SIR Mervyn King has given his last press conference, and exits Threadneedle Street for good on 30 June. The legacy-assessing has already begun. But the economy we behold after a decade of King’s leadership at the Bank of England is nothing the governor can boast about: average hourly wages are below the level they were when King assumed the governorship in 2003, and the British economy is still producing at a level below that of 2008.
By the simplest measures, the reign of this King has been a fairly bad one for Britons economically. The key question, however, is how much of this is his fault; central bankers are powerful, after all, but far from omnipotent.
There are several grounds on which to assign King a share of the blame for Britain’s economic malaise – perhaps his response to the earliest phases of the financial crisis. But the biggest is that the bank failed to nip the financial bubble of the early 2000s in the bud. And it failed thanks in no small part to the governor’s own predilections.
King is a crisp and clear thinker, drawn to the elegance of theoretical economic models with which he grappled with as an academic and as the Bank’s chief economist in the 1990s. He is rather less interested in the messy business of regulating banks, as many who have worked with him over the years have told me. He seems to dislike bankers on an almost visceral level.
All that helps explain why, in the decade before the crisis, the Bank became so thoroughly disconnected from the business of overseeing British banks. Instead, as part of Labour’s overhaul of financial regulation in the late 1990s, the Bank of England gained true independence on monetary policy. It was the the remaking of the Bank in King’s image.
As the Bank’s chief economist, King established its credibility as a maker of independent monetary policy. He brought in first-rate young economists and brought down inflation. The things we now take as the routine aspects of the Bank’s work are as much his invention as that of anyone else: the inflation target, monthly policy meetings structured across two days, minutes, and Inflation Reports.
While some argue that the time has come to rethink the finer points of the Bank’s remit, King’s was an innovative approach that has generally served Britain well. But the flip side of the Bank being remade in King’s image was found in bank supervision, which didn’t fit as squarely into King’s models for how a modern central bank ought to act. The Bank’s leadership had already acquiesced as supervision duties were shipped over to the Financial Services Authority (FSA).
The FSA was famously focused on the small questions of banking supervision – making sure banks didn’t defraud investors, for example – and not the big ones, like whether their degree of leverage endangered the UK or world economies. King, many former colleagues told me, evidenced little interest in deploying the powers the Bank retained over the banking system. They described bank oversight as a career-stopper at Threadneedle Street, a place that the most ambitious young Bank employees were to avoid at all cost.
And under King, in the pre-crisis days at least, the Bank engaged the City less on its own terms – understanding how things were working or not working, where the bodies were buried – and more as what an academic economist might want the banking sector to be. When there was a question of studying how gilts were to be issued, for example, I’m told King instructed his staff to consult some of the leading academic students of auction theory, and not the people who actually traded government bonds all day.
A governor, and a central bank, that had been more attuned to the risks building in the system certainly wouldn’t have been able to prevent what became a global financial tsunami. But he may have lessened the damage to the UK economy. King is an honorable public servant who has made many contributions to making the Bank a more modern, credible institution. But his blind spots helped leave Britain exposed to the disaster that was to come.
Neil Irwin is a columnist for the Washington Post and author of The Alchemists (Headline Business Plus £25).