The newspapers and internet today are full of headlines about Mervyn
King admitting the Bank of England was ‘late to the game’, and that central bankers should have ‘shouted from the rooftops’ regarding the financial blow-up. It’s true,
the BoE governor did make these ‘mea culpa’ remarks — but they came rather half-heartedly, and couched within a radio lecture that seemed to point even more fingers at other
King was giving the Today Programme Lecture 2012, which he addressed to a Radio 4 theatre audience yesterday evening. Early in the half-hour speech, he gave an
anecdote from 1997, in which then-governor Eddie George and him, Merv, celebrated Gordon Brown’s proposal for Bank independence. An independent central bank was something he and Eddie had
been working hard for, explained King. There was a fly in the ointment, though — ‘Although far from clear at the time, the later decision to remove from the Bank of England the power to
regulate banks would return to haunt us.’
There you have it then — the BoE’s powers were limited, especially with regards to the naughty banks. Thus its responsibility for the subsequent financial fiasco was also limited. King
followed this anecdote with a longish spiel on how, in the decade after 1997, the Bank sustained a period of low and remarkably stable inflation. Coexisting with this golden age, according to King,
was a remarkable lack of economic overheating: ‘There was no unsustainable boom like that seen in the 1980s; this was a bust without a boom’. In other words — there were no red
lights flashing about a possible banking tailspin; we couldn’t have known.
So what went wrong, then? The banks overextended and lent too much, said King, and they lent to other financial participants, which made it all much more complicated and worse. (But remember,
because the central bank had been stripped off its regulatory role, there was absolutely nothing it could have done.) Once it was clear that we would all be credit-crunched though, in 2008, King
said the BoE was on-the-ball with a proposal — recapitalising the banks. This was a ‘bold action’, said King, and he acknowledged that it ‘could have happened sooner’.
However, ‘the most important thing was that it was done’.
Every time King admitted that the Bank of England may have, perhaps, been a teeny-weeny bit at fault, he pointed out that everyone else was at fault, too. ‘On all sides there was a failure of
imagination to appreciate the scale of the fragilities and their potential consequences. No-one could quite bring themselves to believe that in our modern financial system the biggest banks in the
world could fall over. But they did.’ (So it was a failure of the imagination, then. Like Picasso on a bad day.)
Then we have King’s mea culpa passage, which so many are quoting today, but which itself contains some you-can’t-blame-me sentences:
‘That isn’t to say we were blind to what was going on. For several years, central banks, including the Bank of England, had warned that financial markets were underestimating risks. So
why, you might ask, did the Bank of England not do more to prevent the disaster? We should have. But the power to regulate banks had been taken away from us in 1997. Our power was limited to that
of publishing reports and preaching sermons. And we did preach sermons about the risks. But we didn’t imagine the scale of the disaster that would occur when the risks crystallised. With the
benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and
that so-called ‘light-touch’ regulation hadn’t prevented any of this. And in the crisis, we tried, but should have tried harder, to persuade everyone of the need to recapitalise the banks sooner
and by more. We should have preached that the lessons of history were being forgotten – because banking crises have happened before.’
More interesting than King’s lecture was the interview he gave to Evan Davis this morning, during which he was pressed about his speech, or
rather all the things he left out of his speech. Here, the governor sounded just a little bit more contrite.
There’s another term Sir Mervyn left out of his lecture completely — ‘Quantitative Easing’, which will no doubt be his biggest legacy when he steps down next year. If King
wants credit for the low-inflation, non-boom Eden before our great financial fall, what about the fact that inflation is now at 3.5 per cent versus the Bank’s target of around 2 per cent, and
look set to bust this target for a third year? So the credit crunch is the fault of the banks, and lack of proper regulation the fault of the government. But if no mention is made of a monetary
policy that has caused ballooning inflation and shrinking pensions — what, then, does the Bank of England do?