Conventional wisdom holds that setting up the Bank of England's independent Monetary Policy Committee (MPC) was Gordon Brown's masterstroke as Chancellor. On the contrary, it has proved to be a catastrophe. Although the credit crunch is global and US-led, the British end has the MPC's fingerprints all over it.

Its decision to keep cutting rates through 2003 all the way down to 3.5 per cent sowed the seeds of the present housing meltdown. Analysis of MPC minutes through that period clinches the argument that it blundered its way into the most disastrous interest rate decision since Nigel Lawson in 1988. That comparison with a politician's decision from the bygone era of Treasury control captures the critical question: was it the narrowness of Mr Brown's remit to the MPC that caused the error, or the act itself of handing over interest rate policy to a committee of technocrats?

Mr Brown's original 1998 remit letter to the MPC focuses on “price stability... growth and employment”. Its 2.5 per cent price stability target refers to “underlying inflation... RPI [retail price index] excluding mortgage repayments”. That last phrase explains the MPC's loss of direction during 2003, diverting its attention away from house prices and exclusively to the consumer price index (CPI). At several points, the minutes show the MPC coming agonisingly close to the right conclusion and then veering back to its obsession with the CPI. Mervyn King, the Governor of the Bank, actually got it right in mid-2002, voting three months running for a rate rise to head off the housing boom. Then even he lost his way and fell for the Bank's oft-repeated line that “it was not house prices themselves which were relevant for policy, but their implications for household consumption”. The neo-Orwellian mantra is clear: if CPI falls below 2 per cent, cut rates; if CPI exceeds 3 per cent, raise them. Nothing else matters - or only insofar as it might affect CPI, demand, output and employment.

Yet there was more to the MPC's blunder during 2003 than simply the wrong remit from the Chancellor. Blunder it definitely was, as the chart illustrates. During 2001, the MPC had cut rates by a third to 4 per cent. This galvanised the housing market so that by the end of that year house price inflation had quadrupled to 12 per cent. It doubled again through 2002 and fluctuated near 20 per cent for the next two years. That was the explosive period for the housing market that unleashed the gung-ho, one-way-traffic approach of lenders and borrowers and generated the present backlash.

How did the clever men and women of the MPC fail to spot this massive spanner in the works and react with a rate rise? The answer lies in the susceptibility of conscientious professionals to thickets of statistics. The minutes of the February 2003 meeting, when the committee opted for the first of two fatal further rate cuts below 4 per cent, offer the most telling of many such examples.

“House prices continued to increase strongly,” they reported, “but the increases in annual house price inflation obscured the fact that there were a number of indicators suggesting that the monthly rate of increase was now slowing.” What were these indicators? A survey of estate agents suggesting that they expected house prices to fall. From that, and tentative mortgage approval indicators, the committee concluded that “a rate reduction seemed unlikely to cause house prices to accelerate, given the current slowdown in housing activity”.

As the chart shows, that was spectacularly wrong. Nor is this entirely hindsight. There were some City thinkers (not only this one) at the time querying such a loose monetary policy in the face of rampant house price inflation. This misguided policy sailed ahead uncontested after Mr King gave up his lone fight for a rate rise in August 2002. It took another 15 months of unanimity against a rate rise for the MPC to wake up to the threat and execute a U-turn in November 2003. This momentum of the consensus is the strongest argument against the committee system for setting rates. It has worked with equal force in the opposite direction over the past six months.

Here, only one dissenter, David Blanchflower, has advocated the further rate cuts that now look blindingly obvious. The rest of the committee has obediently followed the CPI-linked mantra and voted 8-1 every month since April to keep bank rate at 5 per cent, only for the Bank to bow to global equity market pressure and cut by half a point a fortnight ago. It needed the force majeure of the banking crisis to correct the MPC's myopia towards the bigger picture of collapsing asset prices and confidence.

It is tempting, as with the opposite error in 2003, to point the finger at the MPC's remit and its exclusive focus on CPI. If that had been widened to include asset prices, both errors might have been reversed sooner. Yet the tyranny of the consensus also plays its part. The horse from the 2003 stable has bolted and we are suffering the consequences.

Can the MPC push through an immediate 1 per cent rate cut before CPI numbers justify it? If the MPC will not show that vision, will our newly emboldened Prime Minister admit the flaws in the “masterstroke” of his previous life and reclaim the politician's share of responsibility for monetary policy? Publishing full minutes of the monthly Chancellor-Governor meeting would keep the politician honest, as it did under Mr Brown's predecessor, Ken Clarke, who defied Eddie George, the Governor in 1995, and was vindicated by subsequent statistics. That was the kind of wider vision needed back in 2003, and it is sorely needed again today.

Jamie Stevenson, former head of research for Dresdner Kleinwort, is a Teaching Fellow in Finance at the University of Exeter Business School

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