Bank of England (Appointment of Governor) Bill

Matt Hancock Excerpts

Friday 6th July 2012 Commons Chamber

[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.

[Matthew Hancock (West Suffolk) (Con)]

My hon. Friend has just made the interesting claim that the Treasury Committee would not have approved the appointment of the late Baron George, one of the great former Governors. What evidence has he to back up that claim?

[Stephen Hammond]

My contention was not that he would not have been appointed, but that he might not have been, simply because he had been a Bank of England insider all his life and had no experience of other parts of the financial system, or indeed of the economy. I am merely suggesting that if we empower the Committee to appoint the Governor, it may not take account of a number of the salient factors that the Chancellor can consider. It may take a narrower view.

The hon. Member for North Ayrshire and Arran (Katy Clark), who has now left the Chamber, made an interesting point about a split along political lines. In the case of Lord George, Committee members on both sides of the political divide might have taken the view, as a caucus, that a Bank of England insider would be entirely inappropriate as a Governor. I am not saying that he would not have been appointed; and my earlier remarks were not a filibuster, but a deliberate attempt to show that the appointments of some of the greatest Governors might have been called into question.

The Financial Services Bill rightly confers increased powers of scrutiny, but I do not understand how this Bill would safeguard independence, and I did not hear the hon. Member for Hayes and Harlington explain that this morning. When he kindly allowed me to intervene earlier, I suggested that it would safeguard the independence of the Governor from the Government, but did not necessarily take account of his independence from Parliament. I think he should bear in mind the possibility that the independence of both the appointee and the institution itself would be undermined if the Treasury Committee were given the power of veto.

--- Later in debate ---

[Brandon Lewis]

The argument that something has not happened so it will not happen could have been put some years ago about the present financial turmoil in the eurozone. The argument that something will not happen because it has not happened before has unfortunately been proved wrong time and again. As has been said, one sees regularly in the press and hears in the markets in America the argument that a particular appointment has been made purely because it will get through a committee. There is no disrespect to the successful applicant, but it can give the impression that the appointment is a second choice. It is a matter of the most acceptable common denominator rather than the person wanted by the Executive or any other body; it is the person they can get through the door. That in itself detrimentally affects the individual’s credibility and authority to do their job. Such an impasse here, if the Treasury Committee and the Treasury were at loggerheads for any prolonged period in deciding on the appointment of the Governor of the Bank of England, could result in chaos in international markets and our markets.

I appreciate that it is unlikely that an impasse would result in an unfilled post. It is almost unthinkable, but, as we have seen in recent years, too often now the unthinkable can become the reality. I hope that, in reality, the Treasury and the Select Committee would reach a compromise, such as extending the tenure of the incumbent Governor until a successor was confirmed. Although before my time, some hon. Members will have seen how a person’s authority wanes as soon as it is known that they are about to go. Continued uncertainty about the next appointment, with no decision and no sign of an end to the impasse, would damage the Bank of England’s credibility, which would be hugely detrimental to the role, not just of the Governor but of the Bank of England itself, in both our internal and external markets.

The constitutional quagmire would be further exacerbated if the Treasury Committee adopted the procedure proposed by the Institute for Government. After a Select Committee hearing with the proposed candidate, the Committee would deliberate before announcing its verdict. Then it would have the opportunity to call the Chancellor before it to tell him why the nominated candidate was unsuitable, expecting him to justify why it should change its mind and agree with his proposal. Then we would be into further deliberation before the Committee decided that it did not wish to change its mind. Potentially, the appointment would then be referred to the House for resolution. If, after that lengthy process, the original candidate were confirmed, there is no doubt that their credibility and authority would have been fatally undermined by the whole political ping-pong between the Government and Parliament, never mind the trouble that that would cause to the markets during the weeks or months that passed while parliamentary time was made available.

Even if the Treasury and the Select Committee could agree on a compromise candidate quickly—regardless of this morning’s examples, we all know what “quickly” can really mean—the new appointee would be undermined before they had even taken up the post. The media would portray a second-choice candidate as not having the confidence of the Treasury, the Chancellor of the Exchequer, the Government or the Select Committee, whichever had originally been against the appointment. In those circumstances, what confidence would the wider banking and financial sector have that the new Bank of England Governor would be able to fulfil their role while working closely with the Government?

As I said earlier, the very Select Committee that scrutinises the role of the Bank of England and the Governor might be the Committee that appointed the Governor. For that reason there is a strong argument for allowing the Executive to appoint the Executive-imbued role of the Governor, and for allowing the Select Committee to scrutinise and comment on it, rather than having a Bank of England Governor who is answerable to the Committee for their job in the first place. As was said earlier, we in the House know that the integrity of members of Select Committees is strong enough and powerful enough to deal with that properly, but what matters is not necessarily what we in the House think about the role of the Governor of the Bank of England, but what people outside think, and what the markets think. It is the perception that becomes the reality, and we need the markets to have confidence and faith in the Governor and in his ability and independence, which the House can scrutinise.

Why stop with the Governor the Bank of England? The Bill’s purported aim is to preserve the Governor’s independence, to remove the appointment from political considerations and pressures. As I have said, it would do quite the opposite, but why stop there? Surely if there is a suspicion that the system is sullied by political interference because the appointment is made on the recommendation of the Chancellor, the appointment of the deputy governor or any members of the court of the Bank of England are likewise politically contaminated. Yet we hear little suggestion that their appointment process politically compromises those positions. In fact, these people act as a powerful check and balance within the Bank of England’s internal governance structure, to prevent any Governor of the Bank of England acting in a politically motivated way. At the moment he does not have to be concerned about the views and role of those on the Select Committee who appointed him.

There is also a substantial list of other public appointments made by her Majesty the Queen following recommendation by the Prime Minister or other Ministers. The Bill’s supporters could end up advocating that the relevant Select Committees should have an opportunity to veto or to make those appointments too. As the hon. Member for Edmonton (Mr Love) said, with the changes that have already happened there is a drip, drip effect, and we gradually see the evolution of change around such appointments. If the Bill were to be enacted there would be a big jump, and bigger jumps would follow. Perhaps members of the Culture, Media and Sport Committee should have the ability and opportunity to veto or choose the appointment of the chairman, vice-chairman or other members of the BBC Trust. Perhaps members of the Defence Committee should have an opportunity to veto the appointment of the Chief of the Defence Staff. I have no doubt that members of the Environment, Food and Rural Affairs Committee would enjoy the power to veto the appointment of the chairman of the Forestry Commission or any of the other 10 forestry commissioners, particularly in the current climate.

Where should we stop? It is a valid question, and one that I think deserves some time in this House. Indeed, the power that Select Committees have to veto appointments might be a good topic for the Backbench Business Committee to put forward for debate. However, I do not think that it is right for a single private Member’s Bill to give that Executive power to a single Select Committee. The Minister is here and has heard the views expressed and no doubt will take those thoughts forward. Should Parliament have the final say on the president of the Valuation Tribunal for England, or on which judges are elevated to the Supreme Court, or even on who is installed as the next Archbishop of Canterbury, a debate that I am sure would be of great interest to Members on both sides of the House?

As odd as some of those examples might be, they are all appointments made by Her Majesty following recommendations from her Ministers. I could list many more examples, but I assure hon. Members that they will not have to listen to that right now. Those are all positions of which the holder has a responsibility for making decisions that affect people’s lives.

[Matthew Hancock]

Is it not odd that one of the previous Government’s last acts was to give the Prime Minister only one recommendation to Her Majesty on who should be Archbishop of Canterbury, which effectively took away from the Government and from Parliament a real choice over who would take that role and, therefore, moved appointments away from the proposal before us today, rather than towards it?

--- Later in debate ---

[Mark Durkan]

That is not what the hon. Member for Wimbledon said and certainly not what I heard. We seem to be hearing a lot of interventions from Government Members interpreting what each other said. Several Members have mentioned what the Treasury Committee Chair, the hon. Member for Chichester (Mr Tyrie), is saying in private, and that it is different from what members of the Committee have said and different from the fact that the hon. Gentleman’s name is on the Bill.

[Matthew Hancock]

I do not want to ask about the hon. Gentleman’s interpretation of somebody else’s point. I want to ask about his view, because given the point that he made before the two recent interventions, I do not quite understand whether he thinks that the Bill is a major constitutional innovation.

[Mark Durkan]

I do not think that it is a major constitutional departure; I think that it would be a significant step and gain for Parliament. I do not go as far as my hon. Friend the Member for Nottingham East (Chris Leslie) in saying that the appointment of the Governor of the Bank of England should be subject to a full debate and vote in this Chamber, however, because that would cause all sorts of difficulties. Many of the difficulties that people allege could occur if the Treasury Committee had the role given to it by the Bill would certainly become risks in a highly charged debate and Division in this Chamber on the appointment of the Governor of the Bank of England. The issue would become highly political and potentially partisan, and it would cause market shakes and do nothing for the reputation of this House.

This Bill, which would give a parliamentary stamp of approval to the appointment, is a modest measure, because it would involve the relatively contained, constrained and considered forum of the Treasury Committee. In yesterday’s debate many hon. Members told us how special the Treasury Committee is. They said that it was a partisan-free zone where people are wise and worthy and do not go into it with any ulterior agendas. Then suddenly we are told today that if it were given the extra role that it seeks for itself in the context of the Financial Services Bill, all that would change. I do not believe that it would. This is not the power of appointment that Conservative Members are describing; it is a power of consent and confirmation. The Treasury Committee would not be doing the interviews, drawing up the shortlists, and so on.

--- Later in debate ---

[Mike Freer (Finchley and Golders Green) (Con)]

I, too, thank the hon. Member for Hayes and Harlington (John McDonnell) for introducing the Bill. He has a reputation as a firebrand in Parliament, so I was surprised and pleased at his thoughtful speech. He almost got me to cross the line and support him. However, I was somewhat surprised to realise, as the debate continued, that the Bill is a Trojan horse. It is not about the Governor of the Bank of England; it is about appointments in general and the power of Parliament in making them. The Bill should do what it says on the tin. If it is meant to be a prod for us to debate reforming the role of Parliament in making appointments, it should say so, but it does not. It is specifically about the power of appointment and dismissal of the Governor of the Bank of England.

[Matthew Hancock]

Is my hon. Friend surprised to hear some Members argue that they do not support the Bill as it stands but would vote for it on different grounds?

[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.

--- Later in debate ---

[Matthew Hancock (West Suffolk) (Con)]

I rise to speak in this important debate to challenge some of the views that have been put forward, but also to set out the deep constitutional changes that are built into the Bill. It is appropriate that the Bill is given full scrutiny in the House, and those who have said otherwise are, with the greatest respect, slightly missing the point about the Bill’s centrality to our constitutional settlement. That is quite a strong thing to say, but I will go into it, and also discuss some of the international and historical examples that the Bill brings to light.

Dr Johnson, in his celebrated dictionary of the English language—a man almost as wise as my hon. Friend the Member for Orpington (Joseph Johnson)—defines a Tory as one who adheres to the ancient constitution of the state. While the Tory party is putting that to the test more broadly, I stand as a proud defender of our ancient constitution, even while it needs upgrading from time to time. It is in that role that I speak against the Bill today.

The proponents of the Bill, in particular the hon. Member for Hayes and Harlington (John McDonnell), underestimate its profound implications and how it would alter the foundations on which the Westminster system is built. For it is the job of the Executive to provide strong and decisive government, and it is the task of the legislature to hold that Executive to account. We have heard many speeches that make that distinction. It is a distinction that has survived revolution, war and financial crises, and it even broadly survived 13 years of new Labour Government. It has been adopted and revered by some of the greatest and most successful democracies in the world, such as Australia, New Zealand and Canada, all countries with records of strong central bank performance and all countries in which the governor of the central bank is appointed by the Executive without the legislature having a veto.

[Brandon Lewis]

Does my hon. Friend agree that the structural relationship between our Executive and legislature, the line we have talked about quite a bit today, and the way the Bank of England works and its autonomy are exactly why countries around the world have mirrored our structure so that they can deliver for their residents?

[Matthew Hancock]

Indeed. The English-speaking world and countries more widely have been wise to mirror that structure because it leads to strong Executive Governments who can deliver for the people in good times and bad. The Bill would have us rend asunder the gossamer fabric of the British constitution. I note that the hon. Member for Foyle (Mark Durkan), who is no longer in his place, supported the Bill, but described it as a significant constitutional departure. However, he also said that it was not a major constitutional departure. I will not go into an analysis of the difference between a significant departure and a major one, but I think that the Bill would wrest a key instrument of Executive power—the power of appointment—away from Her Majesty’s Government and confer it instead on a single Committee of this House.

[Kwasi Kwarteng]

Other Members have made the point that if we are to go down this route, we should perhaps seek to extend the powers of this House and its Select Committees, whereas the Bill relates to only one appointment. We should really be looking either at the mass or not considering the Bill at all.

[Matthew Hancock]

Like my hon. Friend, I find it odd that some Members have concentrated on the implications of the Bill, rather than on the Bill itself, and others have made the point he raises clearly. Because that discussion has already been aired quite a lot and I want to keep my comments relatively concise, I will leave it where it is, other than to say that I agree with the broad thrust of his point.

Another implication was raised by my hon. Friend the Member for South Derbyshire (Heather Wheeler) in her short speech. She pointed out that the decisions of the Treasury Committee, and indeed those of all Select Committees, are technically referred to the Floor of the House for what is in almost all circumstances a rubber-stamping exercise. I am a member of the Standards and Privileges Committee, which does in fact have some executive powers, but they are over the running of this House, not the Executive functions of the UK Government under the Crown. That distinction is as vital as the distinction between oversight and scrutiny on the one hand and Executive power and veto on the other—voice not veto, as it has been eloquently put. The constitutional implications are not inconsiderable. Given that the Government have already proposed to spend 10 days in Committee of the whole House discussing a constitutional change of a broadly similar size, the idea that we should pass this Bill—

[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.

[Mr Hoban]

Does my hon. Friend, who served with me on the Financial Services Bill Committee, not share my view that we risk over-personalising the debate by suggesting that the Governor exercises all judicial power? My hon. Friend is right to highlight the fact that the Governor will be chairman of the Financial Policy Committee, is chairman of the Monetary Policy Committee and will have three deputy governors to work with. These powers are and will be vested in the institution, not in the person of the Governor.

[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.

[Stephen Hammond]

I am interested to follow this line of reasoning. My hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) said that a vote on the Floor of the House of Commons, or perhaps the Government, could overturn a Treasury Committee decision and, if necessary, get rid of the Committee. However, the problem is that Committee members are no longer appointed by Whips but elected, and there is no guarantee that a newly elected Committee would not also choose to be in conflict with the Government.

[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.

[Kwasi Kwarteng]

Does my hon. Friend not think that this knotted discussion about the relative powers of the Select Committee and the Government demonstrates the quagmire of indecision and delay that the route proposed by the Bill would lead us into?

[Matthew Hancock]

I do not think that the principles in the Bill have been well thought through. That is why I started by arguing that the constitutional implications of the Bill are profound and underestimated by its proponents. Many of the questions that are being raised in interventions on me are ones that I had not even thought of while I was wondering what view to take on the Bill.

[Brandon Lewis]

To add to the point made by my hon. Friend the Member for Spelthorne (Kwasi Kwarteng), does my hon. Friend the Member for West Suffolk (Matthew Hancock) agree with the point that I made in my speech, which was that the complication and complexity in this debate highlight the turmoil that this process would create for the markets, even if it lasted for only 24 hours? The damage to the markets could be enormous. My hon. Friend has great experience of this world. What does he estimate would be the cost to our economy of even a 24-hour delay, let alone a delay of several weeks, because of this kind of back-and-forth?

[Matthew Hancock]

If there was parliamentary deadlock and votes were needed to change the Standing Orders of the House in order to get a Governor of the Bank of England, the cost would depend on the economic circumstances. In good and calm economic circumstances, there would undoubtedly be a cost because of the increased uncertainty in the markets. For example, one might expect the yield on Government bonds to rise and for uncertainty over the future of the banking system to grow, which might have an impact on the LIBOR market. I do not want to touch too much on the LIBOR market. In times of financial stress, such as those that we have been living with for five years with few signs of abatement, the impact of the uncertainty could be very serious indeed.

[Brandon Lewis]

Does my hon. Friend think that an unintended consequence of the proposal might be that the belief that such complications could happen would put off some of the best potential candidates for Governor of the Bank of England from putting themselves into the process in the first place?

[Matthew Hancock]

I have no doubt that the appointment of a Governor of the Bank of England should be above politics. We should appoint somebody for their economic, financial and policy-making experience. They should be somebody of weight from that world. The position has rarely been filled by somebody from the world of politics, and for good reason. As well as having to engage in the political world of the country, the Governor has great duties in putting the economic and financial interests of the nation to the fore. I would therefore be concerned if a potential Governor chose not to put their name forward because they did want to get involved in the quagmire of party politics during their appointment. The point that my hon. Friend the Member for Great Yarmouth (Brandon Lewis) makes is an important one, and it anticipates a point that I have on page 36 of my speech. Since I am only on page 4, perhaps I should make some progress.

I will not dwell on the argument that the constitutional precedent would be much wider than simply the implications for the Treasury Committee. My hon. Friend the Member for Great Yarmouth made the point that the Chief of the Defence Staff might have to be confirmed by the Defence Committee, so I shall cross that line out of my speech. A potential head of MI6 might have to be scrutinised by and avoid a potential veto from the Intelligence and Security Committee before being given the job. There are more extreme and absurd examples showing that we should not take this lightly and push a new principle through the House on a Friday afternoon.

My point about Parliament and our system of government is only one consideration, but it is the reason why the principle of the Bill deserves serious and profound reflection. Its ramifications could outlive the Government of the day and last many Sessions of Parliament, because once such changes are made they tend to take hold. The appointment of the judiciary is a long-standing and slowly evolving matter, and very few Members would support the idea that the Justice Committee should have a veto over the appointment of High Court judges, but that is analogous to the proposition in the Bill.

I will go through some of the lessons from history and some of the international lessons that are pertinent to the Bill. Central banks are unique financial institutions and have a delicate balancing act to perform. As has been pointed out, the Bank of England was set up in 1694 to finance the nine years war against France. We won that war largely because Britain had the ability to finance a standing Army effectively, through the Bank of England. Instead of borrowing directly from the market, Britain established the Bank of England to issue debt on behalf of the Government. From then on, the strength of the institution was watched and repeated in countries around the world. In 1844, the United Kingdom broke new ground by issuing to the Bank of England a monopoly on the supply of money, so that competing banks could no longer issue banknotes of their own.

[Kwasi Kwarteng]

Was not one of the principal features of the Bank until its nationalisation that it was entirely independent of the Government? Does my hon. Friend think that was important in any way?

[Matthew Hancock]

It was, but I would not wish to return to private subscription for the ownership and governance of the Bank of England, because of its role in our political economy. My hon. Friend the Member for North East Somerset might wish to push for that, but I believe that the settlement reached after nationalisation in 1946, whereby the Bank of England has its own capital base but is effectively part of the national political economy and one of the national institutions of economic governance, is the right one, rather than having private shareholders.

Since the Bank Charter Act 1844, other banks have been able to issue notes in sterling, and I believe that nine other banks do so in Scotland and Northern Ireland, but they have to be 100% backed by Bank of England banknotes held in the vaults of either the Bank of England or the issuing bank. That ensures that control of the money supply is within the grasp of the Bank of England rather than any other bank. I know that there are some Members who would prefer to return to the system from before 1844, not least my hon. Friend the Member for Wycombe (Steve Baker), with whom I regularly debate the point. I did so yesterday. However, the broad and settled view of the House is that we should retain the current situation.

Because the central bank is the monopoly provider of money and the lender of last resort, it must share a common strategy with the Government even though it is vital that its operational decisions on interest rates and financial stability are independent. The current appointment process fulfils well the twin objectives of operational independence and broad agreement on strategy. It also means that the Government can appoint a Governor who broadly shares their philosophy of economic management, even if the Governor is kept at arm’s length from party political machinations, the 24-hour news cycle, headline grabbing, tweeting and retweeting, and the Westminster bubble culture, which is the special discourse of the modern political set-up.

Economic history shows us the importance of the broad strategic agreement between the Governor and the Government of the day.

[Mr Hoban]

The Treasury and the Bank currently work together on the funding for lending scheme. Is my hon. Friend aware of any instances in which the sense of co-operation between the Government and the Governor was not quite as strong?

[Matthew Hancock]

Absolutely, and the Minister will be delighted to hear that he has anticipated the next section of my speech.

The nine years war, which the Bank of England was set up to finance, was the first example of successful co-operation on a strategy between the Governor and the Government of the day. The first Governor was a man called Sir John Houblon—his face appears on a modern £50 bank note, so hon. Members will know him well. Like many of his successors, Sir John dealt with the City but was not part of it. He was a grocer by trade and rose through the East India company—he was a business man who came to the City to oversee the Bank. At that time, the Governor, deputy governors and directors of the Bank were voted for by private shareholders, who had to have a £500 shareholding—a huge amount in those days. The Governor had to have a £4,000 shareholding.

We can only speculate who would get the job now if the late 17th century equivalent of the Treasury Committee had a veto over candidates. The House of Commons was, back in the day, notoriously corrupt and vice-ridden, unlike today. By way of illustration, the prospective parliamentary candidate for a by-election in Bath laid on a meal before polling day. There were 32 voters, but the meal consisted of two boiled haunches, two chines of mutton, four geese, four pigs, 12 turkeys, plain chickens, rabbits, an abundance of claret and sherry, and—my favourite—two venison pasties. A ball to persuade the voters’ wives followed. Glasses were broken and windows shattered at the end of it.

The modern system of corporate governance is similar to chief executive officers having skin in the game in financial organisations. As my hon. Friend the Member for Spelthorne (Kwasi Kwarteng) pointed out, when the Bank was given operational independence in 1997, it was returning to the independence it had enjoyed for 200-odd years until it was nationalised in 1946.

There are examples of when the Bank and the Government have agreed broadly on strategy and prosecuted it effectively, but there are also historical examples of how things can go wrong. The Bank was founded before the first Governor took office by an initial loan made by a Scottish banker called William Paterson. Founding the Bank was not Paterson’s only contribution to economic history; he was also the main instigator of the infamous Darien scheme, which involved a Scottish colony in Panama that was supposed to replicate the success of the English colonies in north America. With a monopoly company facilitating trade between the new and old worlds, the Scottish public went wild for the scheme and invested a quarter of the country’s gross domestic product in the embryonic New Caledonia. Of course, the reason the Panama canal is not called the firth of the Pacific is that the colony was a disaster—thanks to poor leadership, endemic diseases and weak demand for Panamanian goods—bankrupted Scotland and led, indirectly, to the Act of Union in 1707. Although William Paterson was not the last Scot to drive a country to the brink of financial ruin, he might have been the first.

I shall cite another example of the Bank and the Government having separate strategies that shows why the Bill would be a mistake. In 1716, a man named John Law, another Scottish gambler-turned-economist, managed to persuade the Government of France that, having defaulted on their debts four times between 1648 and 1715, they could create a scheme to end the national debt by enabling them to take control of the money supply and replace gold and silver, whose price was ruled by the markets, with something that he said would be more stable. He suggested creating a central bank in France along the lines of the Bank of England. In return for the deposits on gold and silver, there would be paper money deposited in a state-owned scheme that would turn it into something more valuable. This proved irresistible to the French people.

[Stephen Hammond]

On the subject of gold and silver and the gold standard, there is a much more modern example of where the Governor and the Government split over policy—post-first world war and into the 1930s, when Montagu Norman disagreed with the Labour Government about returning to the gold standard. We know the catastrophe that followed then.

[Matthew Hancock]

In that example, there was one person who understood the implications of returning to the gold standard and whose views were more consistent with the Labour Government’s. John Maynard Keynes argued vociferously for the strategy that many in the Government wanted to pursue but which he could not persuade the rest of the Bank to pursue, which was that they had to stimulate the economy in times of economic weakness and that there would not be an automatic return to growth. That is an argument with which I strongly agree. It is important to ensure an effective stimulus when the economy is weak. The most effective such stimulus today is monetary policy.

That brings us directly to the strategy now. The Bank and the Government broadly agree on the economic strategy of tight and responsible fiscal policy and loose monetary policy in order to deliver economic growth that is sustainable and not based simply on building up more debt. However, immediately before the 2010 general election, when I entered the House, it appeared that the Bank did not agree with the then Government’s strategy. This was destabilising. I used the example from 1716 to show that there is a long history of problems when there is disagreement on strategy, but it is by no means a problem that went away after 1716—it was with us right up until 2010, although fortunately it is not the case right now.

[Brandon Lewis]

My hon. Friend might have heard an Opposition Member say earlier that this kind of thing will not happen because it has not happened before. Does he agree that the examples he has just given prove that just because something has not gone wrong for a long time, it does not mean that it will not cause a problem in the future?

[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.

[Mr Nuttall]

At the start of my hon. Friend’s reply to the last-but-one intervention from our hon. Friend the Member for North East Somerset (Jacob Rees-Mogg), he said that the money supply was too loose after 1997. What does he think about the Bank of England’s decision yesterday to print another £50 billion?

[Matthew Hancock]

I supported yesterday’s decision, because one thing we are dealing with now is the consequence of money being too loose, which is the deleveraging in the banking system, which is causing a huge drag on the economy. Therefore, the mitigation of that deleveraging, through loose monetary policy—low interest rates and in a quantitative sense—is something that I support. However, more strongly than I support the Bank’s decision, I support its ability to make it in a way that is unconstrained by political considerations.

[Mr Deputy Speaker (Mr Nigel Evans)]

Order. Any chance of mentioning the Bill from time to time?

[Matthew Hancock]

Absolutely; this argument is vital to the Bill. It is a question of whether the Governor’s appointment should be in the gift of the Government or should be capable of being vetoed by people who are not necessarily the Government’s appointees. I apologise if I did not make it clear why this is precisely and closely related to the Bill.

In considering the Bill’s impact, it is important to remember that the Governor is only one member of the Monetary Policy Committee and of the Financial Policy Committee. As we saw last month, the Governor voted in favour of quantitative easing a month before the Committee had a majority for it. In that light, it is slightly odd that the Bill considers only the Governor when the body that determines our monetary policy is the whole membership of the Monetary Policy Committee. There are nine members, five of whom are executives of the Bank of England and four are so-called external members. While the Treasury Committee has oversight of, and the ability to scrutinise, all the others, there is no proposal for the other eight Committee members or the other members of the Financial Policy Committee to be subject to a veto by the Treasury Committee. In that sense, those who support the arguments in this Bill—I do not—should support a veto over the appointment of the other members of the Committee.

The Bill makes it clear from line 20 onwards that the deputy governors are not subject to the oversight of the Treasury Committee. Given that the deputy governors have one vote each and the Governor has only one vote, too, although he does by convention vote last, the argument does not change with respect to the deputy governors and the Governor. There is thus a confusion at the heart of the Bill.

The proposed appointment process by the Treasury Committee ignores the measures in the Financial Services Bill, which I think removes the motivation for bringing this Bill forward now. The structure of the Bank of England will change from having an imperial Governor to having one who is the head of a committee—the Financial Policy Committee—on the financial stability side of the Bank.

The need for a common strategy between the Bank and the Government is more important now than it has been for a long time. The financial crisis laid bare the importance of co-ordinating monetary and fiscal policy. For a while, it was wrongly believed in this country that those two policies could be separate. Indeed, financial policy was separated again, so we had a tripartite system, with financial policy vested in the Financial Services Authority, monetary policy in the Bank of England and fiscal policy in the Treasury. It is not the case that they were separable. It is clear from how the world is having to manage the current difficult situation that these are not discrete entities, but aspects of one another.

The banks themselves are part of the transmission mechanism, too. I like to say that they stand in relation to the Monetary Policy Committee as the Higgs boson particle stands to matter: they give substance to the Committee’s decisions because they transmit interest rates and monetary policy into the real economy. Similarly, the level of debt in the economy is symbiotically connected to banking regulation because regulation of the leverage of banks has a direct impact on the amount of debt, and the removal of the regulation over leverage and the amount of debt in the economy was one of the main drivers of the over-leverage and vast expansion of the money supply that led to the grave difficulties we face in managing the current economy. That explains why it is so important for the broad strategy of the Government of the day to be supported by the Governor of the Bank of England.

What we do not want to see are more asset bubbles, and we might see those if we had a Governor who did not agree with the strategy of the day. Fiscal policy could work against monetary policy, rather than the two broadly working together both to deal with an over-indebted economy and to enable the decisive action that is necessary to stimulate the economy and prevent a banking crisis from turning into a slump. This is not, as some of my hon. Friends have suggested, a matter that has no impact on our postbags. Although few people write to me about the appointment process of the Bank of England, an error in that process could have a profound impact on our economy, and would doubtless hit our postbags very hard.

[Heather Wheeler]

I understand the point that my hon. Friend is making, and he is, of course, absolutely right. That is the beauty of being able to make a speech lasting for three quarters of an hour that takes us from A to Z. It is very impressive. Members who prefer to make short speeches tend to allow the floor to others so that they can express all these other views at greater length.

[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—

[Mr Deputy Speaker (Mr Nigel Evans)]

Order. What has this got to do with the Bill?

[Matthew Hancock]

It is important that the Governor of the day has the same broad strategy as the Government—but I will move on, Mr Deputy Speaker.

We have one further, and chilling, example.

[Mr Nuttall]

Just to be clear, will my hon. Friend confirm that the Bill is about the appointment and the dismissal of the Governor and has nothing to do with broad policy?

[Matthew Hancock]

It is to do with the appointment and dismissal of the Governor, and my argument is that the broad strategy of the Governor must be aligned with the broad economic strategy of the Government, and that this Bill could rend the two asunder.

What is currently happening in the eurozone serves as a definitive example of the problems that can arise when the views of Governments and of the leadership of a central bank diverge, and it shows what could happen if this Bill were to be enacted. The history is familiar to us all, so I will not go through it again in detail. Since the start of the sovereign debt crisis, the European Central Bank has injected euros and liquidity into the system, yet monetary policy in much of the eurozone remains very tight. That clearly harms some of the countries in the eurozone. There are tensions as a result of the relatively tight monetary policy and the need for some countries to tighten fiscal policy—there are no fiscal transfers between the members of that currency. That, compounded by weak banks, means that the monetary policy on the ground is even tighter. The lack of co-ordination between the ECB and the countries and Governments in the eurozone is highlighted on our television screens many nights of the week. Greek bond deals leapt more than 10 points to more than 100% when it was announced by the Government in November that there was to be a referendum on the bail-out package supported by the president of the ECB.

We have heard anecdotal evidence so far about the impact of a governor on financial markets and uncertainty. Adam Posen, who serves on the MPC, and Kenneth Kuttner wrote a paper in 2007 which found substantial academic evidence that the appointment of a central bank governor can have a direct impact on the markets, which my hon. Friend the Member for Spelthorne was speaking about. They concluded that

“financial markets tend to react to the appointment of a new central bank governor with larger-than-normal price changes, especially when a distinction is made between ‘newsworthy’ announcements…and those merely confirming an anticipated appointment.”

That is the problem that Members were talking about: uncertainty in the financial markets as a result of bank appointments becoming unclear and uncertain.

I want to take up the question of whether the Treasury Committee should have a veto. I said earlier that I am a member of the Standards and Privileges Committee, and I am also privileged to be on the Public Accounts Committee. That Committee’s power over the appointment of the Comptroller and Auditor General is, I think, similar to the power of veto that the Treasury Committee has over the OBR. The National Audit Office is obviously not Executive but merely a provider of sophisticated information about the Government and the wider world. That distinction between providing information in an independent way, separate from Government, and taking Executive action in the broad strategy set out by the Government is crucial.

As I come to a conclusion, I want briefly to consider the international evidence.

[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?

--- Later in debate ---

[Mr Deputy Speaker (Mr Nigel Evans)]

I think that it is up to any hon. Member to use whatever communicating devices are at their disposal, quite frankly. The House is clearly here for the hon. Member for Clacton (Mr Carswell) to come to and speak, if he so wishes; if he does not wish to do so, it is up to him.

[Matthew Hancock]

Hear, hear, I say. I think that all sorts of communication are very useful in this modern age. I respect my hon. Friend the Member for Clacton (Mr Carswell) a great deal—and the hon. Member for Blaenau Gwent (Nick Smith)—but I have a very simple response. As I said at the start of my speech, I think that this proposal would mark a significant constitutional departure. It is about the distinction between the legislature and the Executive and about blurring that distinction. The idea that we should pass the Bill after only five hours of debate on a Friday lunchtime, compared with the 10 days of debate in Committee of the whole House proposed by the Government on House of Lords reform, which merely changes the architecture within that legislative branch, is absurd. If we want to make a change of such importance, we should be able to debate it fully and frankly. Going through some of the historical and international comparisons is vital to a significant change.

[Brandon Lewis]

Is it not important to consider not only whether we should allow a Select Committee to have the power of appointment or dismissal of the Governor, but the impact that that has on all Select Committees, and the difference between their scrutiny role and their Executive role, which is a big constitutional change in the way that the House works?

[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.

[Stephen Hammond]

There is one final risk, which is that after the veto, the candidate who is then in place is seen as the second choice by the markets, and that is a great risk to the economic future of the country.

[Matthew Hancock]

I certainly agree. The private consultation, for instance, would be a far better process to ensure that there is consensus and the strength of a broad agreement behind the incumbent, who has to rise above party politics once appointed.

There have been some great central banking success stories over even the last decade. The Reserve Bank of Australia has an appointments process similar to that of the UK, yet no Australian bank needed a bail-out—so far—or suffered a downgrade, and Australia avoided recession. The Governor of the Bank of Canada is nominated by independent directors of the bank and confirmed by the Government. During the global recession, Canada’s GDP declined by 3.4%, compared with 4% in the US and more here. Not a single Canadian bank failed or required an emergency capital injection from the Government. Today, employment and economic activity in Canada are back at their pre-crisis levels, whereas here they languish below those levels because of the depth of difficulties that we got into when a Government did not listen to the Governor of the Bank of England. In addition the Bank of Canada had regulatory control over their banks, as proposed in the new Financial Services Bill.

This Bill is no magic bullet. It brings in risks without rewards, it is of a deeply constitutional nature, it deserves all the scrutiny that it is getting, and I oppose it.

[John McDonnell]

On a point of order, Mr Deputy Speaker. Whatever Members might think of the Bill, I think that it is worth putting on the record the abundant criticism on Twitter and elsewhere about what is happening in the House today. In normal circumstances there would be an opportunity to claim to move that the question be now put—a closure motion—but that is not possible today because many Members have returned to their constituencies because of the flooding. It is completely understandable that they should do so to look after their constituents’ interests, but it is worth putting it on the record that that is one of the procedural issues we have had to face today.

--- Later in debate ---

[Mr Hoban]

The Treasury Committee already has a role—it conducts, for example, pre-commencement hearings for members of the Monetary Policy Committee. Paul Tucker and Charlie Bean, the two deputy governors, have been through that process, which we envisage will continue.

Even the Labour Front-Bench spokesman in the House of Lords was wary of the proposed increase of authority for the Treasury Committee. Although there has been a broader debate on the role of the House in appointments and whether there should be pre-appointment hearings, this is not the time to make those broader points. If there is to be such evolution, we need a much broader debate. Alighting on the appointment of the Government as a peg for that debate is not the right way to go about things. If I make more progress, I shall highlight the Government’s response to the Liaison Committee, which has discussed increasing the role of Select Committees.

[Matthew Hancock]

Will my hon. Friend take into account the views of Back Benchers who are not on the Treasury Committee, and note that a majority of hon. Members who have spoken today spoke against Second Reading?

[Mr Hoban]

That is a fair point. The weight of opinion has been to oppose the Bill. I gave a list of hon. Members who have spoken—I forgot to add my hon. Friend the Member for Spelthorne (Kwasi Kwarteng), who was the last Back-Bench speaker—but the balance of views has been against the proposal. There has been some discussion of the fact that the debate has continued until almost 2.30 pm, but the hon. Member for Hayes and Harlington, despite his three e-mails, could not get the 100 hon. Members required for the closure. The House has expressed its view today.

The appointment veto was proposed by the Treasury Committee. There was a consultation on, and pre-legislative scrutiny of, the Financial Services Bill prior to its Second Reading but, except for the Treasury Committee, no one called for the appointment of the Governor to be subject to its approval.

We need to recognise the changes being made to the accountability and governance of the Bank. It is facing pretty significant organisational change, and it is right that the arrangements for its governance and accountability be thoroughly debated as part of that process. In November, the Committee published its report on the accountability of the Bank and in it made several recommendations on governance. As a consequence, we have tabled amendments in the other place to strengthen and modernise the Bank’s governance arrangements.

Those amendments will replace the current committee of non-executive directors of the Bank with a non-executive oversight committee that will have a broad remit to oversee the Bank’s performance against its objectives and strategy, and provide for explicit powers to commission and publish internal and external reviews of the Bank’s policy-making process. In the Bank’s annual report and accounts, published on Monday, the Governor said in the foreword that the Bank must carry out its new responsibilities with

“openness and transparency, and be held accountable for them to Parliament and the public, just as”—

it is “for monetary policy”—an important signal from the Bank about its role.

Since the Bank’s nationalisation in 1946, appointments have been made by Her Majesty the Queen on the recommendation of the Chancellor and the Prime Minister. The Bill would require that the appointment be made by Her Majesty with the consent of the Treasury Committee as well. The current legislation states that the Bank may, with the Chancellor’s consent, remove the Governor from office in certain circumstances, but again the Bill would require that the Treasury Committee consent to that removal. We have made our position clear: we do not believe that giving the Treasury Committee a statutory power over appointments or dismissals is either necessary or appropriate.