INTERVIEW: Martin Taylor

Martin Taylor presses his fingertips together, leans back in his chair and stares into the distance in contemplation. I’ve just suggested to him that if he’d fired Bob Diamond two decades ago the whole history of the global financial crisis might have been different. After a microsecond of thought, Taylor breaks into a smile.

“I like to think the financial system didn’t hang on a binary choice of mine in 1998 – that would really be solipsism in the highest degree!” he chuckles.

Fair enough. But the Apprentice-style fire-or-not-fire decision scenario was real enough. Taylor himself described it in an article for the Financial Times a few years ago.

Taylor was the chief executive of the Quaker-founded British bank Barclays. And Bob Diamond’s investment banking division had blown up due to an unexpected sovereign default in Russia, forcing the group to register a large loss.

What made it worse was that tight trading limits for Russian debt set by by the bank’s board had been deliberately bypassed by Diamond’s traders. The ambitious American banker, humbled, was offering his resignation.

Taylor turned it down believing that Diamond was too important to lose. Diamond, of course, went on to drive Barclays into the very heart of the global credit storm that unleashed disaster on the world and the UK economy in 2008.

And he became one of the public villains of the crisis thanks to his spectacularly ill-judged suggestion before the Treasury Select Committee in 2011 that the “period of remorse” from bankers “needs to be over”.

“Looking back on it I think I made the wrong call,” Taylor tells me, sitting in his rather spartan office on the upper floors of the Bank of England’s City of London headquarters. “But it was more about Barclays than the financial world as a whole.”

Tieless, glasses nestling in his blazer pocket, wearing comfortable slacks, 66-year-old Taylor resembles a country solicitor more than a former City titan or the influential regulator he is now, as an external member of the Bank of England’s Financial Policy Committee (FPC). The only hint of financial services about him is a faint pinstripe on that dark blue blazer.

I’d wanted to interview Taylor for some time, and not only for his juicy insider knowledge on Barclays. He’s also been at the heart of some of the major post-financial crisis reforms and institutions.

He served on the Independent Commission on Banking (better known as the Vickers Commission, after its chair, Sir John Vickers) which was set up by George Osborne to decide whether or not to split up investment and retail banking in the wake of the crash.

And since 2013 he has been a member of the FPC, which sniffs out financial crises before they happen and orders the inflation of banks’ capital buffers when they seem to be getting too excited.

Taylor’s time with the commission is drawing to an end. He has informed the Treasury he will step down no later than June 2019. So perhaps it seemed a reasonable time for him to reflect a little in public, not just on his time on the FPC but on the decade since the crisis.

The first question is, how much has really changed in our financial system over the last 10 years? Taylor’s answer is unequivocal, trenchant even.

“I don’t know whether to laugh or be irritated by it but one of the things I’ve found about a lot of the writing about the tenth anniversary of the crisis is that lots of them basically said ‘nothing’s changed’. But actually almost everything has changed,” he says.

 “The industry has changed profoundly. The relationship of regulatory supervisors to industry has changed profoundly. The incentives have changed. The rules on pay have changed. The rules about liquidity in banking have changed. I think there’s been an extraordinary policy response. And I think there’s been some cultural change. Those who wrote it’s all the same, I don’t know where they’re looking. They don’t see the world that I see.”

I decide this is not a good time to divulge that I myself recently wrote an essay lamenting the timidity of the reform effort. We move on.

Lots of banks have been fined huge sums by regulators over various scandals, from interest rate rigging to insurance mis-selling. Plenty of bosses have departed under a black cloud. But virtually none of the top bankers during the crisis whose institutions foundered and incubated gross misconduct – not even Fred Goodwin of the Royal Bank of Scotland – have been struck off from the Financial Conduct Authority’s “approved persons” list. Inclusion on it is needed to work in the industry.

Doesn’t that, I suggest, represent a gross failure of nerve by regulators, a blow to genuine accountability? Taylor’s not having it.

“I think on the whole that the people at the top of institutions that went wrong in the financial crisis, they lost their jobs, they lost a lot of money, they lost their reputations. I think the idea that they didn’t suffer is a strange one. Imagine what it’s like to be in their shoes – it’s not great actually,” he says.

“I don’t think having the FCA write something on your tombstone is necessarily the be all and end all.”

A new book on Barclays’ roller coaster history by the writer Philip Augar relates that when Taylor was in charge he wanted to split off the troublesome investment banking division. Indeed, he resigned after failing to win the support of the board for his radical restructuring plans.

The Vickers Commission was asked to look into that very question, not just for Barclays but the entire UK banking sector. Yet Vickers stopped short of recommending a clean break and proposed a somewhat complicated “ringfence” of banks’ retail arms instead.

Why didn’t Vickers go the whole hog? Wasn’t this a missed opportunity, especially from Taylor’s perspective?

“I’ve done lots of work for government. If you’re on one of those committees, the ideal space to get to is somewhere where there’s an overhang on a Venn diagram and where what you think is a proper solution is something that government and parliament is going to accept,” explains Taylor.

So did he think that a full split proposal might not be welcomed by the government and risked being rejected?

“I was certainly conscious of it,” he says. “Finding a resolution to something does just mean recommending something. Recommending an ideal solution which government then does not enact is useless. Equally, finding an inadequate solution the government enacts is useless too.”

But he’s adamant that ringfencing, finally due to come in next year, is an acceptable solution to the problem of banks funding their casino trading habits with ordinary depositors’ savings.

“I remember when we reported it in September 2011 and said we wanted these things to be done by the beginning of 2019, a lot of people laughed and said, ‘This is for the long grass and it’s never going to happen’. And you know what? It’s three months away and it’s happened,” he says.

Yet, on the subject of Vickers, there’s been an unusually public disagreement between the Bank of England and Sir John on the question of banks’ capital requirements.

The FPC has mandated UK banks to have a capital buffer [shareholders’ equity to absorb potential losses] of at least 4 per cent of total assets. But Sir John, essentially, thinks that’s too low – and a floor beneath what the Vickers Committee itself proposed.

What does Taylor think of the concerns of his old chair?

“John has been vocal about the systemic risk buffer. I’m comfortable that where we’ve got to, we’ve got a system with about as much equity as Vickers proposed, and arrived at in a slightly different way, and with an awful lot more debt that is convertible into equity,” he says.

“Would I prefer in an ideal world for some of that debt to be equity? Yes I would. But I think we’re in the right place.”

I point out that even Mervyn King, who was the Bank’s Governor when Taylor joined the FPC in 2013, is now saying that banks should have substantially more capital than the regulatory minimum.

“Mervyn’s a friend and I’ve known him a very long time. He was Governor of the Bank for 10 years and deputy governor for five and chief economist before that and he didn’t actually do it in those 20 years,” says Taylor, slightly mischievously.

“If you’re a macroprudential regulator your default setting is to fall asleep worrying about the banking system and to think a little bit more capital would be nice. And the next time you think maybe a little more. We don’t want more capital to make supervisors sleep better – we want more capital to have the appropriate amount of resilience in the system.”

Often central bankers and regulators are surprisingly gregarious in person but automatons when they write anything down. With Taylor it’s almost the other way around. As an interviewee he’s rather hesitant, diffident even. Our talk is punctuated by long pauses for thought. At a couple of points he asks, almost plaintively, “Don’t you think?”

Rather disappointingly, he refuses to talk at any length about Barclays, where activist investor Edward Bramson is now pressing the bank to get out of investment banking, just as he urged all those years ago.

Yet a supremely self-confident intelligence shines out of Taylor’s speeches for the FPC, which are crowded with erudite and witty historical references to imperial China and the French revolution. Their substance is usually the magisterial brushing aside of the latest anti-regulation fallacy propagated by the financial lobby.

And there have been some Exocet newspaper articles. Along with the one that lifted the lid on the history of Bob Diamond at Barclays was a particularly memorable broadside in 2009 which castigated his former banking colleagues for paying massive bonuses to staff out of illusory paper profits during the bubble.

His mordant conclusion: “The system was brought down not because risk management was deficient (though it was), nor because greed was rampant (though it was), but because bankers could not count.” 

Perhaps that unusual self-confidence with the pen reflects his origins in journalism, and his editing of the Lex investment column for the Financial Times in the early 1980s.

Before I leave, I suggest to Taylor that it’s inconceivable that anyone today could progress from journalism to senior banker to regulator in the way that he did. “It was inconceivable then!” he laughs.

“I had a very strange career. But I think people ought to change sector. One of the problems I found towards the end of my business career was I was dealing with people who knew everything about a rather narrow area. You want people like that – [but] you don’t want everyone to be like that. Because otherwise it’s quite hard to see where connections are made.”

Serious questions are being asked about what we want from central banks – and not before time

What numbers should central bankers like Mark Carney, Mario Draghi and Jerome Powell go to bed thinking about? Inflation? The rate of unemployment? GDP growth? Productivity? In other words, what should the target of an independent central bank be? After several years of lying dormant, this old question has, if not quite exploded in a volcanic eruption of debate, at least begun to rumble again.

Labour broached the issue last week with its publication of a report for the party by GFC Economics which suggests the Bank of England's mandate ought to be modified to include a target of 3 per cent annual productivity growth. This follows a paper earlier this month from Lawrence Summers (the veteran US economist who came close to being appointed by Barack Obama as the chair of the US Federal Reserve a few years ago) suggesting the Fed ought to move to a "nominal GDP" target.

Although droves of politicians in the UK, the US and across the EU have moaned and even raged about the decisions of central banks in recent years - including Theresa May - virtually none have called for decisions on interest rates to be put back into the hands of politicians. Indeed, scarcely any have even called for the mandate of those banks to be changed. Like Stanley Baldwin's 1920s press barons, they seem to prefer the power of the bully pulpit without the tedious responsibility of actually having to do any thinking about the sensitive trade-offs inherent in their simplistic demands.

So, in this depressing context, this flicker of fresh thinking about central bank mandates is welcome.

Such a debate can help to clarify that central banks, despite the impression given by the populist agitators, are not a law unto themselves. Policymakers do not arbitrarily decide what is good for the public and what is to be avoided, who should be subsidised and who should be penalised, who should be made richer and who should be made poorer.

The banks are operationally independent only - they work to achieve broad goals set for them by elected governments. That's true of the Bank of England, the Federal Reserve, the European Central Bank and indeed all of the independent monetary authorities across the Western world, from Sweden, to Canada, to New Zealand.

But what should the democratically selected target of those institutions be? They have all traditionally been given (roughly) the same target of 2 per cent annual inflation, and told to aim to hit it over the medium term. However, there is no macroeconomic reason why 2 per cent inflation, as opposed to, say, 4 per cent, should be the magic number consistent with full employment, steady GDP growth and macroeconomic stability.

And indeed the Summers argument is that this old framework, which seemed to work reasonably well before the global financial crash, is now breaking down. In an era when both interest rates and inflation are apparently being chained down by powerful secular economic forces, monetary policy is left potentially impotent to restore growth in the event of a downturn. Summers wants a nominal GDP target (inflation and real growth added together) of 6 per cent.

For similar reasons, Simon Wren-Lewis of Oxford University prefers a primary target of maximising GDP growth, with an inflation target transformed into a backstop. Others have previously suggested simply raising the inflation target from 2 per cent to 4 per cent.

The objection of Bank of England policymakers and officials to GDP targets is that growth data from statistics agencies, unlike inflation data, is often revised over time, sometimes dramatically, and that setting this metric as the target could result in wild and damaging policy swings.

Advocates see this as an exaggerated technical quibble. It also fails to engage with the central objective of the reform, which is to shift the mindset of central banks so that policymakers and staff will no longer consider miserable productivity and weak GDP growth acceptable merely because inflation has been quiescent.

The usual response of institutional conservatives to the idea of raising the inflation target to 4 per cent is that it would shatter the central bank's credibility and befuddle the public although, in truth, there's not much real evidence to believe this. Reasonable people can differ about the relative strength of these mandate proposals and the various objections. Yet all sensible people should welcome the rumbling of a radical debate here.

It's true that it's unhealthy to expect central banks to solve all of a society's economic problems. These institutions cannot please all the people all the time. Yet it is healthy to talk seriously and constructively about what it is we want our central banks to do.

Everyone’s in favour of regional economic rebalancing for the UK – until someone suggests actually doing something about it

We’re all familiar with nimbys: people who are in favour of new housing developments so long as it’s “not in my back yard”. But now they have some competition in the disingenuousness stakes from the “YBNTs”.

Almost everyone claims to support regional economic rebalancing in the grossly over-centralised UK. And it’s pretty plain that this is unlikely to be achieved without moving some operations out of the over-stuffed capital city of London, with the onus on central government to take a lead.

But propose transferring specific resources and one immediately starts hearing: “Yes, but not that.” What the YBNTs seem to envisage is a form of immaculate rebalancing, which involves no disruption whatsoever to the capital and its workers. They were out in force this week after Labour suggested moving “some functions” of the Bank of England out of London to Birmingham.

The first thing to note is that Labour’s “some functions” proposals were misleadingly written up by the (London-based) media as Jeremy Corbyn wanting to move the entire Bank, wholesale, to Birmingham.

We had the same kind of hysterical media reaction when the BBC moved its sports and children’s TV operations to Greater Manchester in 2004. There were similar wails when the Government said this year it wants to shift “part” of Channel 4 out of London. And don’t even mention the idea of migrating Parliament up north while the asbestos-ridden Palace of Westminster is extensively repaired. In the end MPs refused even to move across the road, never mind decamping to the Bull Ring.

It’s amusing to see how business journalists and political commentators, who can usually be relied upon to preach the abstract economic ideal of mobile workforces and invigorating commercial churn, suddenly turn into Mick Cash on a bad day when the possibility emerges they might have to move themselves.

It’s true that regional relocations can fail. The transplant of most of the Office for National Statistics out of London to Newport a decade ago has not been a success and the agency plainly lost some valuable expertise in the transition.

Yet, as a relocation prospect for staff, the third largest city in Wales is very different from Manchester and Birmingham, the second and third most important urban hubs in the country.

As regards the Bank, one of the objections to Labour’s suggestion is that the regulator-cum-policymaker’s current berth in the heart of the City of London represents an intangible benefit that must not be jeopardised. But have they ever considered that this proximity might actually be a source of weakness, opening up the Bank to excessive lobbying and regulatory capture by the hundreds of firms surrounding its Threadneedle Street fortress?

Conversely, following the complainants’ proximity logic, why is the Bank’s physical distance from manufacturers in the North-west, Midlands and North-east, not a disadvantage for its policymakers? As the Bank of England itself frequently tells us, its job is to set interest rates for the whole country, not for one sectional or regional interest.

And the history of the Bank and the Government in this regard is hardly unblemished. The strong pound in the 1980s onward reflected the boom of the City of London in the Thatcher era of deregulation. But the overvalued currency was harrowing for UK manufacturing. 

And in the post-1997 era of operational independence, even the former Governor, Mervyn King, has openly wondered whether the Bank might have got it wrong in tolerating a super-charged currency, and all its associated distortions, in the years leading up to the financial crisis.

This is not a clinching argument for relocation. It’s facile to claim that if the Bank’s HQ had been historically based in Birmingham we would have avoided the financial crisis. But it supports the case for keeping an open mind.

Each relocation proposal should be scrutinised carefully and judged on its merits. The tone matters. And the tone reveals. The suggestion of a shift of some resources to one of our major regional economic hubs should really not be provoking the pearl-clutching reaction we have seen in recent days. And the fact that it does merely underscores our inordinate national over-centralisation problem.

This article was first published by The Independent on 12/12/17

Higher wages could help solve our economic woes

Which comes first: the chicken or the egg? Productivity growth or wage increases? Most economists generally assume that the chicken of productivity growth comes before the egg of workers' wage hikes. In this mental model, productivity (the amount of output that the economy produces per hour of labour) rises thanks to technological advances or more efficient ways of working. This boosts firms' revenues and profit margins. Companies are then able to pay their workers more and everyone is better off.

The general view of most policymakers and analysts is that if firms, in aggregate, increase workers' wages before there has been an increase in national productivity, the result will simply be a damaging burst of economy-wide inflation as too much money chases too few goods and services.

This is the kind of description of the way the world works that one can find from economic authorities such as the Bank of England and the Office for Budget Responsibility. This is why there's so much emphasis given to policies and schemes designed to increase our economy's productive potential. "Raising productivity is essential for the high-wage, high-skill economy that will deliver higher living standards for working people," is how the Chancellor Philip Hammond summed it up last year.

But is this story entirely right? What if wage increases for workers did not always need to follow productivity growth, but could precede it, perhaps even cause it? What if the egg came before the chicken? Some fascinating research posted on the Bank of England's Bank Underground blog by Alex Tuckett last week provides some evidence that wage-led productivity growth may indeed be a possibility.

Tuckett takes a dive into the data of wage growth and output growth in each broad industrial sector of the UK economy. "A careful analysis of the sectoral data suggests that the relationship between productivity and wages is not simple, and that causality may run in both directions," he concludes.

This is an important finding given the UK's current economic condition. Productivity growth has collapsed since the financial crisis. So has wage growth. Real average wages in the UK still languish some five per cent below their level in 2008 (despite the overall growth of GDP in that time). And the Brexit-related slump in the pound has pushed up inflation, meaning real wages are falling once again. On the basis of the OBR's projections, we are on course for the weakest decade of real wage growth since the Battle of Trafalgar.

Under the dominant economic story, the collapse of productivity growth is the fundamental reason wages are on the floor and to rectify the latter productivity needs first to be fixed. Attempts to bypass this are often criticised as counterproductive. In his summer 2015 Budget George Osborne mandated a chunky hike in the minimum wage. This drew the disapproval of many economists who argued that low wages for those at the bottom reflect their low personal productivity and that significantly increasing their wages by government diktat will merely increase unemployment.

But if the chicken follows the egg, perhaps wage increases will prompt higher productivity in firms that employ low-wage labour. Perhaps, in order to protect their profit margins, managements will be spurred into increasing the efficiency of their operations. Perhaps they will invest in more capital equipment to enable their workforce to produce more per hour of their time. Think of a hand car wash installing automatic equipment but retaining the same amount of staff, retraining them to operate the new machinery, and doing more business. This would make minimum wage increases positive for productivity.

And perhaps this is true on a macroeconomic level too. Simon Wren-Lewis of Oxford University has hypothesised that there exists a significant "innovation gap" in the economy, which has built up since the financial crisis due to pessimism about future levels of consumer demand (made worse by George Osborne's deep capital expenditure cuts after 2010). "Most firms…[could be] using out-of-date production techniques which are too labour intensive," Wren-Lewis suggests.

If output and wages were given a positive shock, by government fiscal stimulus for instance, perhaps the overall productive capacity growth rate of the economy would rise in response because some companies would be prompted to step up their capital investment and also research and development programmes.

And this investment might create positive spill-overs. Economists in the US have reasoned along similar lines, suggesting that aggregate supply could be dragged up by stronger aggregate demand.

Economic history strongly suggests that, in the long-run, productivity growth does indeed determine wage growth. And the idea that doubling everyone's pay overnight would double our productivity is obviously fanciful. Yet it's not mad to suspect that looser government fiscal policy and higher wages for workers could help shake us out of our almost decade-long economic funk.

And after many years of productivity growth forecast disappointments it's surely time we took the respectable hypothesis of wage-led and aggregate demand-led productivity growth more seriously - and that economic policymakers summoned up the courage to put it to the test.

The Bank of England was right not to bow to the veggie lobby over five pound notes

"When he warned of the economic downsides of a Brexit vote last year Mark Carney will have braced himself for a shower of abuse. But it's unlikely the Bank of England's Governor anticipated being castigated, like Falstaff, as a "whoreson greasy tallow-catch" by a coalition of vegans, vegetarians, Hindus and Sikhs, all united in anger at the fact that the new polymer five pound note contains minute traces of animal fat.

But the Governor has stood firm not only in the face of the Brexiteers but also the vegetarians. The Bank announced last week, after some reflection, that it will stick with its tallow fivers.

Is this wise? Wouldn't it be better to recall the offending notes and placate the 135,000 or so people who felt strongly enough to sign an online petition last year calling for such a reversal? One of the reasons proffered by the Bank last week is "value for money for the taxpayer". The Bank estimates that it has spent £70m on printing new polymer notes. It would incur these costs all over again to reprint them on new material that did not contain tallow. That's on top of the £50,000 cost of destroying the tallow-contaminated ones.

In other words, it believes a recall would be too expensive. The Bank does say it will look into the feasibility of making future production runs of polymer notes tallow-free.

But that's not placated the vegetarian petition signers who have asked how the Bank is justified in putting a price on their ethical and religious rights.

But our societies generally operate on the principle policymakers are justified in making judgements about how much public money should be spent on meeting certain objectives that are dear to the heart of some groups, whether this is providing prayer rooms in hospitals, or protecting the habitats of certain rare species of plant.

Indeed, even human lives have an implied " value" in public policy.

Many lives could be saved or prolonged every year if the government bought up the niche cancer drugs developed by pharmaceutical companies, or by councils redesigning every potentially unsafe road junction in the country. But they don't do these things because the public cost is deemed prohibitive.

It's true that there are some things that most of us would agree should not be measured by the benchmark of money, such as a human liberty.

Money is not a consideration in the eyes of the government when it comes to protecting our citizens from enslavement.

Similarly, the law doesn't allow people to sell their second kidneys to the highest bidder - even when it would make the buyer and the seller better off - due to the prevailing social conviction that such a trade would undermine human dignity.

It's not about money.

Yet the number of such incommensurable rights and ethical values has, by necessity, to be very limited or the result would be a chaos of clashing principle.

If we deem every ethical or religious assertion a trump card - overriding all else - in public policymaking the system will fall apart; it would be an open invitation to every crank and zealot to demand special and expensive public recognition for their own particular hobby horse.

Should the belief of vegetarians and Hindus that they should not be put in a position by the Bank of England where they have to touch a bank note made with a trivial amount of tallow be among those small number of trump cards?

Should taxpayers' money be no object in the mind of the Governor of the Bank of England when it comes to considering the demands of their conscience?

Or did the Bank of England make a reasonable choice in balancing out the strong concerns of a minority with the broad economic interests of society as a whole?

There is no definitively right or wrong answer here. It's a judgement. We all have the right to make up our own mind about whether a sound decision has been made.

But we surely owe a degree of sympathy to those greasy tallow-catches who are responsible for making the trade-off on our behalf."