May 4, 2012, 1:12am
The financial lynch-mob seems determined to bury Mervyn King. It’s easy to blame a lame duck. Even if Northern Rock had been more aggressively addressed, would that have left the UK banking system intact? No. That leaves the charge he failed to rein in banks before they nearly sank themselves. But from 1997 the Bank of England became a side-show, setting monetary policy with a nod to stability. The convoluted multi-partite regulatory system post-1997 signalled that the civil servants had taken over. If anyone is to blame, it was regulators who mistook form-filling for prudential regulation. The crisis of 2007/08 showed a lack of authority. The Bank saw its role as an academic monetary arbiter rather than guardian of market stability. Perhaps King’s academic bent can be blamed for his reluctance to take firm control. But the days when the Bank carried a big stick to chastise bankers were over long before King’s watch.
Bill Blain is senior director at Newedge UK Financial.
Mervyn King argued that “there seemed no reason to expect the worst recession since the 1930s” and nobody saw it coming because “no-one believed it would happen.” Actually many people in the City did. They spotted that house price to earnings ratios had reached unsustainably high levels and the only way was down. Of course, banking crises are old as the hills; plus the 1929 Great Crash started in the Florida housing market. King was too focused on inflation and missed the big picture. King also claimed that “with hindsight we should have shouted from the rooftops that a system had been built in which banks were too important to fail.” Hindsight isn't good enough. We pay the governor a large salary to have some foresight. Blaming Gordon Brown, the FSA and the banks doesn’t wash. Ultimately, the buck stops at the top and King needs to take responsibility. The public interest requires an independent inquiry.
David Blanchflower is a former member of the MPC.