Bank of England (Appointment of Governor) Bill

Jacob Rees-Mogg Excerpts

Friday 6th July 2012 Commons Chamber

[Stephen Hammond]

I am grateful to the hon. Gentleman.

The Bill is supported by large numbers of Members from both sides of the House, including many right hon. and hon. Friends whose judgment and intellect I respect and admire. However, let me start by setting out the four points on which there are internal contradictions in the hon. Gentleman’s argument or where there are reasons to oppose the Bill. First, the role is unique, and its extension increases that uniqueness. Secondly, the Government are already putting safeguards in place through the Financial Services Bill. Thirdly, despite what the hon. Gentleman has argued, a lot of people would accept that what he proposes is a fairly major constitutional change. Moreover, an underlying point he made is that this Bill somehow fits with the principle “for the people, by the people” so that anything other than that would be unacceptable.

I recently participated in a transport debate and gave what I thought was a fairly good detailed speech; indeed, one or two people were kind enough to say it was useful. I was pleased to note that my hon. Friend the Member for Preseli Pembrokeshire (Stephen Crabb) who was the duty Whip at the time, said something like, “That was one of the dullest speeches I have ever heard; more time limits, please”! I hope the Whips will find my speech today to be equally dull; perhaps there is a case for time limits in debates such as this.

It might bring a little colour to the debate as well as a sense of purpose if we look at one or two of the Governors of the Bank of England over the last century who have been extremely powerful figures on the economy and powerful figures in respect of their independence from Government. We could reflect on how their appointments were made. Montagu Norman, for example, the Governor of the Bank of England from 1920 to 1944 was described by many as more of a bohemian artist than a banker. He liked to wear Sherlock Holmes-type clothing, was prone to nervous breakdown, regarded politicians as asses and openly said so. I just wonder what the Treasury Select Committee might have said to him when he was appointed.

[Jacob Rees-Mogg (North East Somerset) (Con)]

When Montagu Norman was Governor of the Bank of England it was a private company, so I do not think it would have been right, prior to nationalisation, for a Select Committee to have had any involvement in the appointment.

[Stephen Hammond]

Indeed. We could have a long discourse about the fact that Montagu Norman was the initiator of sound monetary policy, but in view of the strictures set out by the hon. Member for Hayes and Harlington, I shall not go down that course today.

It might be worth referring to two more modern Governors. Lord Kingsdown, who was Robin Leigh-Pemberton at the time he was Governor, was in some ways a classic figure. He had been a lawyer for many years and had no banking experience. He was appointed chairman of Nat West bank and was then invited to become Governor of the Bank of England. I am sure we could envisage the Treasury Committee saying, “But you are a lawyer, and we want a banker or someone with financial services experience”. The current Governor’s predecessor, Baron George, went from Cambridge to the Bank of England and never left it. Again, can we not hear the Treasury Committee saying, “But you are an insider in the Bank of England. You have no experience anywhere else. How on earth”—

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[Stephen Hammond]

I bow, of course, to my hon. Friend’s greater knowledge of this matter. My key point was that the Bank of England and its family, cousins and outside friends will now have a much greater role at the centre of the regulation of our financial system and, indeed, of our overall economy.

It is in some ways understandable that the immediate drive of the Bill before us is to increase the powers of parliamentary accountability, but I think there is some confusion between accountability and independence. Parliament will gain further powers of control, scrutiny and accountability under the Financial Services Bill. The exact powers are clearly defined, with reference made to the new financial stability objective, to the position of the deputy governor and the Financial Policy Committee, to the Governor’s appointment for eight years and to the fact that the Treasury Committee and, indeed, Parliament can hold the Bank of England to account. That being so, it is not necessarily the case that giving the Treasury Committee the power of veto over the appointment of the Governor would enhance that accountability, although it might impede the Governor’s independence. It is right for Parliament to have greater accountability and greater scrutiny, but we need to be clear that the Governor, who is at the centre of the operation of macro-economic policy and macro-financial and prudential control, must be independent.

The Bill before us contains not only a power of veto but a power of appointment, which could be seen as a step backwards in the whole argument about independent policy making. The Bank of England Act 1998 took a momentous step forward in respect of the independence of the Bank and the Governor by giving the power of decision over interest rates to the Monetary Policy Committee. That was, and will remain, the historic achievement of the Labour Government. It followed from and was a continuation of what the previous Governor had introduced, in tandem with the then Chancellor, my right hon. and learned Friend the Member for Rushcliffe (Mr Clarke), with the publication of the minutes of the interest rate-setting committee.

[Jacob Rees-Mogg]

Does my hon. Friend believe that the conduct of monetary policy from 1998 to 2008 was any better than it was when the Bank of England was not independent and when previous Conservative Governments from 1979 onwards were interfering in monetary policy very considerably?

[Stephen Hammond]

Again, my hon. Friend presents me with a tempting line of debate. It is reasonable to suggest that the period between May 1993 and May 1997 will be regarded as one of the golden eras of the operation of monetary policy. It was the period that drove the first 12 quarters of growth before 1997, and it was the period during which my right hon. and learned Friend the Member for Rushcliffe and Baron George—who, as I said earlier, might not even have been appointed by a Treasury Committee—operated monetary policy. I am sure that my hon. Friend and I could enjoy a happy morning discussing monetary policy, but, as I have said, I will not go down that line.

The protections and requirements introduced by the Financial Services Bill seem to me to be exactly the same as those introduced by the Bank of England in terms of independence. What concerns me is that if the Treasury Committee can hold the Bank responsible for its actions in the past as well as its immediate decisions, it does not necessarily need a power of veto over the Governor’s appointment. It has the power of accountability and of scrutiny.

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[Jacob Rees-Mogg]

Historically, there was a much better check on appointments to the Executive, because its members had to resign their seats and stand in a by-election. The public scrutinised appointments to the Cabinet, which was a fantastic system.

[Richard Harrington]

For once in my political career, I am completely speechless. I cannot claim before I scrutinise Hansard tomorrow that I fully understand my hon. Friend’s point, but I am sure that, being the person he is, he is absolutely right.

A further extension of the role of the Select Committee would make a fundamental difference to our system. It is not just a question of extent, as is the spreading practice of giving various Committees different scrutiny roles. Select Committees getting involved in hearings on major executive posts would be a fundamental change, and Parliament should discuss it if Members believe it is the right thing to do. That would an interesting and significant debate.

I would oppose the change. We have all seen the hearings that take place in America on the appointments of judges, Secretaries of State and so on, which are watched live all over the world. Although I do not feel that such hearings add anything to the democratic process, a valid argument can be made for them. However, they should not be introduced on a one-off basis in the case of the Governor of the Bank of England, because that would represent a fundamental change to our system. I do not think many people in this country would support judges being publicly appointed, and the same is true of many other roles including, I believe, the Governor of the Bank of England.

Select Committees are very good for scrutiny—that is their role. The Standing Orders, which I probably do not read enough, state that a Select Committee is

“appointed to examine the expenditure, administration and policy of the principal government departments”.

However, the control of executive appointments is quite different. The importance of that point should not be underestimated.

In 2000, in the report “Shifting the Balance”, the Labour Government stated:

“Any indication that a Ministerial appointment relied upon the approval of a Select Committee or was open to a Select Committee veto would break the clear lines of accountability by which Ministers are answerable to Committees for the actions of the executive”.

That is true. I ask the hon. Member for Hayes and Harlington to consider the fact that the Treasury Committee having a veto over the Governor of the Bank of England might allow a Chancellor or Prime Minister to say, “Well, it wasn’t my doing. That wasn’t the candidate I wanted”. That would give them an excuse, whereas now there is direct and clear accountability to Parliament.

I hope that no one, least of all the hon. Member for Hayes and Harlington himself, thinks I am saying that he has introduced the Bill with anything other than the best intentions, but the point about accountability should be considered. I believe in direct accountability, not in our senior elected politicians—or indeed junior ones such as myself—having an excuse to blame somebody else. I fear that that could be an unintended consequence of the Bill.

I believe in extra accountability and in making Select Committees strong, but I cannot support the Bill, because it goes totally against our current system. It is that system itself that Parliament should discuss and debate at length.

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[Mike Freer]

I never fail to be surprised at the ability of hon. Friends and hon. Members to vote for what they do not really believe in, as we might see next Tuesday. [Laughter.] The Whips do not need to write that down.

Before I read the substance of the Bill, I thought I would look at the history of the Bank of England. I promise not to go too far back, but I glanced to see whether there was a precedent for Parliament’s being involved in the appointment of the Governor. The Bank of England was formed to raise money for the Government of the day, who could not raise the princely sum of £1.2 million themselves because they were not credit worthy, even though they had sought to attract money by offering 8% interest rates—an eerie echo of the problems of the Greek and Spanish Governments 318 years later. It is not the time, while we are dealing with sovereign debt crises, to discuss whether Parliament should appoint the Governor of the Bank of England, and I will talk later about what would happen if we had to appoint someone in the middle of a crisis.

The Bank was originally a private bank paid for by private subscriptions. I read through its book of subscriptions from 1694—in fact, I have a copy of it with me. I was tempted to read it all out. I have the scars on my back from introducing the London Local Authorities Bill. I am pleased to see my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) here, because he taught me that the way to prolong a debate was to read out, in detail, the coat of arms of all the London boroughs, so it was tempting to read out the list of original subscribers.

[Jacob Rees-Mogg]

I am delighted to note that the time spent debating that Bill was not wasted.

[Mike Freer]

I can assure my hon. Friend that I learned a huge amount from the painful experience of taking that Bill through the House.

I wanted to find out whether anything could be learned from seeing who were the original subscribers to the Bank. One of them was the Receiver of Their Majesty’s Customs. I thought it was rather odd that a tax collector—a modern day Treasury Minister—was a founder of the Bank of England. Under the column headed “Quality” are listed merchants, widows, haberdashers, scriveners, grocers and apothecaries. Even clerks were allowed to subscribe to the original Bank of England.

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[Joseph Johnson]

Yes, I could not agree more with my hon. Friend. Like other Members who I will not mention again, I think that it would be far preferable for the Treasury Committee, if it is to have a formal role in any appointment of the Governor of the Bank of England, to be a statutory consultee. I do not believe that it would be remotely appropriate, however, for it to be given powers of decision over any such appointments.

In my view, moving towards the system of making the Select Committee a consultee, perhaps through a tweak to the Financial Services Bill as it goes through the other place, would be a more sensible system that would not cloud lines of accountability and would, in my view, avoid putting the Treasury Committee in the position in effect of having to mark its own homework. That would inevitably be the case if it were given veto rights over a candidate that it had itself jointly chosen in a binding pre-appointment hearing. From Parliament’s perspective, I believe that it would be better and preferable to stick with the status quo, whereby the appointment of the Governor is a matter for the Crown on the advice of the Chancellor and the Prime Minister. That enables the Treasury Committee to do its job of holding the Bank to account regularly and effectively in hearings with policy committee members.

In support of calls for a parliamentary veto of the appointment of the next Governor of the Bank of England, much has been made of the supposed precedents set by the Treasury Committee’s veto in the appointment of the head of the Office for Budget Responsibility. Reference has also been made to the rather more long-standing role of the Chairman of the Public Accounts Committee in the appointment of the Comptroller and Auditor General. The CAG is an officer of Parliament but until 1983 was appointed by the Executive. Since the passage of the National Audit Act 1983, the CAG has been appointed following a vote in the Commons on a motion proposed by the Prime Minister with the agreement of the Chair of the PAC. The selection process preceding that is run by an unusual partnership between Parliament and the Government, with the Chair of the PAC sitting on the selection panel with representatives of the Executive.

I happen to think that the comparisons are rather misleading and unhelpful. The role and responsibilities of the Governor in economic and financial policy making are completely different from the role of the Chair and members of the OBR, who are responsible collectively for producing forecasts and other analyses twice a year. In the case of the OBR, a parliamentary veto of the appointment can make sense in terms of providing assurance about the independence of the role of the OBR. The role and responsibility of the Governor are completely different. Whereas the OBR performs an important function in providing an independent and unbiased forecast on which Government policy can be based, the Governor carries out Executive functions on behalf of the state and has responsibilities delegated to him for key areas of economic policy.

A further important difference already touched on by my hon. Friend the Member for Great Yarmouth is that the appointment of a prospective Governor is clearly market-sensitive in a way that appointments to the OBR or National Audit Office in the case of the Comptroller and Auditor General clearly are not. Once an appointment is announced, his or her perceived policy leanings—whether or not, for example, the next Governor is perceived to be a hawk or a dove—can be duly factored into asset prices in an orderly way. Pre-appointment hearings of a sort that give MPs on the Treasury Committee a potential veto could quite easily cause anxiety and costly volatility in financial markets, for little obvious benefit—a point also made by my hon. Friend the Member for Spelthorne (Kwasi Kwarteng).

To reiterate the central point, rather than giving the Treasury Committee a veto, a better option would be to upgrade and modernise consultation arrangements, potentially to include not just the Chair of the Treasury Committee—a point that I made earlier—but the chairman of the court of the Bank of England. It is important that we upgrade and modernise the court of the Bank of England so that it can perform its oversight function more effectively than it traditionally has done and so that it feels properly empowered to use the rights that it already has under the Bank of England Act 1998, which are to manage the Bank’s affairs, other than the formulation of monetary policy. That means much more than simply addressing what many have described as an excessively deferential culture at the “court of King Mervyn”, as the Financial Times cheekily described it some time ago. It means more than changing the court’s somewhat archaic name, or removing a little of the flummery—the men in pink coats deferentially bearing silver platters around the Bank, and so on.

[Jacob Rees-Mogg]

It would be a tragedy to change some of the historic appurtenances of the Bank of England that remind us of the great rich tapestry of our history.

[Joseph Johnson]

My hon. Friend is right. It is important to focus on the substance of what needs to change at the court, rather than on the men in pink coats and the silver platters. That means ensuring that members of the court, or the supervisory board, as the Treasury Committee would prefer it to be called, have the ability and willingness to take a tough and challenging line, with a chairman who is prepared to take on a rather more effective and higher profile role than has, perhaps, been the case in the past.

Logically, if anyone should be given a right to consent to the appointment or removal of the Governor of the Bank of England, it should be the chairman of the court of the Bank of England, rather than the Treasury Committee as a whole. That avoids many of the constitutional difficulties to which many of my hon. Friends have referred.

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[Jacob Rees-Mogg]

Does my hon. Friend agree with me that 10 days is a negligible amount of time to debate so important a constitutional change and that for a constitutional change of that magnitude, we would need the whole Session?

[Matthew Hancock]

I agree with my hon. Friend in one respect, which is that changing the separation between the Executive and the legislature that scrutinises them would have great constitutional implications. I ask Members to draw their own conclusions on the contrast between that and merely changing the form of appointment to one of the two Houses of the legislature. That is a matter simply within the legislature, rather than to do with the role of the Crown in Parliament, which is the basis of our constitutional monarchy.

Let me bring the debate down to more practical considerations. If the Treasury Committee were to reject the Government’s preferred choice of Governor, a small number of MPs would effectively have vetoed a Crown appointment. The whole House would not have made that rejection; a small number of MPs would have done so. I do not think that there is any precedent for such a challenge, whereby a small number of MPs who are not Ministers challenge, through the power vested in them, the authority of our Executive—at least not since the days of Charles I, and we all know how that turned out.

Where would the Bill leave the royal prerogative? That question needs to be addressed. What would it mean for the role of the Crown in Parliament? In this jubilee year, as we celebrate 60 glorious years of Her Majesty, these are questions to which we need answers. It is perhaps no coincidence that the original proponent of this broad constitutional change was himself an avowed republican, with a history of great hostility to the Crown’s role in government: Tony Benn. Indeed, I understand the heartfelt and strongly held republican position of the hon. Member for Hayes and Harlington. He does not contradict me, so I presume that is his position. The Bill directly challenges that question of parliamentary accountability.

The Governor of the Bank is already accountable to the Treasury Committee for his or her decisions on monetary policy and financial stability, but I turn to the question of the increasing role of the Bank, because there is no doubt that under the Financial Services Bill it will have a bigger role than hitherto. The separation of bank regulation from monetary policy is a flaw and a mistake that has had grievous consequences, not least because the banking system is the conduit for monetary policy’s impact on the real economy.

I therefore strongly and passionately support the relevant change in the Financial Services Bill, but it does not follow directly that, under it, the position of the Governor is stronger than hitherto, because up until and including today in matters of financial stability the Governor has been imperial within the Bank of England. Executive powers over the areas of financial stability for which the Bank is responsible are the sole responsibility of the Governor in person, accountable to the court of the Bank and to the Treasury Committee.

Under the new proposals, the Governor will chair the Financial Policy Committee, and it is in that committee, rather than in the individual, that powers over financial stability will be vested. So on matters of financial stability not only will there be accountability externally, but decision making will be conferred on a committee that the Governor chairs, rather than on the person of the Governor himself.

[Matthew Hancock]

I am grateful to the Financial Secretary to the Treasury for making that clear, and I agree wholeheartedly. In the debate about accountability under the Financial Services Bill, one fact often overlooked is that, whereas previously a power vested in the Bank of England involved a decision by the Governor alone, for which the Bank’s deputy governors would take collective responsibility, it will now formally involve a decision by a committee, of which the Governor will be chair. That is an important distinction. Despite concerns about increased power going to one individual, in fact the increased power goes to an institution, but the internal arrangements at the institution are being changed in order to reflect that increased power. That is why I strongly support the Financial Services Bill not only in principle but in the design of the system that we are discussing.

To whom would the Treasury Committee be accountable if it had this Executive power? In the words of Juvenal, “Who watches the watchmen?” Under this proposed amendment to the Bank of England Act 1998, the Treasury Committee could stall or reject the appointment of a perfectly qualified candidate for whatever reason it chose— perhaps, heaven forfend, even in order to raise the personal profile of a member of the Committee. Given the powerful investigations by Select Committees over recent months—for instance, into phone hacking—I am sure that we would all be sceptical about the idea that any member of a Select Committee could possibly try to change the way in which an inquiry went forward in order to raise their own personal profile. I am absolutely certain that that does not happen.

[Jacob Rees-Mogg]

In those circumstances, a Government who commanded a majority in the House of Commons would be able to overturn the Select Committee’s decision or replace its members so as to arrive at a different decision. If the Select Committee were wholly irrational, it could be fired by the rest of the House.

[Matthew Hancock]

I have a great deal of respect for the intellectual integrity of the supporters of the Bill, but they cannot have it both ways. They cannot argue both that the Bill would have no impact because a Government with a majority could force their decision through the House of Commons and that it would be very important in changing how things operate. If the Treasury Committee vetoed a proposed Governor and that decision was then overturned by a Government vote on the Floor of the House, in practice the direct consequence would be that the position of that proposed Governor would be completely undermined.

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[Matthew Hancock]

Of course. The Government must command support for their programme from a majority of the House of Commons, but the Treasury Committee is voted for by Back Benchers, and as the two electorates are different we would not necessarily get the same result from both. The argument put forward by my hon. Friend the Member for North East Somerset—most of Somerset—(Jacob Rees-Mogg) is an argument for deadlock because it could lead to the Treasury Committee pushing one point of view and—because it is elected by a different electorate from those who support a Government—ending up with a contravening view being expressed on the Floor of the House. That is because the Bill would apply to the Treasury Select Committee or its successor body should its name be changed or its powers be passed to somebody else.

[Jacob Rees-Mogg]

If a Government command a majority in this House, they are in control of the Standing Orders, and therefore if a Select Committee made a wholly irrational decision, it would be completely open to them to find a way to change that Committee. It must always be true that the Floor of the House—the whole House—has command of any and every Committee of the House, but it would be an extreme circumstance for a Government to try to push through such a scheme.

[Matthew Hancock]

The argument appears to be that we should give the Treasury Committee a power of veto, unless the whole House disagrees with that veto. However, the majority in the House support the Government and it is the Government who initially propose who should be Governor, so the Government could never be overruled in extremis. To support a Bill in which the ultimate safeguard is the abolition of the Select Committee system is a little extreme.

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[Matthew Hancock]

I agree strongly. We need to be vigilant and—dare I say it—humble about how little we know about the future, instead of making grand assertions that because something has not been a problem in the past, it will not be a problem in the future.

[Jacob Rees-Mogg]

I agree with my hon. Friend that there have been many occasions in history—a few of which I may quote later—when Governors have shown themselves to be hostile to Government policy, but I wonder whether that is an argument against independence of central banks, rather than against the ratification of the appointment of central bankers.

[Matthew Hancock]

My argument is in favour of the operational independence of central banks—“freedom in a framework”, if I may put it that way, or “constrained discretion”, as economists inelegantly call it. The argument is that the broad strategy should be agreed on and put in place. Within that strategy and agreed framework, independence allows the Bank of England—or the institution making operational decisions—to look past shorter-term considerations and the impact of their decisions on Twitter and the next day’s headlines, and thereby take the political cycle out of the political economy of a decision affecting the country over a long period.

My analysis of the past tells us something important about central banks now. The point is that they should never be forced to do the Government’s bidding in the areas delegated to them. As we saw in Weimar Germany and Zimbabwe, removing operational independence has significant risks. Although I respect the view of my hon. Friend the Member for North East Somerset that the so-called Ken and Eddie show resulted in a more effective monetary policy than that which was pursued after operational independence was granted in 1997, I do not agree that the previous structure was better, because the ability to look past the political cycle is of value.

[Jacob Rees-Mogg]

I wonder whether we sometimes try to perfect structures as against what actually works. The period of monetary policy from 1998 through, really, to 2010 was disastrous, and was responsible for some of the problems from which we are still suffering.

[Matthew Hancock]

I agree with my hon. Friend that money was too loose. In fact, the growth of bank balance sheets—and, therefore, the money supply—was running at up to 25% a year for several of the years leading up to the crisis. The problem of over-leverage and too rapid growth in broad money is one of the things we are now dealing with as banks try to deleverage. Mistakes were made, but I would not put that down to the independence of the Bank, not least because, in whatever structure, the appointment of the right person and a system to appoint them is crucial, and this debate is directly relevant to the Bill.

[Jacob Rees-Mogg]

I wonder whether one can draw any conclusions from appointments during this period, because Sir Alan Greenspan—with his honorary knighthood—in the United States, whose appointment was ratified by the Senate again and again, was probably one of the worst central bankers in history, and I need not tell my hon. Friend how central bankers were appointed in the United Kingdom.

[Matthew Hancock]

My hon. Friend anticipates a couple of the points I shall go into in more detail later.

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[Matthew Hancock]

I am grateful to my hon. Friend, although I am slightly embarrassed by her eloquence. As she said in her speech, it matters to people that we get the management of the economy right. When it goes wrong, as it has in the past, that has a massive impact on our postbags. It is therefore right and proper for us who debate these issues in the House to devote a great deal of scrutiny to them.

The funding for lending scheme, which was announced last month, is a good example of how this works in practice. When interest rates are near zero, the connection between monetary and fiscal policy becomes even tighter. The ability to get low interest rates out into the real economy can depend on the use of the Government’s own balance sheet. The funding for lending scheme and the liquidity scheme, which I think is one of the most vital elements of our economic recovery, are a joint matter involving use of the Treasury’s balance sheet and the indemnity for the Bank of England, and Bank of England action in the markets, both between banks and in the context of the wider availability of debt. That is a clear indication of the requirement for not just operational independence, but a common strategy between the Governor of the Bank and the Government of the day.

Allowing banks to borrow from the Bank of England in order to lend directly into the real economy means having to ensure that the high rates paid by one bank to another because of the insecurity of, ultimately, their creditworthiness and the difficulty of accessing liquidity are not passed on to people who pay for mortgages or businesses that need to borrow to finance investment. Many businesses that have taken advantage of opportunities, and many mortgagees who have bought houses, are capable of repaying a loan directly at a decent interest rate that is worth while to them, but a margin is added because the banks cannot lend to each other at decent rates that are almost free of risk.

The involvement of the Government in liquidity is nothing new. It has not happened for about 15 years, but for several centuries before that, the Bank of England intervened in the provision of liquidity in the City through the discounted bill market. Liquidity was available to ordinary businesses, and indeed to people wanting to buy their homes, when it was supported by the Bank of England, normally as the “third name” on a bill, in order precisely to ensure that the monetary policy of the central Bank—whether independent or not—got into the real economy and did not end up stuck in the banking system, as happens too often today.

As the current Governor of the Bank of England said in his Mansion House speech,

“the long term nature of the lending and its pricing mean that the Bank could conduct such an operation only with the approval of the Government, as offered by the Chancellor…such a scheme would be a joint effort between Bank and Treasury.”

If, as set out in the Bill, the Treasury Committee could veto somebody who had a strategic agreement with the Government, and in their place ensure that only somebody who agreed with its strategy, and not the Government’s, went into the job, that would undermine this potential for joint working.

[Jacob Rees-Mogg]

I am very sympathetic to what my hon. Friend is saying, but if there were a recalcitrant, stubborn Governor who was not approved by a Select Committee, but was appointed directly by the Executive, and he dragged his heels and was very reluctant to allow an easing of monetary policy, how would a Government deal with that?

[Matthew Hancock]

That would be an example of where monetary policy and the wider economic policies of the Government were not working in tandem. The Minister explained the procedures for the removal of a Governor, and they require the proposal of the court—I think the strengthening of the court is important. There are procedures in place, therefore. It might be thought that a wider discussion of this point would not be in order, but the Bill is about getting rid of the Governor as well as the appointment of the Governor. My hon. Friend might therefore want to touch on that point in more detail later. I had not considered it, but it is important and it should be scrutinised properly and at length by somebody who has considered it more closely than I have.

As for the counter-factual, or what happens when the views of the central bank are at variance with those of the Government, the problem in the years running up to the crisis was not that the leadership of the Bank was too close to the Government, but that the voice of the Bank was being ignored by the Government for political reasons, hence the fact that the growth of the money supply was too fast and the subsequent difficulties in handling the crisis. This was pointed out by the Bank, and Sir Andrew Large made a speech making clear the problems of over-rapid growth of the money supply in 2004. He pointed to the dangers of supposedly benevolent innovations such as the rise of securitisation, and he asked whether that was causing problems that our Government should be addressing. There was no response from the Government of the day.

In May 2006, the current Governor warned that

“a potentially large social problem, with many households getting into difficulty with their debts, is materialising.”

He was in a position to know, because he had received in the post a piece of junk mail—a credit card application from a bank—and the literature said:

“We have the solution, Mervyn, for your bankruptcy.”

The bank in question did not realise that Sir Mervyn King was not bankrupt—and I certainly hope he would never be bankrupt. Indeed, there was a worse problem: one bank—RBS—sent a credit card to a—

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[Nick Smith (Blaenau Gwent) (Lab)]

I thank the hon. Gentleman for giving way. I know that he has been on his feet for close to an hour now, so he will not be aware that a Member from his own side, the hon. Member for Clacton (Mr Carswell), is saying on the Twittersphere that what is going on here is a Government ploy to talk out an attempt to make the Bank of England more democratically accountable. What does the hon. Member for West Suffolk (Matthew Hancock) say to that member of his own party?

[Jacob Rees-Mogg]

On a point of order, Mr Deputy Speaker. Is it really a proper proceeding if hon. Gentlemen do not come to the House to make their points but make them via Twitter? My hon. Friend the Member for Clacton (Mr Carswell) can come to this House and speak, rather than electronically communicating with us.

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[Matthew Hancock]

My hon. Friend makes the point well so I will not dwell on it. No doubt all Members who have a serious interest in the impact of the Bill are in the House. Those who do not want to come to the House to discuss it are perfectly at liberty not to do so; that demonstrates the amount of interest they have in the consideration of the matters before the House.

Given the scale of the change proposed in the Bill, it is vital that we look at what has happened in the rest of the world. I hope hon. Members will indulge me a moment as I do that. About one tenth of major countries involve their legislatures in the appointment of central bank governors. The United States has been mentioned. Japan, Croatia, Latvia, Armenia, Belarus, Georgia, Macedonia, Lithuania and the Ukraine are also examples of countries where the decision and the veto power are vested in the legislature. Nine out of 10 countries have broadly the set-up that we have. Of that list of countries, only two have financial systems of the same size and sophistication as the UK. They are the USA and Japan. The US system, which is comparable to the proposition in the Bill, has already been discussed.

When I looked a little more closely at the US system, I was surprised to find that in the entire history of the Federal Reserve since it was founded in 1913, not a single presidential nominee for the chairman of the board of the Federal Reserve has ever been rejected by the Senate. We heard the argument earlier from the hon. Member for Edmonton (Mr Love), a member of the Treasury Committee, that we should not worry, as the veto will never be used. It that is an argument for a change of constitutional significance, I do not know of a weaker one. The argument that we should change something of great importance because it is never used would not find much support.

The US Senate’s record in vetting all presidential nominations shows little evidence that elected representatives are any better than the Executive at rooting out views on economic policy. One of the people who was most frequently re-vetted and given a warm send-off by the Senate was Alan Greenspan, who served as chairman of the Fed from 1987 to 2006. He was reconfirmed five times, yet his final tenure at the Fed resulted in some of the most disastrous economic policy decisions in central banking history. He got it wrong on derivatives when he argued in 2005 that

“sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions”.

He was wrong in thinking that the price that investors are prepared to pay is the only valid valuation of an asset. He was dogmatically opposed to action against financial bubbles, saying:

“Bubbles generally are perceptible only after the fact.”

He went on to admit that he got these things wrong when he told a congressional hearing in 2008, after the bubble had burst,

“I made a mistake in presuming that the self-interests of organizations, specifically banks . . . were such that they were . . . capable of protecting their own shareholders and their equity in the firms . . . I have found a flaw. . . I have been very distressed by that fact”.

The Senate failed in its job of vetoing people who would make great and grave economic policy mistakes. That stands as a great question that the Bill’s proponents need to answer. Why would the Treasury Committee be better than the Senate at rooting out people whose economic policy propositions are mistaken? I also use the other counter-factual, which is that the Senate has vetoed people who have a wide reputation for being excellent in their field. For instance, last year the Senate vetoed Patrick Diamond—who I am assured is no relation—a Nobel prize winner in economics. He was vetoed by the Republican Senators in retaliation for the Democrats refusing to reappoint a Bush nominee in 2008. Such political tit for tat, which led to a Nobel prize-winning economist not being allowed on to the Federal Reserve board, is a strong argument for rejecting the Bill.

[Jacob Rees-Mogg]

Is my hon. Friend saying that all Nobel prize-winning economists should be revered? Do not some of them disagree with the policy of Her Majesty’s Government?

[Matthew Hancock]

I am merely saying that Mr Patrick Diamond was a good candidate for that role. I am particularly concerned about the tit for tat political retaliation, which we do not want to bring into this system.

In Japan, in March 2008, the opposition party had a majority of seats in the upper house—this ties closely with the debate that we will be having in this very Chamber on Monday and Tuesday next week—and it rejected proposals by the Government to appoint a former Finance Minister as the Bank of Japan governor. That led to a 20-day period, at the height of the financial crisis, when Japan had no Governor of the central bank. It subsequently took two years to fill all the vacancies on the Bank of Japan policy board. That is evidence of what happens when there is a parliamentary veto. The argument that that would lead to more effective policy making has been roundly dismissed, but the argument that it would bring risks into policy making, and the risk of having no Governor at all, is strengthened by evidence in the US and Japan, the two biggest economies that have a similar process.

--- Later in debate ---

[Mr Deputy Speaker (Mr Nigel Evans)]

I do not think I really need to comment on the hon. Gentleman’s statement.

[Jacob Rees-Mogg]

Further to that point of order, Mr Deputy Speaker. This is completely proper parliamentary procedure. Otherwise, you and your predecessors in the Chair would have ruled it out of order. It is absolutely proper that things are debated and it is up to Members to decide whether to be here or in their constituencies on any day of the week. It is quite wrong to criticise Members for debating things fully; that is what we are here for.

[Mr Deputy Speaker]

I am extremely grateful to you, Mr Rees-Mogg, for doing my job and responding to the point of order that I had decided not to respond to.