Is Mervyn King the UK’s most disastrous public servant?
One of the Wikileaks revelations was that King played a crucial role in convincing the Lib Dems that a coalition with the Tories and an extreme cuts agenda was necessary. Whether he overstepped the line constitutionally is really a secondary issue - the fact is that the Bank of England has been an independent political force in the past, notably in the interwar years and the early days of the Harold Wilson government. (Many would argue that it has usually been a negative force.)
But consider this. King, in common with the rest of the world’s central bankers other than perhaps the Reserve Bank of Canada, failed to contain the housing bubble and therefore shares responsibility for the epochal economic disaster resulting. In common with the rest of the world’s central bankers other than the Canadians and the Spaniards, he failed to ensure that the banks took adequate precautions against the inevitable bursting of the bubble. In this, his responsibility is shared with the Treasury and the Financial Services Authority, but it is still real.
After the crash, there was a run on a British bank, the first for well over a century. The reason why runs on banks had been so rare was precisely because the Bank of England was trusted to prevent banking crises bringing about losses to savers or the collapse of credit to industry. In the US, the analogous role was played by the Federal Deposit Insurance Corporation, and the UK has had deposit protection from the Treasury for many years. But bank runs had ended in the UK before the era of deposit insurance. The reason was, of course, the role of the Bank as lender of last resort as sketched by Walter Bagehot.
Why did the public’s confidence in the Bank and the Treasury vanish? When did it happen? There have been financial crises before, plenty of them, but BCCI, the shadow banking crisis of the 70s, the housing bust of the early 90s, and the .com bubble all failed to bring about a run on the bank. There should have been three lines of defence between raging panic and Northern Rock’s depositors - prudential regulation, to stop the bank getting into this position, the lender of last resort, to firehose cash onto it at the first sign of trouble in exchange for its best assets as collateral, and deposit insurance, to save the savers if all else failed. The return of queueing savers is one of the most disturbing features of the whole sorry story - it demonstrates a qualitative change in our society’s basic assumptions. King, among others, should surely answer for it.
After the crisis announced itself, King presided over a Bank of England that slept through most of 2008. While all the economic indicators headed remorselessly south and worrying tremors like the run-that-never-was on HBOS in the spring of 2008 shook the banking sector, the Bank kept its interest rates at normal levels and King fretted about inflation. At the same time, George Osborne and Philip Hammond tried to pretend that another giveaway to landlords (one Philip Hammond MP included) would fix the problem, and even accused Alistair Darling of talking down the economy when he accurately predicted a major recession. But the Bank continued to behave as if everything was completely normal right up to the shock of the second banking crisis and the collapse of world trade.
That, at least, got results. By March, 2009, only weeks after what proved to be the very depths of the crisis, though, he was already demanding cuts. Having been motivated to turn to the printing press, King then wished the coalition on us - a coalition led by people he privately thought were incompetent. I ask again: is Mervyn King the UK’s most disastrous public servant?