Special report: The story of Sir Mervyn King's reign at the Bank
After four 'nice' years as Governor of Bank of England, things turned decisively nasty. Sir Mervyn King is credited with taming inflation, but critics also wonder if he could have done more before the crisis
Sir Mervyn King has let it be known he will not be writing a "kiss and tell" memoir of self-justification as Governor of the Bank of England when he steps down at the end of the month. Instead, he will place a personal account of his 10 years in the hot seat at Threadneedle Street in the Bank's internal record department. This will become generally available, like all public documents, after 30 years. Sir Mervyn wants future generations to be his judge.
But the record of his time as Governor is inscribed for all to see in the economic data of the past decade. And we do not need to study Sir Mervyn's personal testimony to see that this was a tale of two economies: the nice and the nasty.
"Nice" was a phrase Sir Mervyn himself coined in a speech in 2003. It stood for "non-inflationary, consistently expansionary". One can see that in the charts above. Sir Mervyn's first four years in his first terms as Governor, which began in 2003, was a time of strong growth, ranging between 1.5 per cent and 4.5 per cent a year. Inflation was largely under control too, with prices rising by an annual rate close to the Bank's 2 per cent target.
Then came the recession of 2008-09, when the economy plunged by 6 per cent. It was the biggest contraction in output since the Great Depression. And things have been rather "nasty" ever since. The economy has been almost stagnant since the end of 2010, and inflation has come in above the Bank's official 2 per cent target pretty much consistently. Since the financial crisis the Governor has had to write no fewer than 12 official letters to the Chancellor to explain, as the Bank's remit requires, why inflation has been more than 1 per cent above target.
There are signs that the economic outlook could finally be brightening. But, even so, five years after the financial crisis output is still well below its 2008 peak, while other countries such as Germany and the United States regained all their lost ground some time ago. This has been the most feeble recovery in modern economic history.
How much is Sir Mervyn personally to blame for all of this?
It makes sense to divide the King era into three sections: pre-recession, financial crisis and post-recession. Sir Mervyn, the Bank's former chief economist, is universally given credit for designing the inflation targeting regime which helped to bring prices under control in the 1990s after decades of inflationary spikes. But some say this regime itself sowed the seeds of the global financial crisis by blinding policymakers to the dangers posed by the disinflationary impact of China's entry into the world economy, which pushed down manufactured goods prices across the West.
"The Bank probably did too much to offset the disinflationary impetus from China," says Rob Wood, a UK economist at Berenberg Bank and a former analyst at Threadneedle Street. "So interest rates were too low, house prices were rising too fast and consumer spending was growing too strongly."
The charge is essentially that the Bank, trapped by the inflation targeting framework, allowed the economy to run too hot in the boom years.
Another accusation is that the Bank under Sir Mervyn became fixated on monetary policy and paid insufficient attention to risks building in the banking system. "There were huge cutbacks in the financial team of the Bank at just the wrong time," says George Buckley, an economist at Deutsche Bank. "They got rid of a lot of people on the financial stability side in 2006. King's not going to be able to bask in glory on this one."
Then there was the handling of the crisis itself, when the international finance system froze and several giant British banks almost collapsed. The charge is that he was not decisive enough in providing emergency funding to commercial lenders, However, most critics admit that once he woke up to the full scale of the financial and economic crisis, the Governor was highly active, helping to push through the recapitalisation of the banks and also quickly slashing interest rates to record low levels of 0.5 per cent. When interest rates could go no further he spearheaded a demand-supporting programme of asset purchases, known as quantitative easing (QE), which has now reached £375bn, a quarter of UK GDP.
"Can we imagine what would have happened without QE? I suspect things would have been substantially worse," says Mr Buckley.
Yet the former Monetary Policy Committee member Adam Posen was frustrated in his time at the Bank by the Governor's resistance to expanding the asset purchase scheme to include assets beyond government bonds, in order to boost growth more effectively. Others say the Bank dragged its feet in devising other means of getting out credit to the economy, such as the Funding for Lending scheme unveiled last year.
One area where the Bank under Sir Mervyn has not performed well is in its growth and inflation forecasting record. Both have been consistently over-optimistic.
Some place the blame for this on the somewhat autocratic style of the outgoing Governor. An independent report into the forecasting process found that Bank staff had a tendency to "filter" analysis before it reached Sir Mervyn, effectively telling the Governor only what he wanted to hear.
"He's intellectually very forceful and will want to test ideas," says Jens Larsen, an economist at RBC Capital Markets. But such forcefulness coming from someone so senior can be tremendously offputting. "The problem is if that challenge comes from someone in a position of great authority it makes the debate much harder. You feel it's a career risk [to argue back]," says Mr Larsen.
Critiques of the outgoing Governor, of course, go far further. Lobbyists for savers say he has kept monetary policy too loose, in effect robbing pensioners with ultra-low interest rates. The commercial bankers, often castigated in his speeches, blame him for undermining growth with his financial re-regulation push. Labour says he is partly responsible for feeble growth since 2010 because he blessed George Osborne's deficit reduction strategy.
Surveying this multi-faceted and deeply divisive legacy, it is hard to avoid the conclusion that sitting out the ongoing debate and allowing history to decide the final verdict will prove to be one of Sir Mervyn's better decisions.
Heritage: Still in the pink
When Mark Carney sweeps into Threadneedle Street in little more than two weeks' time, he'll be greeted as "Mr Governor" by the top-hatted attendents known as "pinks" after the colour of their elaborate tailcoats. It's the most visible and daily reminder of the traditions of the Bank stretching back to its creation in 1694.
The Bank also has a "court" rather than a board – to the chagrin of MPs pressing to overhaul the governance of one of the most powerful central banks in the world.
Far from pressing to modernise, Sir Mervyn King set himself up as the defender of the Bank's heritage. Answering accusations that the Bank's traditions could be "quite alienating", he said: "I don't think it is sensible to confuse the symbols, clothing and architecture from the way people behave and what goes on there... The traditions and institutions of the Bank are not for me to fool around with and make political gestures."
Tomorrow: The future under Mark Carney
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