Why Mervyn King is the real winner

Allister Heath
SO there you are. The Bank of England is now in charge; the FSA is being disbanded and its name junked; and its staff are being reallocated to the Bank and other new agencies (and many will physically be moving back to the Square Mile from Canary Wharf). Hector Sants, the FSA’s chief executive, will stay on after all to help the transition; he will become a deputy governor of the Bank, in charge of a new subsidiary called the Prudential Regulatory Authority, reporting to the Governor. Gordon Brown’s tripartite system of bank regulation is being swept away, not a moment too soon.

Mervyn King has officially emerged as the credit crunch’s great – and perhaps only – winner, even though his policy of keeping interest rates excessively low was the single most important domestic driver of the bubble (something which for some reason, unlike in the US, nobody wants to talk about in this country). Of course, the real culprit was Gordon Brown and Ed Balls, who forced King to follow a narrow and deeply destructive mandate, focusing exclusively on targeting the consumer price index and largely ignoring asset prices, the soaring money supply and the rest. Many monetarist, Austrian and other non-mainstream economists warned for years that a bubble was under way, only to be dismissed.

All that is now water under the bridge: King has been given sweeping new powers which he will gradually begin to exercise over the next two years. It is an astonishing victory for the Governor, who has reinvented himself as a critic of the City and many banking practices. He may yet also get his way on imposing a variant of Glass-Steagall on the UK: the new banking reform committee set up by Osborne contains at least one supporter of splitting up universal banks. Let us hope the five-strong group produces a genuinely unbiased and fair report that truly seeks to build a stronger, more resilient City, rather than merely pandering to the mob.

In his own speech last night, King suggests that his new system of macro-prudential regulation within this regulatory infrastructure would have seen a “progressive tightening in capital standards that would have reined in the near-tripling of UK bank balance sheets between 2002-2007.” Perhaps; but of course many economists warned that there was a bubble last time yet the authorities either didn’t agree or never really tried to puncture it. More relevant to the markets in the very short-term, King implied that monetary tightening in the UK, when it eventually starts, will take place via higher interest rates, not quantitative tightening (the selling-off of previously purchased gilts).

Brown’s regulatory system and monetary policy were unmitigated disasters. It is vital the coalition gets these reforms right. Osborne is right to scrap the FSA; but I remain unconvinced about the rest. We shall see.

That’s that, then. BP – now unofficially a subsidiary of Barack Obama, Inc – has bowed to the new reality and suspended its dividend for the remainder of the year. Yet that wasn’t the biggest news of the night: it paled in comparison with the deal on the $20bn escrow fund; the announcement by BP that it would be selling $10bn in assets to raise cash; and perhaps most important that the fund didn’t imply a liability cap. Fines and penalties are not included. This is not even the end of the beginning for BP.