THERE will be two immediate consequences from Paul Tucker’s grilling by MPs yesterday. The first is that George Osborne has just been plunged into a political crisis of his own making; his strategy to implicate senior Labour party figures such as Ed Balls and Shriti Vadera has backfired spectacularly. Tucker, the Bank of England’s deputy governor, claimed that he didn’t talk to them about Libor and that his discussions were restricted to civil servants. This is a disaster for Osborne, even though his actual words to the Spectator magazine, where he accused “people close to Gordon Brown”, were carefully couched. The chancellor has again shown himself to be a hopeless tactician and strategist. Of course, Labour bears huge responsibility for the bubble and bust – but Osborne’s decision to focus his attacks on a narrow claim he couldn’t prove was an amateurish error.
The paradox is that Osborne has built his entire response to the recession around the nonsensical assumption that the Bank of England wasn’t to blame for anything. He never criticises it for having kept rates too low, allowing the money supply to surge and house prices to soar, perhaps because he craves its support for his fiscal policy. He also loves its quantitative easing, which allows him to finance his budget deficit while wrongly taking the credit for low gilt yields. Yet Osborne has now been dealt a terrible blow by Tucker, who dramatically reasserted his and the Bank’s independence yesterday. There is a very British establishment power struggle underpinning this scandal.
The second major development is that the City may face a fresh set of scandals: Tucker, who described the Libor market as a cesspit, wants other self-certified markets to be investigated. He lobbed a few other headline-seeking bombshells into the proceedings, calling for changes to the way junior bankers at desk level are paid, and stating that “it has been too easy to get rich quick.” If other markets are found to have been manipulated, there will be rightly be hell to pay for those involved – but it would also deal another massive reputational blow to the City, one from which it may never recover. Many innocent bystanders could lose their jobs as a result. Even if they turn out squeaky-clean, Tucker wants these other markets to be redesigned.
Until the scandal broke, and Bob Diamond released a note of a key conversation where the deputy governor seemed to give Barclays the green light to cut its Libor submission, Tucker was the front-runner to become the next governor. His future remains in doubt. He denied ever giving anybody any instructions to manipulate rates and produced an alternative, benign interpretation of Diamond’s email. But Tucker was left bruised, especially when confronted with evidence from 2007 that he knew that there was something very wrong with Libor. Tucker claimed that he wasn’t aware of allegations of lowballing until recently and that his interpretation of the previous evidence was that he thought Libor was a malfunctioning market, not a dishonest one. But that still suggests that the Bank failed miserably.
The question now is what Osborne will do – will he seek to exert revenge on Tucker for not backing him up on any of his allegations? Or is the chancellor now so weakened that he will be forced to appoint Tucker when Sir Mervyn King retires, for fear of being seen as vindictive? Will Osborne even be chancellor next year, after this latest blunder, the Budget omnishambles and the continuing recession? What a frightful, unedifying and deeply depressing mess.