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The reason such an inquiry might seem appropriate is that over the next few years the Bank acquires new powers and responsibilities that will make this 317-year-old institution arguably the most powerful authority in the land – more powerful in terms of its influence over the economy than the Chancellor himself.
It's a grand experiment in macroeconomic management the like of which has never been tried before. In addition to its existing powers to set interest rates and manage the money markets, the Bank of England will acquire responsibility not just for banking supervision but for controlling the credit cycle in the round – a function known as "macroprudential regulation".
Bankers will once more be forced to jump to attention before the Old Lady's command, while with a nod of the head the Bank's newly formed Financial Policy Committee – which meets for the first time on June 24 – will be able to adjust the supply of credit like water through a sluice. After 30 years in which the collective will of financial markets has dominated the commanding heights of the economy, the Bank is being put firmly back in the driving seat.
Given the calamities of the past four years, can the Bank be trusted with such all-embracing power? On the face of it, the record does not inspire confidence. Does it really make sense to be placing so much faith in an institution which many accuse of being asleep at the wheel as the biggest financial crisis in 100 years came crashing down on the economy?
Worried by the apparent lack of accountability, MPs on the Treasury Committee are belatedly holding a series of hearings into this central plank of the Coalition's financial reform agenda. The Bank's refusal to accept any degree of culpability in the crisis is already well known. But to general astonishment, it has emerged that there hasn't even been so much as an internal inquiry at the Bank as to what went wrong.
At the hearing last week, a former Monetary Policy Committee (MPC) member, Sushil Wadhwani, put the point thus: "Especially in a situation when the Bank is going to be much more powerful and where it seems the Bank hasn't properly accounted for some of the things people regard as errors in this period, I think it imperative that either you [the Treasury Committee] or the Court of the Bank of England, or both, launch an inquiry. It's very important that the lessons are fully absorbed before the Bank is given all these extra powers."
Willem Buiter, another former MPC member, was blunter still. The reforms were "disastrously misconceived", he said. Given that the financial sector is ultimately underwritten by the taxpayer, it should be the Treasury which is in charge of macroprudential supervision, Prof Buiter insisted. A "collective fiscal/monetary affair" of this sort could not reasonably be delegated to an independent authority.
So what are the Bank's supposed policy failings and are they serious enough to make the organisation unfit for the heavy responsibilities and discretions about to be heaped upon it?
For the first 10 years of its reign as an independent monetary authority, it was hard to fault the Bank's performance at all. Inflation was tame, and the UK economy entered one of its longest ever periods of uninterrupted growth. Some called it the Great Moderation. Mervyn King, the Governor, christened it the NICE decade, standing for non-inflationary-continuous-expansion. These were halcyon days for the Bank. Rightly or wrongly, the Old Lady got much of the credit for delivering an apparently golden age of economic stability and prosperity.
Yet apparently unnoticed beneath the prevailing calm, a terrible storm was brewing which was to test the Bank's reputation for economic competence to breaking point. To what extent was the Bank to blame for this maelstrom, did the Bank manage it well once it had begun, and with inflation expected to reach 5pc later this year, what on earth has become of the Bank's main remit, which is to keep inflation low?
Wadhwani believes there are "a whole host of issues" that demand further investigation before letting the Bank loose with its new powers.
One is its handling of the Northern Rock crisis. Then there was the failure to follow the European Central Bank and the US Federal Reserve into early action in lending liquidity support to the banking system. Another issue is the Bank's refusal to lean against the wind and use what tools it had to deal with the emerging credit and housing bubbles. To these must now be added way-above-target inflation and arguably inappropriate political intervention in fiscal affairs.
Many will think the mere fact of the downturn, and its gruelling aftermath, evidence enough of bad policy. Some Treasury insiders still bitterly blame the Bank for the supposedly botched way in which the crisis was initially handled. The Bank had to be dragged kicking and screaming into doing the right thing, one said, a version of events supported by a number of Financial Services Authority (FSA) accounts.
Both the FSA and the former Chancellor, Gordon Brown, have been widely blamed for the catastrophe, yet the policymaker which must be judged to have been more at the centre of things than any other, the Bank of England, has emerged from the storm not just unscathed, but with even greater powers than it had before.
Criticism of the Old Lady falls into five distinct categories. One is that the Bank failed to take action as the credit bubble grew, and indeed stoked the excesses with too easy a monetary policy.
A second criticism is that the inflation remit has been applied in an inconsistent, asymmetric and self-evidently ineffective manner. The MPC banked the external influences during the good years when it was depressing inflation, but asks us to look through these pressures now that it is adding to it.
Third, the Bank compounded the loss of financial confidence in the early stages of the crisis by denying the banking system the liquidity support desperately needed to avert calamity. Apparent fixation with the dangers of moral hazard caused the Bank to underestimate the seriousness of the crisis until it was too late.
Fourth, the Bank gets criticised for a lack of governance, and in particular for an overly powerful Governor unable to countenance criticism or take advice. There was a "group think", Wadhwani claims, a prevailing economic orthodoxy which came from the top and discouraged alternative thinking.
And finally, the Bank is accused of straying into the political sphere by apparently backing Conservative plans for front-end-loaded deficit reduction. To what extent do these charges stack up?
Well, if there was a failure in monetary policy in the lead-up to the crisis, the Bank of England was hardly the worst offender. All central banks can be accused of much the same thing, perhaps more so in the case of the US Federal Reserve and the European Central Bank.
Rather than letting the business cycle run its course, the quest for monetary policy became that of preventing recessions. Every time a crash or downturn loomed, the Fed, with the rest of the world's central bankers in tow, came riding over the hill to save the day by flooding the markets with cheap money – a phenomenon that became known as the "Greenspan put".
Rapid globalisation and technological change could be relied on to keep prices low, making these actions perfectly compatible with inflation targeting. The belief in financial markets that there was some kind of an officially sanctioned safety net – a view fully confirmed by subsequent events – created moral hazard which in turn encouraged reckless behaviour and dangerous levels of balance sheet expansion in the banking sector.
It also prompted indiscriminate search for yield. As the good times rolled, investors became ever more oblivious to risk, culminating in the logical absurdity of "Ninja" lending to people with "no income, no job or assets", and therefore no hope of ever repaying the loan.
Yet the Bank of England didn't lead this process, and even with the benefit of hindsight, it's not obvious that it was pursuing the wrong policies. When Labour came to power in 1997, the Bank was stripped of responsibility for banking supervision and told to focus more or less exclusively on inflation targeting.
For the first 10 years, it excelled in this task. Inflation was stable and output conformed to long-term trend. In such circumstances, it's hard to argue that monetary policy was off track.
Yet there was plainly already a developing problem by this stage. The UK economy was becoming progressively more unbalanced, in that domestic demand was expanding much more rapidly than overall output. In a speech in Plymouth as far back as 2000, Mr King did warn of these dangers. His argument was that it was surely better to act pre-emptively against the imbalances than suffer a nasty shock to demand further down the road.
But there was little support for this view at the time. A two-speed economy was thought better than a no-speed economy, which is what might have occurred if rates had been raised to deal with the imbalances. On the MPC, Mr King was repeatedly outvoted in calling for higher interest rates. Among those who voted against him was the very same Sushil Whadhwani who today accuses the Governor of leading the "group think" of prevailing free market orthodoxy.
It's as true today as it was then – persuading the body politic that painful pre-emptive action likely to increase unemployment substantially should be taken against a crisis which doesn't yet exist is hard to impossible.
The Bank can also reasonably claim that it was powerless to prevent the extraordinary expansion of bank balance sheets starting to take place about this time. Indeed, the fact that Labour deliberately excluded the Bank from this sort of intervention is the main justification for today's reforms. The problem was not monetary policy as such, but failure to recognise that the financial sector was out of control. The Bank, it will be recalled, had been largely stripped of responsibility for financial regulation.
As it happens, the Bank of England did sound the odd warning about collateralised debt obligations – the toxic mortgage-backed securities that sparked the original liquidity crisis – and about the growth in credit more generally, but with no obvious powers to control the phenomenon did little about it.
Yet, whatever the excuses, the Bank cannot entirely escape blame. As William McChesney Martin, chairman of the Federal Reserve from 1951 to 1970, famously remarked, the most important job of a central banker is "to take away the punch bowl just as the party gets going". Central bankers in the 2000s manifestly failed to do this. In fact, they seemed to do the reverse.
All this points to an interesting paradox. Mervyn King was not a man given to pressing the punch on partying bankers. To the contrary, as an academic economist, he believed that the Bank had in the past been far too ready to ply its friends in the City with favours. His was an almost visceral disregard for finance, a fact that helps explain both why he's managed to remain a relatively popular central banker who is not generally blamed for the crisis – his demands for root-and-branch banking reform play strongly to the popular view – and the Bank of England's relatively tardy response to the financial crisis.
When the European Central Bank and the Federal Reserve responded to the initial stages of the credit crunch by flooding the system with cheap liquidity, the Governor's inclination was to dismiss the move as an overreaction. Just two days before it emerged that Northern Rock had requested lender of last resort support, he wrote a letter to the Treasury Select Committee in which he said that not enough regard had been given to the dangers of moral hazard.
"The provision of... liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behaviour. That encourages excessive risk-taking, and sows the seeds of a future financial crisis," he insisted, before adding: "The provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises."
Mr King was hardly alone in failing to recognise the seriousness of the situation, or the extreme economic damage financial crises, when left unaddressed, are capable of inflicting. But then the Bank was in charge of the tiller as the ship sailed towards the rocks, and was, moreover, the only authority with the money market tools to do anything about it.
Critics claim that this almost puritanical adherence to the principles of moral hazard not only got the Bank off on the wrong foot in its response to the crisis, but coloured its attitude throughout.
Mr King had the support of the Court of the Bank of England for his stance, but others thought he was getting it very seriously wrong. A battle royal ensued, according to some FSA insiders. At least two Bank staffers on the MPC are said to have urged the Governor to heed the City's cries for help.
But Mr King's view prevailed. To this day, many City bankers believe the crisis was at root merely a problem of absent liquidity which the Bank could have done something about.
Yet the Governor always thought of the crisis as fundamentally a problem of solvency, not liquidity, which required treatment through recapitalisation rather than funding.
In any case, it wasn't until the early part of 2008, by which stage Northern Rock had been nationalised, that there was any notable thaw in the Bank's position. With the launch of the Special Liquidity Scheme, the banks finally got the long-term funding they craved. Regrettably, it wasn't enough to prevent meltdown at Royal Bank of Scotland and HBOS. This might be regarded as vindication of King's view.
Throughout the crisis, provision of liquidity has repeatedly been used as a way of avoiding the underlying solvency issue. RBS and HBOS seemed to prove the point. The massive state recapitalisations of these banks that later took place were instructed by this analysis.
In the US and Switzerland, where large parts of the banking system were equally bust, less harsh terms were imposed with the result that the banks involved are now free of state intervention. Again critics argue that the oppressive nature of the UK recapitalisations has left the economy with a legacy problem it is struggling to escape.
Muddle, prevarication and poor thinking characterised the handling of the initial stages of the Northern Rock crisis. Demands by Lloyds TSB for massive cheap liquidity support as a condition of acquiring the struggling Northern Rock were fiercely resisted by the Bank. It may also be true that provision of more generalised funding support for the banking system as a whole would have avoided the stigmatisation Northern Rock suffered on seeking the penalty terms of lender of last resort liquidity.
Yet, in the end, the debacle of bailing out Northern Rock had little to do with either a failure in judgment or the tripartite regime of split responsibility between the Bank, FSA and Treasury. Rather it was the absence of an effective resolution regime, compounded by inadequate deposit insurance.
If today's arrangements had been in place back then, the whole affair would have been settled quickly with little or no collateral damage. Lack of the right tools has provided the Bank with a handy excuse for many of its supposed failings.
There will be no such defence next time. The Bank is being equipped with an unsurpassed array of weaponry and powers. The worry is rather about how it might choose to use them.
Thus far, the Bank has studiously avoided any contrition. Given the limitations, the Bank claims, it managed to navigate the financial crisis as well as could be expected.
Up to a point, this is true. One thing the crisis has done is cruelly expose the limitations of inflation targeting, for long considered the only thing you really needed to worry about in macroeconomic management. It turned out to be a lot more complicated than that.
Financial and fiscal stability have proved just as important as price stability, if not more so. Yet the reality is that the Bank hasn't even succeeded on the narrow objective of meeting the inflation target. For much of the past three years, inflation has been well above the 2pc target, unlike Europe and the US, where prices have remained broadly stable.
With each quarterly inflation report, the Bank is forced both to lower its growth forecast and raise its inflation prediction. The point at which inflation returns to target is pushed ever further into the future.
The Bank's problem is that despite its inflation remit, policy has in reality been wholly focused on a different purpose – preventing a depression. This endeavour appears to have been pursued almost regardless of the consequences for inflation. Yet King has never felt able to make that argument explicitly.
And small wonder. If he had said two years ago that with Bank rate at 0.5pc what you can expect by May 2011 is nil growth and a 4.5pc inflation rate, the politicians would have demanded his head on a plate. He'd have been similarly damned had he said it was perfectly possible to bring inflation back to target by jacking up rates, but the price would be an even deeper recession.
The Bank has repeatedly denied it, but to the outside world it looks as if it has been pursuing a growth objective these past three years, not an inflation target. Yet the charade of inflation targeting remains. The Bank asks us to look not at today's inflation, but what it might be a year or two from now once present external price shocks have faded.
Those shocks, and the accompanying squeeze in living standards, are part of the price that has to be paid for the crisis, the Bank says. Well yes, but isn't it the Bank's job to keep inflation on target?
The demand shock that King warned of all those years ago in Plymouth has occurred on a scale he could never have imagined, and it's made the Bank's position as guardian of price stability an extraordinarily uncomfortable one.
As for meddling in affairs he's not supposed to, the Governor is still not forgiven by the hierarchy of the last Labour government for his implied but repeated criticisms of their fiscal policies. Brown was left asking in exasperation why on earth he'd given King a second term after the Governor appeared before the Treasury Select Committee in early 2009 to insist that the country couldn't afford a second fiscal stimulus. King's remarks put the kibosh on the Prime Minister's plans more effectively than open rebellion in the markets ever could have.
Yet in this regard, King is only another in the grand tradition of Bank governors who kick against the incumbent government. What is the point of a central banker if he can't warn of the dangers of reckless, politically inspired policies? In fact, King has been relatively measured in his remarks on fiscal affairs when compared with his opposite numbers at the Fed and the ECB.
So there's the case both for the prosecution and the defence. As the Bank prepares to take on its new, all-embracing powers, the most remarkable thing about it all is quite how durable, in the face of abject disaster, the Brownite settlement around independence has been.
If the Chancellor had been wholly responsible for economic management throughout, this would have been a crisis for
the Treasury much worse than that of Britain's doomed membership of the ERM (European Exchange Rate Mechanism). It would have utterly destroyed the Treasury's credibility.
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