I was taken back by the vitriol that was leveled at Sir Mervyn King after his Today lecture last week (amusingly summed up in an earlier post by Shaun Richards of Mindful Money). The Bank of England governor, due to step down in 2013 after a ten-year term, was lambasted for a multitude of sins.
Charges leveled against him included that he remains blinded by neoclassical dogma; that he was naive to believe that controlling inflation would be enough to ensure financial stability; that he failed to even notice the massive risks and leverage that were building in the UK financial system 2003-07. Many commentators reminded us of King's embarrassing answer to a question about financial stability asked by BBC economics correspondent Stephanie Flanders on 8 August 2007. King answered:
"…it is very important to set a very, very key point here, which is that our banking system is much more resilient than in the past. Precisely because many of these risks are no longer on their balance sheets but have been sold off to people willing and probably more able to bear it … We don't have a system that is [as] fragile [as that now]. The growth of securitisation has reduced that fragility significantly.
Unfortunately for Sir Mervyn, Northern Rock collapsed under the weight of its own irresponsibility within three weeks and, less than a year, later many of Britain's banks, including HBOS and RBS, were bust, with the people of Britain forced to pick up the tab. Will Hutton summed up the problem rather well in The Observer:
"Sir Mervyn cannot bring himself to declare that the Bank was party to the gigantic intellectual mistake that led to the crisis."
King’s most vituperative critics accused him of ruling the Bank of England like a “tyrant” (for more on this theme, read Chris Giles’ insightful The Court of King Mervyn in the Financial Times), and for having been a “disaster” as central banker (that came from David Cummings, a director of Standard Life Investments).
Much of the criticism is justified. However is it possible that the critics have hidden agenda? Could they be seeking to rubbish King in order to divert attention from what he was really talking about? This is the view of Liam Halligan, chief economist at Prosperity Capital Management. Writing in the Daily Telegraph, Halligan, a former economics editor at Channel 4 News who also has an economics column in the Sunday Telegraph, wrote:
"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 meat of King's speech was about what he calls the three 'R's – Regulation, Resolution and Restructuring – and how government must not be swayed from the task of implementing them by silver-tongued bankers with bonuses and "vested interests" to protect.
He praised Sir John Vickers' Independent Banking Commission, which has recommended that the UK government should ring-fence the "utility" parts of larger banks from their riskier “casino” investment banking arms and hold much deeper capital buffers, and said it was vital that "parliament legislates to enact these proposals sooner rather than later". In the Queen's speech on May 9, the UK government reiterated its commitment to banking reform. In the speech read out by Her Majesty, David Cameron's government announced it would provide further details in a 'white paper' that will be published on 14 June to coincide with chancellor George Osborne's Mansion House speech.
On several occasions King urged the government of prime minister David Cameron to stick to its plans for regulatory reform, for example saying:
"For the sake of future generations, we must be bold and decisive and, while the memory is fresh, learn the lessons from this crisis. Reform is essential."
However King, who famously said that "of all the ways of organising banking, the worst is the one we have today" in his Buttonwood speech in October 2010 seems to accept that you cannot fix a broken banking system overnight. He added:
"Dealing with the consequences of our "bad banking situation" is likely to be a long, slow process."
There may well be some truth in what Halligan suggests.
For me, the biggest disappointment with this speech, which seemed more restrained than some of King's earlier efforts, was that he did not use it to admit that the neoclassical dogma to which he appears to continue to subscribe is false, and based on numerous fallacies. He made no reference to the need for fundamental monetary reform, including reining in private banks' credit creation capacities, a theme that ran through the excellent recent Just Banking conference in Edinburgh.
The BBC's Today program lecture presented Mervyn King with a wonderful opportunity to admit, as former Federal Reserve governor Alan Greenspan has done before him [watch from 9 minutes 20 seconds], that his underlying ideology was wrong. But King didn't take it.Further reading on UK banking reform, the Bank of England and Sir Mervyn King:
- Vickers report and ringfencing may turn out to be a sideshow by Ian Fraser
- BoE governor Mervyn King and the case for reforming Britain's banks by Ian Fraser
- Mervyn King has failed – it is time for some democracy at the Bank of England by Shaun Richards
Tags: Alan Greenspan , Bank of England , banking crisis , BBC , Channel 4 News , Chris Giles , David Cameron , David Cummings , financial crisis , HBOS , Liam Halligan , Mindful Money , neo-classical economics , Northern Rock , Prosperity Capital Management , Royal Bank of Scotland , Royal Bank of Scotland (RBS) , Shaun Richards , Sir Mervyn King , Standard Life Investments , Stephanie Flanders , Sunday Telegraph , Will Hutton