There will be many both in the financial sector and at Westminster who will raise a sceptical eyebrow at the governor’s conclusions over the financial crisis
It was the banks and Gordon Brown wot did it. Neutered by New Labour and unable to prevent the City from behaving in an increasingly reckless fashion, the Bank of England could only issue reports and deliver sermons as Britain slid inexorably towards its worst financial and economic crisis since the 1930s.
That is the recent past as seen through the eyes of Sir Mervyn King, and there will be many both in the financial sector and at Westminster who will raise more than a sceptical eyebrow at the governor’s conclusions. King, they will argue, is now rewriting history in order to salvage his own reputation.
Several mistakes were made, the governor admitted in his BBC Today Programme Lecture. The Bank should have done more to prevent the disaster and should have tried much harder to make the case for a big recapitalisation of the banks before the critical moment in October 2008 when the entire global system teetered on the brink of bankruptcy. But a mea culpa it was not.
In his lecture, King sought to guard his back against three separate charges. The first is that the Bank should have done more to “lean against the wind” in the years leading up to the start of the financial crisis in August 2007. The governor’s critics say that he should have done more in these years to prick the bubbles in the City and the housing market and that a long period of steady, non-inflationary growth bred a lot of complacency on the Bank’s monetary policy committee.
Not so, according to King, because unlike the wild gyrations of the late 1980s “this was a bust without a boom”. And since there was no boom, the Bank is absolved of responsibility for what happened next.
The next charge against Threadneedle Street is that it became too narrow in its focus, seeing itself solely as a monetary policy institute rather than as a body which, along with the Treasury and the Financial Services Authority, had a responsibility for the stability of the banking system.
King’s approach here is to blame the Bank’s low-key approach on Brown’s decision within a month of the 1997 election to strip Threadneedle Street of its responsibility for banking supervision. At no stage before 2007, however, did King express any kind of desire to have the much bigger role in policing the City that he has now been handed by George Osborne; on the contrary, he was happy for the Bank to focus on ensuring that the government’s inflation target was hit.
Finally, there is the claim that the Bank failed to appreciate until it was too late the full magnitude of what was unfolding in the year that separated the run on Northern Rock in September 2007 and the bankruptcy of Lehman Brothers in September 2008.
Alistair Darling, the then chancellor of the exchequer, was frustrated by what he saw as King’s over-academic approach to the crisis, with lectures on the perils of moral hazard when there should have been pre-emptive action to head off the looming downturn.
In the summer of 2008, when Britain was in the early stages of a recession that would wipe more than 7% off national output, the Bank was fretting about the spike in inflation caused by rising oil prices. The fact that King and his colleagues did eventually act decisively to slash interest rates and bail out the banks does not mollify critics who say that it was a bit late in the day.
Tonight’s lecture comes at a pivotal time for the Bank. It has been handed vastly increased powers by the government to supervise the banks. It is presiding over an economy precariously poised between a double-dip recession and stubbornly high inflation. So King is eager to show that public confidence in his institution is merited. In reality, that trust is now more conditional than it was five years ago and the reputation of the Bank – and its governor – would be shredded in the event of a policy blunder that could be laid at Threadneedle Street’s door.