The death of Eddie George (Edward George, or Baron George of St. Tudy in the County of Cornwall, former Governor of the Bank of England) on April 19 came as a shock. I knew he had been ill with cancer for a long time, but one is never prepared for the finality of death. This post is not an attempt to assess his place in history, but just a recording of some tales I will remember him for.
Eddie had been Governor of the Bank of England for just under four years when the Bank was made operationally independent for monetary policy in May -June 1997. He served as Governor for six more years after that. I got to know him because I was fortunate enough to be chosen by Gordon Brown and his advisers to serve as an external MPC member on the ‘founding’ MPC, which started work in June 1997.
The Governor and Winston Churchill
When I was interviewed for the MPC job on Friday, May 30, 1997 by Ed Balls and Alan Budd, I was told at the end of the interview that two issues still could present obstacles to my appointment. The first was that I did not have British nationality. The second was a public disagreement with something the Governor (Eddie George) had said. The issue of prior public disagreement was indeed the first thing that came up during the interview. Budd and Balls also said that it did not matter per se, but that they just did not want to be surprised by it.
I had publicly disagreed more than once with statements of the Governor, most recently at a Treasury seminar on EMU (the first time I had ever been inside the Treasury). There are various published versions of this around. The easiest place to find it is in “The Economic Case for Monetary Union in the European Union”, the Review of International Economics, Special Supplement, pp. 10-35, 1997. In it I fall all over a passage in a speech by Eddie George from 1995, in which he argues that real economic convergence (convergence of real economic performance and structure) is a prerequisite for successful monetary union. Similar silly and uninformed statements had been uttered widely, among others by Tony Blair. I comment on this as follows (p. 22):
The fundamental misunderstanding, reflected in the above quote, of what nominal exchange rate flexibility can deliver prompts the following proposition:
Proposition 6. Real convergence or divergence is irrelevant for monetary union.
I then go on for about half a page elaborating just how off the mark any contrary opinion would be.
The first issue was a fact that remained a fact until after I had left the MPC in 2000. I also was the undoubted author of the statement that created the second issue. I went home thinking: nice to be considered; close but no cigar.
I was therefore quite surprised to be called at home the next day (it was a Saturday), to be told that if I wanted the job, I could have it. I thought about it for 1/4 second and said ‘yes’.
The next Monday at 14.30, I met with the Governor in his palatial office at the Bank. All four outside members were announced at that same time (Charles Goodhart and I with immediate effect, DeAnne Julius from September 1, 1997 and Alan Budd on his retirement from the Treasury at the end of the year). The Governor was most gracious. I had decided to wear an Emmanuel College tie to mollify him (Eddie George is a member of Emma, as am I (and indeed Charlie Bean, the current Deputy Governor for Monetary Policy)).
Eddie immediately reminded me not only of the article, but also of a lecture I had given (forgotten by me) in which I had said that he knew less economics than Winston Churchill (the statement referred to Churchill’s decision to put the UK back on the gold standard in 1925). Eddie chuckled and said he only mentioned it so that we could get it out of the way and get on with business. I replied that it could hardly be considered insulting to be compared to Winston Churchill. That was the end of the matter.
We continued to have opposite views on the desirability of the UK adopting the euro. Like many of those who lived through Britain’s entry into the ERM on October 8, 1990 and its inglorious exit on Black Wednesday, 16 September 1992, Eddie viewed the third stage of EMU as another ERM experiment. He was Deputy Governor at the time of the ERM entry and exit and would have rather swallowed a live whale than go through an ERM trauma again.
It is true, regrettably, that the Maastricht convergence criteria include a 2-year stay in ERM2 purgatory, but once that pointless hurdle is cleared, full monetary union is qualitatively different from any fixed-but adjustable peg or target zone regime. Speculative attacks against a national currency are no longer possible, for the simple reason that there is no longer a national currency separate from the euro.
A second reason why I believe Eddie George and I differed on the desirability of full EMU participation for the UK is that he was quite convinced the UK still represented something close to an optimal currency area (OCA). I viewed and view the UK as a small open economy – a price taker in global markets for goods, services and non-sterling financial instruments, which satisfies none of the traditional (Mundell I) or new (Mundell II) criteria for having an independent currency. Eddie viewed the UK as a small version of the USA. I viewed it as a somewhat larger version of the Netherlands.
We never bridged this gap, but it never became is issue between us, if only because EMU membership was not an issue for the MPC to decide. During my three years on the MPC, I made public statements in support of EMU membership only if and when Eddie George or Mervyn King (who was and is even more strongly opposed to EMU membership for the UK than Eddie was) made anti-euro noises in public.
Chair of the MPC
Eddie George was the ideal chairman of the MPC. He approached the job as the chairman of a collegial board, the first among equals. He clearly held a unique position. He chaired the meetings and therefore set the agenda, and had the casting vote in case of a tie. But it was more than that. I never called him by his first name while I served on the MPC, but always addressed him as ‘Governor’ or ‘Mr Governor’. He never asked for that. It just came naturally.
He also never tried to ram his views on the right course of action as regards interest rates down the throats of his MPC colleagues. Everybody was given the chance to present their views and to question the views of others. The MPC meetings I attended were among the most ‘disinterested’ and ‘a-political’ discussions of how to achieve the Bank’s mandate, that I have ever attended anywhere – academic in the correct sense of the word: objective, open-minded, disinterested, balanced.
Remember that there was no model to imitate or emulate. We definitely did not want the Fed model, with its dominant Chairman who could and did deny his colleagues on the Federal Reserve Board access to the Federal Reserve Board staff and other resources if they took a line the Chairman disagreed with. Under Ben Bernanke (a much more collegial personality than his two predecessors), the sharp edges of Chairmanial autocracy have been smoothed and rounded off and the ‘presidential’ excesses of the Volcker and Greenspan era appear to have become a thing of the past.
The ECB did not get going until a year and a half after the creation of the MPC, but it too did not present an attractive model. The very fact that the head of the institution is called ‘President’ suggests a non-collegial form of decision making and management, both within the 6-member Executive Board and within the monetary policy making body, the Governing Council. The current President, Jean-Claude Trichet certainly views himself as the primus, but not inter pares. The ECB’s hierarchical, Presidential and non-collegial Board and Governing Council, with its decision-making by consensus (a mechanism par excellence for encouraging groupthink and for being systematically behind the curve), is also as different as possible from the model developed under Eddie George.
In the final pre-rate decision policy discussion, the Governor would aways get the ball rolling by asking the senior executive MPC member for monetary policy to lead off. When I was there this was Mervyn King, first as Chief Economist and then as Deputy Governor for Monetary Policy. After Mervyn, the Governor let all other members of the MPC say their bit, supposedly randomising the order in which members spoke – I don’t have a sample large enough to test the randomness of the ordering.
The Governor aways spoke last. This has two advantages. First, if you really want a free and frank discussion, it is likely to be helpful if you don’t know the preferences of the chair. Second, if you believe that the chair should not be put in the minority, it permits the chair to adjust his tune to blend with that of the majority view. The likely majority view is bound to have emerged by the time it is the chair’s turn to speak.
Eddie George was on the winning side in a number of 5 to 4 votes, but he never voted with the minority. Whether this is because his true preferences always put him in the majority camp (he was a man of the extreme centre) or whether this was because he feared that being put in the minority would undermine the authority of the chair, both at home and abroad, is unclear.
Early in the life of the first MPC, Eddie asked me one-on-one what I thought about the Governor voting with the minority, and he indicated that a discussion of the full MPC about the issue might be in order. I assume he had the same conversation with the other MPC members. The full MPC discussion never took place while I was there. Mervyn King has taken the model of individual accountability and majority decision-making one step further, and has voted with the minority on two occasions. I agree with Mervyn’s stance on this issue. I don’t even believe that the Governor’s authority would be damaged if he voted repeatedly with the minority. What would hurt the Governor’s authority would be a pattern of repeatedly voting for the wrong policy.
Defending the Bank
Eddie George worked for the Bank of England for 41 years – his entire career. He loved the institution, its history and traditions, and would turn ferociously on those whom he believed to be damaging it. During my three years on the MPC, I was involved in just one serious conflict that had Eddie George in the opposite camp. This was the conflict created by the insistence of the four external MPC members (DeAnne Julius, Sushil Wadhwani, Charles Goodhart and myself) that there needed to be dedicated independent research support for the external MPC members. It became a serious issue in September 1998.
This was part of the external MPC members’ ‘Not the Federal Reserve Board’ drive. The power of the Chairman of the Federal Reserve Board is derived in no small part from the fact that the FOMC members that have access to independent resources to back up their views (the Presidents of the 12 regional Federal Reserve Banks) have limited status and legitimacy (except for the President of the New York Fed, who at least has status). The six other members of the Board of Governors of the Federal Reserve system have legitimacy (confirmation by the Senate) but have to ask the Chairman for the key to the bathroom and can be frozen out of access to Federal Reserve Board staff and other resources at the (dis)pleasure of the Chairman. Again, this ludicrous state of affairs appears to be much improved since the arrival of Ben Bernanke as Chairman. It was, however, the prevailing reality when I served on the MPC.
Eddie George considered our request for independent, dedicated resources for the external MPC members a vote of no confidence in himself and the institution. He felt the external members were accusing him of not being in good faith as regards access to the Bank’s resources. And he felt strongly we were dividing and even balkanising his Bank.
Eddie George had a short fuse and a perceived attack on the integrity of his Bank was more than enough to light that fuse. I received a spectacular one-on-one dressing down from him on the issue. Voices were raised and tempers lost. Both of us felt that issues of principle were involved. To me it was clear that the policy-related research priorities of the external members of the MPC, when they did not coincide with those of the executive members of the MPC, were invariably put at the end of the queue. We needed our own dedicated research support if the external members were to do the job they were mandated to do. It wasn’t a lot of fun. I had similar unpleasant one-on-one shouting matches on the issue with both David Clementi (Deputy Governor) and with Mervyn King.
The external MPC members won on this issue after the internal conflict leaked into the public domain. Each external member was given the support of one Masters-degree level and one Ph.D.-level researcher. With eight professional economists at the disposal of the external MPC members (plus the good secretarial and administrative support we had always enjoyed), the resources necessary for a proper discharge of the duties of the external members were, at last, in place.
The at times bitter disagreement about independent, dedicated resources for the external MPC members did not, incredible as it may seem, interfere with the dispassionate discussion of the issues relevant to the interest rate decisions of the MPC. Somehow, everyone involved left their egos at the threshold of the room where the monetary policy decision of the month was about to be made. That, I think, is in no small part due to Eddie George’s chairmanship, his love of the Bank and his ability to take the long view and see the big picture despite his short fuse.
Genuine warmth and willingness to be bothered
Eddie George had a remarkable generosity of spirit and a willingness to make an effort for people without any expectation of a return, other than the satisfaction of doing the right, or rather the kind, thing. At some point during my term, my in-laws were visiting from the USA. I mentioned the visit and the fact that my father-in-law had been a banker for much of his professional life to Eddie – without intending to drop any handkerchiefs. Immediately Eddie suggested that my in-laws come to the Bank, both to meet with him and to be shown the gold (including the legendary gold recovered from the Nazis) in the vaults of the Bank. It really made the day for my in-laws.
Another example. The wedding reception for Anne Sibert and myself was held in the museum of the Bank of England. Both Eddie George and Vanessa, his wife, came to that reception. One of Anne’s junior colleagues at Birkbeck College was absolutely dying to be introduced to Eddie. Much against my instincts, I played intermediary. Instead of being at least mildly annoyed, Eddie went straight to the young man and talked to him in his most avuncular mode. Again a good deed not likely to be requited in this life.
Eddie liked people and liked talking to people, and there was genuine warmth in his interactions. His willingness to talk to people extended to journalists. This caused concern and even mild panic attacks in the press office, as Eddie would, in not infrequent unguarded moments, proffer views that reflected the truth as he saw it rather than as the rest of the policy establishment would like it to be. The combination of a sensitive issue and a young ingenue journalist was considered especially high-risk as regards the likelihood of clarity instead of tact in the Governor’s statements.
How would Eddie George have handled the financial crisis?
One of the great unanswered questions of the current crisis in the UK is whether with Eddie George as Governor the actions of the Bank of England would have been very different from those of the Bank under Mervyn King.
It is clear that, unlike Mervyn King and other MPC members with academic backgrounds like myself, Eddie George understood the importance and fragility of both funding liquidity and market liquidity. To me, liquidity was stuff from the Radcliffe Report (1959), and stuff that mattered for developing countries and emerging markets. The notion that the majority of border-crossing banks in the north-Atlantic area could face funding liquidity problems and that a large number of key wholesale financial markets could become dysfunctional at the same time did not occur to me before it actually happened.
Nor did it occur to the Bank of England. Learning took place, but it was not monotonic. As late as the summer of 2008, the Bank was making a mess of things by announcing the closure for new business by October 21, 2008 of the Special Liquidity Scheme it had created on 21 April 2008.
It is unlikely that Eddie George would have made that mistake. However, any Governor of the Bank of England would have had to live with the fact that regulatory and supervisory responsibilities had been stripped from the Bank of England when it became operationally independent for monetary policy in June 1997. Eddie George strongly opposed this decision. Any Governor would have had to work with the dysfunctional Tripartite Arrangement for financial stability between the UK Treasury, the Bank of England and the FSA – the brain child of Gordon Brown and his advisers. Any Governor would have had to cope with a deposit insurance scheme that did not work and with the complete absence of a Special Resolution Regime for dealing with near-insolvent banks.
We must also remember that the advantages of endowing the central bank with supervisory responsibilities for the banking system (and for other systemically important financial institutions and markets) – a better flow of information – must be weighted against the near-certainty of regulatory capture of the supervisor/regulator by the financial sector. We have seen this in the US, where the Fed, and even more the SEC, have internalised the interests, world-view and fears of Wall Street to such a degree that it has been impossible to take the tough measures required to clean and restructure banks’ balance sheets, (re)capitalise banks and restructure their managements and boards to the extent necessary to restore financial intermediation to the point that a sustained economic recovery is possible.
When there has to be a choice between better institution-specific information and a material risk of capture, cognitive or other, of the central bank by the captains of finance, ignorance may be the lesser of two evils.
But one would have liked to have Eddie George’s wisdom and judgement to draw on during the unprecedented crisis that has swept all before it since August 2007. He was a man who inspired confidence and trust – the moniker ‘Steady Eddie’, while not terribly orginal, was not inaccurate. I am fortunate to have known the man. I will miss him.