David Ruffley MP questions Dr Sushil Wadhwani and Professor Charles Goodhart on Accountability of the Bank of England

Monday, 23 May, 2011

On the 23rd May 2011 David Ruffley MP questioned Dr Sushil Wadhwani and Professor Charles Goodhart on Accountability in the Bank of England.

The text of Mr Ruffley's interview can be found below and the full text of the proceedings can be found here

Q187 Mr Ruffley: Dr Wadhwani, good to see you again. When you had disagreements, if I can call them that, with the Governor of the Bank of England, when you served on the Monetary Policy Committee, about the access to staff that you wanted and so forth, who did you complain to?

Dr Wadhwani: Essentially, it was not just me having a disagreement, there were four of us together, and Charles was certainly one of the others. I am now relying on memory, but essentially my-

Q188 Mr Ruffley: Where I wanted to go with this is, did you complain to the Court?

Dr Wadhwani: Yes.

Q189 Mr Ruffley: You did?

Dr Wadhwani: Yes. We first went to Court. We first essentially exhausted our options in terms of discussion with the internals. Having done that, we did actually take it to Court. Court then raised it with the senior internal members and then at some point in this process it leaked and it made it into the press. We were then coming in front of you. You also played a very important role in resolving this. We were due to come in front of yourselves and it was essential for the credibility of the whole process that it all be sorted before we made our public appearance. That, essentially, provided a deadline for all the negotiations between Court, the internals and the externals to be resolved.

Q190 Mr Ruffley: That was an example of the Court doing something useful, was it?

Dr Wadhwani: Yes.

Q191 Mr Ruffley: May I ask you why you do not think the Court has asked for a piece of work to be done, not by the Court itself, because it would, I would guess, lack the necessary expertise? Why do you think the Court has not called for an independent inquiry, scrutiny, into the conduct of Bank policy in the run-up to the banking crisis?

Dr Wadhwani: I am not close enough to the process now, but certainly soon after I left, Court did commission an inquiry into the forecasting process of the Bank. So there is certainly precedent for them-

Q192 Mr Ruffley: Sorry, the forecasting in the run-up to the banking crisis or-

Dr Wadhwani: Yes. I may have the date slightly wrong, but I left in 2002 and it is my belief there was an inquiry into the forecasting model in 2003, which was set up by Court, and Court essentially invited an external expert.

Q193 Mr Ruffley: Who was that, do you know?

Dr Wadhwani: Someone will help me. Was it Professor Adrian Pagan?

Professor Goodhart: I think it was, from Australia.

Q194 Mr Ruffley: You see, what is interesting is that there was a precedent for the Court commissioning some work. Given that precedent, why do you think that precedent was not followed? I know you were not there at the time, but why do you think the Court neglected to do that?

Dr Wadhwani: I have to say I am far removed from the process but I find it very, very surprising. I find it very surprising.

Mr Ruffley: Well, I share your surprise.

Dr Wadhwani: The only other thing I wanted to add is that I think if Court were to set up such an inquiry, it is very important that Court itself chooses these experts and doesn't allow the Bank executive to choose these experts. I think it is very important that the process be seen to be entirely independent and above board.

Q195 Mr Ruffley: Yes. Professor Goodhart has been at pains to stress that the Court does not get involved in policy matters. To paraphrase, he talked about making sure business efficiency is what it should be and resolving perhaps disputes between members of the Monetary Policy Committee. I understand that, but don't you think there is a case for the Court to have beefed-up powers, to have an express power to commission the kind of work that you cited as a precedent and which I think this Committee would have liked to have seen the Bank call for in the light of the banking crisis? In other words, for the Court to take directly on board the responsibility for scrutinising policy decisions and, indeed, policy mistakes. Do you think there should be a rewriting of the Court's remit?

Dr Wadhwani: I certainly think that Court should be given enhanced powers. I worry that with the Bank becoming so much more powerful, there is going to be an accountability deficit. We should do everything we can to increase the checks and balances in this whole process through yourselves, Court, more externals; everything we can do.

Q196 Mr Ruffley: Following on from stronger, tougher powers, if you like, to scrutinise and to challenge the policy choices and decisions of the rest of the Bank, do you think the personnel on the Court of the Bank of England, given that I think we are arguing for newer powers, should be improved? I would just say a comment that the one thing that many of the former Court Directors had in common was trusteeship of either the Royal Ballet or the Royal Opera House in London or, indeed, the National Ballet in Scotland. It does seem to be the great and the good, sometimes a bit past it, to be quite frank. Do you think the personnel should be improved?

Dr Wadhwani: I should say right away that the members of Court that helped us through the resources dispute were unquestionably independent, very clued up and they knew exactly what they were doing. The sorts of people I am thinking about included a very nice lady from the Consumers' Association, a trade unionist, and they were incredibly helpful to us throughout the process.

Q197 Mr Ruffley: Yes, but on the point about new powers, if you wanted to construct from scratch a body that was going to commission a piece of work to work out what went wrong in the Bank in the run-up to the banking crisis, would you be content with the cast list of the Court that you have at the moment or would you want people with more expertise? Yes or no?

Dr Wadhwani: I think it is always helpful to essentially have greater heterogeneity and certainly I think some members of Court should have significant expertise in this area because I think they can help other Court members a lot.

Q198 Mr Ruffley: Professor Goodhart is smiling; I don't know whether it is knowingly or not. Professor Goodhart, would you like to comment on this?

Professor Goodhart: To your yes or no question, I would answer no because I think that what worries me is what you seem to be asking to be set up is a body related to the Bank that has the role of continuously second-guessing the Bank.

Mr Ruffley: No, I-

Professor Goodhart: When you ask for one of these expert committees to be set up, it is almost always going to be when something has gone wrong. That is going to mean that you are getting the Court, or requiring the Court to be passing what is an implied judgement of no confidence in the Bank's policies.

Q199 Mr Ruffley: What, in the very act of commissioning an independent report?

Professor Goodhart: Yes. If you are going to ask the Court to set up a body to say what were the mistakes undertaken in the run-up to the crisis, you are more or less saying they made a lot of mistakes. Now, you are established by Parliament to do that second-guessing. I think to have a body connected with the Bank, in a sense over the Bank, in a position of responsibility that is also going to be second-guessing the Bank would be a recipe for problems.

Q200 Mr Ruffley: You are actually over-interpreting what I said. Following the precedent in 2002 you referred to, it would be the Court or a reconstituted Court commissioning work to scrutinise what had gone wrong.

Professor Goodhart: But setting up the body to look at the forecasting is an implied judgment that there is something wrong with the forecasting, it needs to be improved.

Q201 Mr Ruffley: But they did it.

Professor Goodhart: Sure they did it, but forecasting is about as technical as you can get and I think that you would always find that setting up committees to study this, that and the other is always going to be done when there is a clear assumption that something has gone wrong.

Q202 Mr Ruffley: You don't think there was a clear assumption that something has gone wrong with the banking crisis?

Professor Goodhart: It went wrong everywhere. As I say, it went wrong with every central bank in the world; it went wrong with virtually every regulator; it went wrong with virtually all political institutions; it went wrong with economics. We were all guilty.

Dr Wadhwani: Some central banks are better than others and maybe there are lessons to be learnt from that. For example, the Reserve Bank of Australia did lean against the wind in terms of the emerging house price bubble and they did do a better job. Maybe there were some lessons for us to learn from that.

Q203 Mr Ruffley: Final question for you, Dr Wadhwani. The Financial Policy Committee will be a committee of the Court rather than a committee of the Bank of England, which is what the MPC is. What conceivable justification is there for that difference? I think what I am saying here is that this Committee as a whole is not desperately impressed with what the Court has done in recent times and for the new FPC, a very important body, to be accountable because it is a committee of the Court, which is different from the MPC, it is rather worrying to me. Is it worrying to you?

Dr Wadhwani: I don't know enough about why they have structured it this way, so it is possible that I am missing the argument, but I would agree with you that, given my current level of ignorance about the reasons for having structured it that way, it does seem odd.

Q204 Mr Ruffley: Professor Goodhart, could you help us?

Professor Goodhart: I do not understand what lies behind it.

Q205 Mr Ruffley: Do you think there is anything fishy going on? Why the distinction? Well, we will have to ask other witnesses.

Professor Goodhart: I am afraid I am ignorant.