Coffee House

Mervyn’s mini mea culpa

3 May 2012

The newspapers and internet today are full of headlines about Mervyn
King admitting the Bank of England was ‘late to the game’, and that central bankers should have ‘shouted from the rooftops’ regarding the financial blow-up. It’s true,
the BoE governor did make these ‘mea culpa’ remarks — but they came rather half-heartedly, and couched within a radio lecture that seemed to point even more fingers at other
King was giving the Today Programme Lecture 2012, which he addressed to a Radio 4 theatre audience yesterday evening. Early in the half-hour speech, he gave an
anecdote from 1997, in which then-governor Eddie George and him, Merv, celebrated Gordon Brown’s proposal for Bank independence. An independent central bank was something he and Eddie had
been working hard for, explained King. There was a fly in the ointment, though — ‘Although far from clear at the time, the later decision to remove from the Bank of England the power to
regulate banks would return to haunt us.’
There you have it then — the BoE’s powers were limited, especially with regards to the naughty banks. Thus its responsibility for the subsequent financial fiasco was also limited. King
followed this anecdote with a longish spiel on how, in the decade after 1997, the Bank sustained a period of low and remarkably stable inflation. Coexisting with this golden age, according to King,
was a remarkable lack of economic overheating: ‘There was no unsustainable boom like that seen in the 1980s; this was a bust without a boom’. In other words — there were no red
lights flashing about a possible banking tailspin; we couldn’t have known.
So what went wrong, then? The banks overextended and lent too much, said King, and they lent to other financial participants, which made it all much more complicated and worse. (But remember,
because the central bank had been stripped off its regulatory role, there was absolutely nothing it could have done.) Once it was clear that we would all be credit-crunched though, in 2008, King
said the BoE was on-the-ball with a proposal — recapitalising the banks. This was a ‘bold action’, said King, and he acknowledged that it ‘could have happened sooner’.
However, ‘the most important thing was that it was done’.
Every time King admitted that the Bank of England may have, perhaps, been a teeny-weeny bit at fault, he pointed out that everyone else was at fault, too. ‘On all sides there was a failure of
imagination to appreciate the scale of the fragilities and their potential consequences. No-one could quite bring themselves to believe that in our modern financial system the biggest banks in the
world could fall over. But they did.’ (So it was a failure of the imagination, then. Like Picasso on a bad day.)
Then we have King’s mea culpa passage, which so many are quoting today, but which itself contains some you-can’t-blame-me sentences:

‘That isn’t to say we were blind to what was going on. For several years, central banks, including the Bank of England, had warned that financial markets were underestimating risks. So
why, you might ask, did the Bank of England not do more to prevent the disaster? We should have. But the power to regulate banks had been taken away from us in 1997. Our power was limited to that
of publishing reports and preaching sermons. And we did preach sermons about the risks. But we didn’t imagine the scale of the disaster that would occur when the risks crystallised. With the
benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and
that so-called ‘light-touch’ regulation hadn’t prevented any of this. And in the crisis, we tried, but should have tried harder, to persuade everyone of the need to recapitalise the banks sooner
and by more. We should have preached that the lessons of history were being forgotten – because banking crises have happened before.’

More interesting than King’s lecture was the interview he gave to Evan Davis this morning, during which he was pressed about his speech, or
rather all the things he left out of his speech. Here, the governor sounded just a little bit more contrite.
There’s another term Sir Mervyn left out of his lecture completely — ‘Quantitative Easing’, which will no doubt be his biggest legacy when he steps down next year. If King
wants credit for the low-inflation, non-boom Eden before our great financial fall, what about the fact that inflation is now at 3.5 per cent versus the Bank’s target of around 2 per cent, and
look set to bust this target for a third year? So the credit crunch is the fault of the banks, and lack of proper regulation the fault of the government. But if no mention is made of a monetary
policy that has caused ballooning inflation and shrinking pensions — what, then, does the Bank of England do?

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Show comments
  • John Jefferson Burns

    Everard me old cock sparrow

    Yes Labour were culpable. But as for Merv Gnome he, despite alleged independence was terrified of Gordon’s tantrums.

    Only now liberated by the urbane George and Dave can he speak his mind.

    You adduce more evidence of the Brown/Beria Stalinist regime

    But as a member of the imperial establishment you know this.

  • Sir Everard Digby

    Inependence? You seriously believe Brown/Blair/Labour would allow a body to make its own decisions with no political interference. Labour is nothing but political interference.

    This so called independence is purely another quango -in place to deflect blame from politicians yet the mouthpiece for decisions maded by politicians.

    The BoE does have one serious question to answer which Merv the Swerve has always avoided.

    During the period 1997-2010 Labour were pronoucing on a huge range of subjects and interfering in our everyday lives to the point of obsession.

    Yet strangely,as personal debt exploded, neither Labour or the BoE made a single mention of it,nor did they try to rein it in.

    Why was that?

  • El Sid

    Unfortunately there is a lot of truth in the narrative that “Brown took away a lot of the tools we needed to do our job”. The BoE aren’t blameless, but it’s worth noting how many banks needed to be bailed out in 10 years of FSA supervision versus 100 years of BoE supervision.

    It’s not just in the lack of power – it’s more subtle things like a loss of granularity in supervision. In the old days the Bank would review the lending of each bank on a monthly basis – that didn’t happen under the FSA. And the tripartite system meant that a lot of data got passed to and fro in the form of whole-industry reports, which disguised the problems at individual institutions.

    Aside from the fact that the FSA paid peanuts and got monkeys, who lived in terror of Gordon Brown. Hence the real disasters like the FSA allowing AIG to issue “insurance” to people who had no insurable interest in the things that were being insured.

    The BoE was twitching about things like the customer funding gap as early as 2003 (eg *ttp:// compares the situation to the late 1980s and mentions the increased liquidity risk). OK, even if they had had the powers to do something then maybe they wouldn’t have done anything – but at least it might have happened, whereas we know what happened with the FSA/No 11 in charge. The IMF were also sticking their oar in, their 2003 review called for the UK to introduce a special administration for insolvent financial institutions. The FSA/Treasury never did anything about it, but it might have at least reduced the systemic effects of Lehmans going pop.

    It’s also worth comparing the tripartite system with Canada’s system of a single body, relatively indpendent of politicians – the proof is in the pudding here :

  • John Jefferson Burns

    King is my perfect idea of a gnome.
    He lacks Bernanke’s perfect beard.

  • TomTom

    He should have opened his MOUTH or resigned. He simply went along. He loaned HBOS £60 billion in MARCH 2008 and kept it a secret from HBOS and Lloyds Shareholders creating a FALSE MARKET

  • Kevin

    “how, in the decade after 1997, the Bank sustained a period of low and remarkably stable inflation”

    The final paragraph of this posting is hard-hitting, but my memory is that Norman Lamont introduced the policy of targeted inflation, after the previous EU economic crisis.

  • Percy

    The most amazing thing about King is that he hasn’t been sacked, he is truely useless; he’s up there with Brown and Balls in the culpability stakes.

  • oldtimer

    I think this all adds up to what might be described as a bald and unconvincing narrative.

    Both the BofE and the FSA were well aware of the risks taken by banks before the crash and the assumption that they would be bailed out. Yet neither did anything either in word or deed.

  • David Lindsay

    Even Mervyn King now regrets that Gordon Brown and Tony Blair reversed one of Labour’s greatest achievements and ended democratic political control over monetary policy. That reversal must itself be reversed as a matter of the utmost urgency.

    Attlee never went through with the 1945 Manifesto commitment to nationalise the clearing banks. At the time, he was probably right. But he went through with the nationalisation of the Bank of England.

    And the man who reversed that assertion of democratic political control over monetary policy went on to learn how right Attlee had been. An independent central bank, or anything like one, is an intolerable alternative government.

    As even the head of that alternative government now recognises.

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