 2010, another moment when the three conditions I mentioned were in force, and he seems to annoy the hell out of Tories. But wasn't he wrong about the economy?

Well, the specific decision everyone associates with him was Bank of England independent control of monetary policy. At the same time, and as part of the same package, the Financial Services Authority was set up to take over many of the Bank's regulatory functions in the so-called tripartite structure. The Balls-critical case is that this particular decision was wrong, and that it was one of the reasons why the banks got so bad. Interestingly, far fewer people object even now to giving the Bank control of monetary policy, partly because central bank independence was a really deeply felt and broadly spread ideology, and partly because the period 1997-2007 was actually rather prosperous and it wasn't all chopped liver.

The Balls-critical case is strongly identified with the Bank itself. Of course it would be - tell me more about this "not our fault" idea, I find it strangely fascinating. It also implies that it wouldn't have happened if it wasn't for pesky kids, which appeals to Tories. It also suggests that things would be different if the Bank had kept more powers and more staff, and this obviously appeals to any institution. Anyway, here is an excellent profile of Mervyn King and the Bank as he thought it from the Financial Times's Chris Giles.

To say the least, it does not sound like the King-era Bank was going to stop the bubble and restrain the banks if it weren't for that terrible man Balls. It sounds a lot more like just what it says, that the Bank's remaining responsibility for financial stability in general was not taken seriously, that it was a Siberia assignment, and that Mervyn King personally was convinced that markets were perfectly efficient and nothing could possibly go wrong. Further, the idea of the central bank being a "monetary policy only" institution was King's as much as anyone else's, and he took steps to staff and organise it as such.

It's possible to argue that the whole shape of British economic policy was wrong and Balls shares responsibility for that. However, even if he didn't forecast the storm, he did realise the weather had changed, unlike the Bank which kept the sails set just as they were through 2008. And he was also aware that we might only be passing through the storm's eye in 2010, rather than (like King and the Bank) clapping himself vigorously on the back.