Professor Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs, which is today publishing Central Banking in a Free Society, a pamphlet in which Tim Congdon argues that the Bank of England should be privatised. Professor Booth makes that case here.
Earlier in the week, David Cameron signalled that he believed that banking regulation should be returned to the Bank of England. However, there is a danger in thinking piecemeal about this problem. As is proposed by Tim Congdon, in Central Banking in a Free Society, it is vital that the Bank of England is privatised, has its capital significantly increased to around £15billion, and is allowed to use freely its lender of last resort function to support banks that are illiquid but solvent.
The emasculation of the Bank of England by Gordon Brown in 1997 is substantially responsible for the current mess. A system of maintaining banking stability that had been copied all round the world was destroyed and the Bank of England turned into a monetary policy research institute. When Northern Rock hit problems, the Bank did not know how to act. It had lost its day-to-day experience of the banking sector and there was uncertainty as to the roles of the FSA, the Bank of England and the Treasury. Instead of the Bank of England using its lender of last resort function generously and quickly, Northern Rock collapsed and confidence evaporated.
But, simply to transfer banking regulation back to the Bank of England, without privatising the Bank, will lead to the establishment of the FSA’s bureaucratic mentality at the Bank of England. The institutional understanding of the banking sector that existed at the Bank of England before 1997 has been destroyed and cannot easily be recreated whilst it remains nationalised.
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