The bank bail-out and interest rate cut: what do we do now?
Two key pillars of the New Labour economic policy are consigned to the dustbin today and a third might be waiting by the front door ready to be dumped in the same way.
The first pillar is the freedom offered to the City to allow it to attract money and business and drive growth. That is now gone. The Government might be fighting shy of taking too much direct control of the banks but there is now an all-party consensus that bonuses and pay needs to be curbed (the Financial Services Authority will be doing this apparently) and that there needs to be a major international effort to regulate the markets. I’m not sure this can be done without a similar effort to clamp down on tax havens which will also go to the heart of New Labour’s friendship with the City.
The second pillar is the fiscal rules. It seems likely that Darling will finally tear these up tonight – they are pretty much shredded already anyway. (update: the lecture Darling was due to give in which he would have referred to the fiscal rules has been postponed with no new date yet set.)
The third pillar is independence of the Bank of England to set interest rates. This may yet survive but today’s interest rate announcement poses some hard questions. The Bank’s press release made a brave stab at claiming that the cut was a response to the risk of undershooting the inflation target next year but this is not entirely convincing. If the Monetary Policy Committee decision was entirely in line with its remit, how could it make exactly the same decision on rates at the same time as five other Central Banks? This suggests a level of co-ordination that must have involved governments and makes a nonsense of the claim that MPC members made up their own mind based on consideration of the inflation data and then voted. I’m not saying the cut was the wrong decision but it does raise hard questions about the sustainability of the monetary architecture in tough times.
What this means is that the fiscal, monetary and broader approach to growth that governed economic policy over the last ten years is largely in tatters. The big question after today is what replaces it. What are the new economic goals we are setting ourselves and what tools shall we use to get there? This, I think, will be the main political debate for 2009 and the one that will probably dominate the next election. A debate, of course, conducted under the shadow of a recession.