What can we learn from the Bank of England?
By Scott Sumner
David Beckworth has a very interesting podcast where he interviewed Adam Posen, who heads the Peterson Institute for International Economics. During 2009-12, Posen served on the Monetary Policy Committee at the Bank of England. In his discussion with David, he pointed to some differences between the BoE and the Fed:
1. The BoE has “live meetings” where there is an informal, free flowing discussion among equals. Fed meetings tend to be more scripted and the outcome is generally pre-ordained.
2. At the BoE, the Governor (currently Mark Carney) can be outvoted at a given meeting, without there being any sort of catastrophic loss of credibility. In the US, things are always arranged so that the chair is in the majority, and indeed there are generally no more than 3 dissenters.
3. The Bank of England is less nationalistic than the Fed. Adam Posen was appointed to serve on the BoE despite being an American. Mark Carney heads the BoE, despite being a Canadian. Just imagine President Trump picking a Canadian to head the Federal Reserve Board.
4. The BoE has a Monetary Policy Committee to make monetary policy decisions, and a Financial Policy Committee to make financial policy decisions. What a strange idea! The British decided to have extremely important policy decisions made by people who are actually experts in the field, instead of rank amateurs. In the US, we think nothing of having extremely consequential monetary policy decisions made by people whose expertise is financial policy, or even worse, community banking.
I don’t want to oversell the difference here. I happen to believe in the “wisdom of crowds”, but there will be a number of occasions where a dictatorial Fed chair in the US will make better decisions than what you’d get out of a more egalitarian committee such as you find at the BoE. It would take a long period of time to establish that one regime is superior to the other. Indeed the US might have done better during the Great Recession if Bernanke’s approach had been more dictatorial. But in the long run, decision made by committees will generally be superior to those made by individuals, and decisions made by markets, will generally be superior to decisions made by committees. Ultimately, we need to move past the discretionary central banking model, and toward a system where market signals direct policy.
A good start would have the Fed announce a willingness to buy unlimited NGDP futures at a price implying 3% growth and sell unlimited NGDP futures at a price implying 5% NGDP growth. This would put “guardrails” on Fed policy, add to credibility and accountability, and finally begin to rein in the policy discretion that greatly worsened the Great Depression, the Great Inflation, and the Great Recession.
PS. The BoE’s Monetary Policy Committee has nine members. The inner core has the Governor (Carney), three deputy governors and the bank’s chief economist. There are also four external members, appointed to renewable 3-year terms. (That was Posen’s position.) Policy decisions are based on a simple majority vote, where the Governor has no extra influence.
PPS. In the podcast, Posen also had some very interesting remarks on the recent decline in foreign direct investment into the US.