By Luke Hickmore
Mark Carney does dry humour well. But the awkwardness was palpable when he quipped last week about whether he would keep his job. Such are the febrile times in the UK at the moment. It’s no mystery that some of the candidates to become the new British Prime Minister have misgivings about Carney. It was a potent symbol that the era of economics driving politics was over. Politicians are back in control and one of the upshots will be more volatility.
Next May it will be 20 years since the Bank of England was granted independence. Labour had just won a landslide election victory by seizing the middle ground of politics between the traditional left and right. Part of that meant taking a much more market-friendly stance. So it was that Gordon Brown set the Bank of England free from government control barely four days into his job as Chancellor of the Exchequer.
Mr Brown claimed that giving the Bank independence would herald the end of the ‘boom-to-bust’ economic cycles that had been caused partly by politicians meddling in monetary policy. Financial markets welcomed it and so began a pretty benign period for the UK economy. It grew steadily, inflation behaved and unemployment was fine. Economics drove politics for the best part of the following decade.
But operational independence couldn’t spare the UK economy from the ravages of the financial crisis. In the teeth of the crisis global leaders gathered and talked up the need for global solutions to global problems. Governments did act. But the bulk of responsibility for creating any form of growth after the financial crisis fell to central banks. So it was that central banks lowered rates and set off on the grand monetary policy experiment of quantitative easing.
It is clear that the policies of central banks have distorted financial markets (regardless of whether you’re a fan or them or not). They’ve trumped up asset prices and, broadly speaking, made those who own assets wealthier than those who don’t. They have also helped to shape the zeitgeist.
There’s a feeling that central banks have turbo charged the gap between rich and poor by making the rich richer and the poor poorer. Not all of the criticism is fair but the sense of injustice about income inequality is palpable. The feeling of unfairness is part of what motivated British voters to leave the EU. They didn’t feel the status quo served them so they rejected it. It’s a feeling that is galvanizing people across the US and Western Europe. It is small wonder that one of the best-selling books in recent years was about income inequality.
All of this has led to a certain irony. A policy that meant economics drove politics has ended up doing just the opposite. Reliance on central bank policies has created a social situation which is redefining the political landscape and politicians are reacting by defining the economics. In other words, politics is driving economics once again. The UK’s shadow Chancellor has advocated ending the Bank of England’s independence. Politics doesn’t drive economics to quite the same extent in the US at the moment but the Fed has come under similar pressure. The ECB is an equally dirty word to many Germans and Greeks alike, just for different reasons.
The halcyon days of 1997 look like a distant memory. Some will welcome the change. They (wrongly) trace the roots of income inequality back to central bank independence. Others say that structural reforms are long overdue and that it’s right that politics is front and centre so that politicians might actually have to act. Meanwhile some question whether it’s prudent for political whim to define so much about our economic future. Volatility can be assured. Financial markets like cold hard numbers over political calculations. And there are very few of those to go on when it comes to political change.
Luke Hickmore is co-manager of Aberdeen Asset Management’s Strategic Bond fund
