I don’t know Mervyn King particularly well. I’ve talked with the Bank of England Governor a deux just a few times over the years, always at official functions. Rather than Whitehall and Threadneedle Street, my vantage point as an economics commentator has been the world of international business, initially as a correspondent and, more recently, as a practitioner. I can barely remember the last time I was in the same room as Mervyn King.
I mention all this because what follows may differ from other commentaries you’ve recently read. At a time when British economic policy-making has descended into shrill claims and finger-pointing, I don’t want anyone accusing me of ulterior motives. That will, no doubt, happen anyway but one must learn to live in hope.
Since King gave a speech on BBC radio last Wednesday, practically the entire UK commentariat has trashed him. Armed mainly with anonymous quotations from “senior bankers”, the Governor has been called “arrogant” and “out-of-touch”.
It’s now conventional wisdom that King, who has led the Bank since 2003 – having previously been Deputy Governor and, before that, Chief Economist – “let the credit bubble expand”. The Bank, in the run-up to the sub-prime debacle, “lacked market intelligence”, so King “missed the crisis” and was “slow to react” when it did.
The Governor’s latest speech also contained the idea that warnings issued by the Bank, as the 2008 meltdown approached, weren’t stern enough. “With the benefit of hindsight, we should have shouted from the rooftops,” he observed. This phrase, in particular, has been savaged, with King widely accused of making a “non-apology”.
My view is that much of what has been written about King in recent days is not only nonsense, but dangerous and commercially-motivated nonsense. Yes, the UK economy is struggling, and yes, the public are looking for scapegoats. As a well-paid and “clever” civil servant, the Governor fits the bill.
It needs to be clearly and widely understood, though, that the City is trying to destroy King’s reputation for the simple reason that he is pretty much the only senior UK policy-maker still arguing for the kind of robust bank regulations, much tougher than those currently proposed, that are needed to prevent another serious financial meltdown.
The negative-publicity campaign against King, years in the making but seriously escalated last week, is being staged by the same “vested interests” which he, almost alone among Western central bankers, has dared to face-down. As such, the investment banks drip their poison, the PR agencies punt it and knocking-copy sells papers – not least when times are tough.
The Governor is determined to do everything he can, before his term expires in June 2013, to rein-in UK banks. The City doesn’t want that, of course. So history is being re-written, with King being accused of all manner of things in order to undermine his authority.
I don’t remember, for instance, King “allowing the bubble to inflate” prior to the credit-crunch. On the contrary, he was often attacked by business lobby groups for being too hawkish. In August 2005, lest we forget, King was out-voted when he tried, amid signs credit was over-heating, to prevent interest rates being cut. The casting votes against him came from external MPC members appointed by then Chancellor Gordon Brown.
Similarly in June 2007, again as credit was spiraling, King tried to raise rates. Again he was out-voted, with Brown placemen playing a crucial role. So let us not say King was soft on inflation or credit in the run-up to sub-prime. Let us stick to the facts.
The reality is that King did see the credit crunch coming. Among several warnings he gave, the one that sticks in my mind was at the Lord Mayor’s Banquet, also in June 2007. “Excessive leverage is the common theme of many previous financial crises – are we really so much cleverer than the financiers of the past?” King publicly observed, as the City boys pursed their lips.
“It may say champagne – AAA – on the label,” King boomed, criticizing sales of complex derivates approved be deeply-compromised ratings agencies. “But by the time investors get to what’s left in the bottle, it could taste rather flat”.
King’s words of June 2007 were truly extraordinary. What more could a Bank of England Governor have said, without being accused of spreading panic? And when it comes to his “lack of market knowledge”, King didn’t have detailed break-downs of each banks’ balance sheet, because the bank supervision has been transferred to the (Treasury-controlled) Financial Services Authority back in 1997.
Brown set up the FSA because he wanted to control the bank regulator. The then newly-minted Chancellor wanted to keep the UK’s lending boom going, in the misguided hope that the resulting “feel good” factor would make him the UK’s most popular politician.
So King was right last week, when the said the FSA was “a reform that would return to haunt us”. He was right to defend the Coalition’s measures to bring bank regulation back to Threadneedle Street.
I also believe he was correct, when the credit crunch first hit, to make the banks sweat, questioning unconditional root-and-branch bail-outs. “Moral hazard” isn’t an academic parlour game. It’s the reason why the Western banking system collapsed and why, unless drastic reforms happen, it will ultimately collapse again.
No-one is saying King is beyond reproach. The Bank’s “quantitative easing” programme, which King has supported, has been grossly over-extended. Few have criticized it more than me.
Yet King was presented with a fait accompli. Downing Street was, and remains, determined to print virtual money, taking the line of least resistance. I wouldn’t be surprised if King finds such policies as distasteful as I do. He could have resigned, but what then? There would have been an almighty panic, with King anyway replaced with someone even more flexible in their understanding of basic economics.
What really got the City’s goat about King’s latest speech is his on-going determination to separate “ordinary” retail banking from “risky” investment banking.
It is vital, said King, that the government brings the Vickers reforms into law “sooner rather than later”. These changes, which “ring-fence” investment and retail banking in the same institution, aren’t set to bite until 2019 – long enough for the banking lobby to water them down even more.
King signaled, as he has before, that Vickers doesn’t go far enough. “We don’t build nuclear power stations in densely populated areas, nor should we allow essential banking services and risky investment banking activities to be carried out in the same ‘too important to fail’ bank”.
King then referred, albeit in coded language, to the massive off-balance sheet losses still smoldering, unaudited and undeclared, within the UK banking system. During the financial crisis, “it was difficult to know which banks were safe and which weren’t,” King boomed. And it still is.
In the aftermath of the Northern Rock collapse, “banks found it almost impossible to finance themselves because no-one knew which banks were safe and which weren’t”. That remains largely the case today.
The state bail-outs “didn’t solve the underlying problem – banks needed not loans but injections of shareholders’ capital”. And they still do.
Within the Square Mile, King’s latest speech was a declaration of war on a banking sector that has wrecked our economy, been mollycoddled and remains astonishingly bloated. Little wonder the money-men have buried the Governor’s message under a pile of self-serving vitriol.