Mervyn King is failing the British economy
As the Bank of England is urged to print more money to avoid deflation, the governor is once again in the spotlight for his dithering
In one of his periodic and cheerless progresses around the country, Mervyn King recently found himself in Leeds. Before an audience of the city's businessmen and financiers, the governor of the Bank of England ended a somewhat downbeat speech about the state of the economy with a ringing declaration. "The long march back to boredom and stability has started this evening in Leeds," he boomed.
King's speeches, of which he has given a few, may convey the idea that he knows where he is going and that he is moving purposefully in the right direction. But his handling of the Bank of England during the credit crisis tells another story.
Since the crunch began in August 2007, King has given a very good impression of a man overwhelmed by events. Under his leadership, the Bank has been too slow, first to rescue the banking sector and then to throw a lifeline to the wider economy. King failed to grasp the seriousness of the situation at Northern Rock and derailed the only potential rescue, leading to the first British bank run for 141 years.
King’s reluctance to act seems to spring from a sort of Puritanism
Despite this searing experience, it then took a further 13 months and three major bank failures before he finally stirred his stumps and started to cut interest rates seriously.
One member of the Monetary Policy Committee who argued consistently for lower rates, David Blanchflower, grew so frustrated during this period that he accused King of "fiddling while Rome burned". He has just announced that he won't be standing for another term on the committee when his current one ends next May.
Even now, the government is trying to push him to do more to prop up what's left of the financial system and the economy. The Treasury is publicly urging King (who has operational responsibility for monetary policy) to undertake a policy of so-called 'quantitative easing'.
This is when the central bank prints more money and uses it to purchase government bonds - driving down mortgage rates. It is what you do to stop a Japanese-style deflationary spiral when all the other levers won’t work any more.
Whether or not quantitative easing is the solution, it is alarming that King should be publicly nudged in this way. But it is something he has brought on himself.
King's reluctance to act is not purely the product of a conservative temperament. It also springs from a sort of Puritanism. He seems actively to dislike bankers. City financiers who have met him claim to be gobsmacked by the disdain in which he holds their profession.
In April he said he found it distasteful that so many young people were lured by money into a City career, and how much he preferred the company of entrepreneurs and small businessmen who actually did things. These may be perfectly understandable sentiments, but in a Bank of England chief they are unhelpful.
This is especially the case at the present time when what is needed is to save the system not to punish the miscreants for their unmeritorious conduct. That can wait for later.
The most successful governors have been those who have rolled up their sleeves and found out what was actually going through the minds of those that they were regulating. King, an austere academic economist, is not the sort to prop up the bar with the traders at the Slug and Lettuce in Threadneedle Street. And it shows.
It is said that King finds it hard to countenance views contrary to his own because he genuinely thinks he is right. He still believes that the Bank conquered inflation in the UK. He refuses to accept that it was the countless Chinese factory workers who were the real heroes of the story.
Instead of providing leadership, King is cut off from the troops under him
He has also surrounded himself at the Bank with too many academic economists who think like him and have no experience of real banking. His management style is not heroic. When things have gone wrong - as with the Rock - he shifted the blame onto subordinates.
The fear is that, despite some hesitant first steps on King's long march, there is a chance that it may be a case of too little too late.
The lesson of Japan's 'lost decade' of deflation was that central bankers need to cut interest rates quickly when asset bubbles burst to forestall the risk of consumer deflation - a poisonous situation where prices start to fall, encouraging people to defer spending and pushing the economy into a slump.
If the UK is now poised uncomfortably close to the brink, King must bear some of the blame.
Instead of providing leadership on this long march, King looks cut off from the troops under his command - the City financiers and branch bankers. He doesn't much like them, and they don't have much confidence in him.
He seems congenitally incapable of making rallying speeches, perhaps because of his fundamental intellectual honesty. His tone is resolutely Eeyore-ish.
Just take a few of his recent themes - about how we came closer to collapse than at any time since World War One, about how more banks may need to be nationalised, or about how we face a 'nasty' decade following the 'nice' one.
Candour is fine - so long as it is followed by decisive action. The tragedy is that King has provided too much of the former, and not enough of the latter. ·
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