Dark clouds over the Old Lady
Amid a crisis at the Bank Sean O'Grady argues its behaviour over the Libor scandal is excusable and has a surprise suggestion for its next Governor
A crisis at the Bank? They've had a few since 1689. The institution was born of – guess what – a crisis in the national finances, to help raise money for the military adventures of William III and Mary, because no one would lend the English money it has had to help out with that task on many occasions since.
The Bank's reputation has seen its ups and downs. Every time a financial institution fails the Bank is usually held accountable. Sometimes it was "asleep at the wheel", but sometimes, as in the case of Northern Rock, it gets blamed when the Bank was not the primary agency responsible.
Still Barings, BCCI and a host of quaint and long-gone names from the past demonstrate that the Bank of England is not infallible, whatever the impression it sometimes likes to give. Indeed, in trying to defend its integrity it too little admits that it can indeed get things wrong.
On the fact of it, the deputy governor Paul Tucker's phone conversations with Bob Diamond were something that went wrong. Like all such transcripts ripped out of context and their time, and offered to a reader cold and with too little discount for the realities of a situation, they look bad. It's not Watergate, but, like the emails and text messages revealed at the Leveson hearings, they have that quality of a light shed in upon a secret world.
And yet I wonder how many of us would be happy to have our work emails splashed all over the papers, or our text rows with spouses and partners, or the words said in the heat of the moment read out and used against long after. I wonder how real the media's indignation is when they affect such unworldliness. Fudging Libor or seeing Barclays collapse at a cost of billions? Er, I think I know which I would plump for.
The truth, perhaps, about this affair is that senior central bankers, like senior diplomats and politicians, sometimes have to do things that require an element of discretion, where common sense and a greater good overrides the rulebook, where they do things they might not have wanted to do in an ideal world. Otherwise they would not be earning their salaries or using the wisdom and experience that their careers have endowed them with.
The atmosphere in the autumn of 2008, we should try to remember, was far from an ideal world. It is summed up in the word that most often appeared in headlines, or seemed to: "meltdown". In the wake of the Lehmans collapse there was a very real chance that the Treasury, via the Bank, would have to nationalise the entire British banking sector. Even as things turned out, a huge proportion of it —unthinkable a few years ago — still lies in state hands.
It was indeed a time for thinking the unthinkable and making judgment calls on things that no one would ever have thought would arise. In that context, commentators ought to cut Mr Tucker some slack, or at least attempt to contextualise what was going on. Besides, as is sometimes noted, but not often enough, Libor (the London Interbank Offered Rate) had become a fairly meaningless concept some months before at the height of the credit crunch. It was not really being taken seriously by anyone. As the Governor, Sir Mervyn King's favourite quip then went, it was "the rate at which the banks don't lend to each other".
By 2008 the banks would not trust each other, would not lend to each other and, soon enough, would not lend to the wider economy either. It was only the massive injection of soft money, liquidity, loans and outright recapitalisation via equity injection that enabled the banks to bear some semblance of normality today. Were that official support withdrawn, they would soon enough freeze up again.
Which brings us to some of the things that Paul Tucker and his colleagues got right; the rescue of the banks through recapitalisation rather than "toxic asset" purchase; the dramatic cuts in interest rates; and that battery of measures that saved the economy from a still worse fate. However they have so far done less well in taming the City.
In that sense, there is a case for a poacher tuned gamekeeper at the top of the Bank when Sir Mervyn King retires next year. The present governor is very keen that the job should go to an insider. His belief seems to be that there is a common misconception that bankers make good central bankers, when in fact the skills required, even the temperament and outlook, are much different (not least when it comes to pay). One of the few ways the Bank can retain its talent is by demonstrating a clear career path, including to the top. If the governorship is always to be filled by an ex-City figure, as it was traditionally for most of its history, then that is not healthy, and implies something rather unflattering about the calibre of those near the top of the Bank of England.
Even so, the bank is about to acquire an extraordinary degree of control over the everyday economic life of the nation, and the task of restoring trust in the banks is an awesome one. it may be time to cast the net wider. Under that dry title of "macro-prudential regulation" lies a battery of weaponry that could turn the supply of credit to the economy on and off according to the economic state of the nation, thus restricting the supply and the loan-to-value and other conditions applied to mortgages, on loans to households and businesses, as well as their cost via the interest rate.
The Bank will have oversight once again of the big banks, of payments systems and, as ever, will be an important voice on the economy. Even with a sometimes patchy record in forecasting, the Bank is still listened to and respected. Given the powers it will have, and given the difficulties it will have with City types who are genetically programmed to get round whatever rules they are presented with, the Bank needs someone at the top who understands their tricks and funny little ways, who can comprehend the next big thing in "financial engineering" and recognise its dangers, someone who is clever enough to make the rules stick.
I am reminded of Joe Kennedy, the father of JFK, who made a fortune on the Wall Street of the 1920s, not so very different in atmosphere to the financial world of today.
President Franklin Roosevelt chose Joe to be the first head of the new Securities and Exchange Commission in 1933, the federal agency tasked with cleaning up the Augean stable that was their banking system. "Takes one to catch one," said Mr Roosevelt.
The only person I can think of who might fit the bill now and offer the Bank of England the charismatic but cunning leadership it requires is … Mr Bob Diamond: a not entirely flippant suggestion.
Sean O'Grady is a former Economics Editor of 'The Independent'
Bank job: Rivals in the running for governor
Gus O'Donnell Stepped down as head of the Civil Service earlier this year, having served under both Gordon Brown and David Cameron. Has indicated that he would be interested in the job. Might not be favoured by the Chancellor though.
Paul Tucker The leading candidate from inside the Bank. The present deputy governor is a City favourite. But he has been damaged by the suggestion he put pressure on Barclays to massage its reported borrowing rate.
Mark Carney The Governor of the Bank of Canada is credited with helping shield Canadian banks from the financial crisis. Reports earlier this year that he had been informally approached by the Bank's ruling court.
John Vickers Chaired the Independent Commission on Banking, which drew up the blueprint for the Coalition's reforms of the financial sector. Knows the Bank, having worked there as chief economist.
Adair Turner Chairman of the Financial Services Authority. But the FSA has taken such a hammering over its failure to monitor the banks properly he may be damaged by association.
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