David Prosser: An unfortunate hat-trick provides King's critics with plenty of ammo

Now more than halfway through his second term of office, the Governor still has an enormous amount of work to do to secure his reputation
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The Independent Online

So what has Mervyn King done to offend the New York Times? The paper, and its international edition, the Herald Tribune, have just published a withering attack on the Bank of England Governor, despite there being no obvious peg on which to hang such an article.

Their case rests on three accusations: that Mr King's record on inflation is poor, that he has compromised the Bank's independence by publicly opining on fiscal policy, and that his calls for British banks to bolster their balance sheets have been ignored.

British economists were quick to defend Mr King yesterday – nothing unites them like an attack from abroad on one of their own – but it has to be said that dealing with the charges one by one is not a happy experience.

On inflation, it has now been a year since the Bank even came within a percentage point of its 2 per cent CPI target. And while the Governor complains about factors such as the global commodity price surge, his insistence that inflation will fall in the medium term has been undermined by the frequency with which that term has been redefined. One might also point out that the European Central Bank has got far closer to its 2 per cent target despite the same external challenges.

As for the issue of independence, we still have not got to the bottom of what exactly Mr King said to Nick Clegg and other Liberal Democrats to prompt their post-election conversion to the Conservatives' austerity programme. His public statements on fiscal policy have fallen short of pronouncing on tax rises or spending cuts, but have still been useful capital for the coalition Government.

Then there is banking regulation. Mr King may yet get his way for a tougher capital funding regime for British banks – though don't bet on it – but the Governor's record here is patchy too. Most obviously, he flip-flopped on the issue of moral hazard, insisting at the start of the credit crisis that banks shouldn't be bailed out, before being forced into a U-turn.

Does this mean, as the NYT claims, that Mr King is no longer respected? That is to overstate the position – you will not find more than a tiny handful of economists, or politicians for that matter, who would go that far. Still, now more than half-way through his second term of office, the Governor still has an enormous amount of work to do to secure his reputation.



The recovery that gathers no steam

Today's duo of releases on retail trade and the housing market tell us that while those awful fourth-quarter GDP figures overstated the extent to which Britain's economic recovery has stalled, we are in for an anaemic year. Or, to put it another way, while there are some positives to cling to for the retail sector and the property market, there are just as many negatives. So, while the headline data on retail sales for January will have come as a relief to sector, the best figures came early on in the month when shoppers were finally able to get out of their homes following the Christmas snow. Later on, sales slipped back, as you would expect with consumer confidence falling and VAT rising.

Similarly, the housing market numbers from the RICS suggest fewer property professionals are now reporting price falls than in months gone by. But that reflects falling supply rather than any improvement in market sentiment – nor is there much prospect of the latter with rate rises to come.

All in all, what we have here is a picture of a consumer sector, so important to the UK economy, that is stuttering. What it does notsuggest, whatever those critics of the Bank of England Governor who are particularly concerned about his record on inflation have to say, is that an interest rate rise would be the right decision at this week's meeting of the Monetary Policy Committee.



Inconsistency on insider dealing

Another day, another insider dealing case: this time, it is one David Massey, a former corporate financier, in the line of the Financial Services Authority's fire. Yesterday, the regulator fined him £150,000 over an episode that saw him make a £100,000 profit dealing on the basis of inside information about the Alternative InvestmentMarket-listed Eicom.

It is not a trivial sum, but many people will think Mr Massey got off lightly. After all, there have been several cases in recent months where insider-dealing convictions have lead to prison sentences. Some have involved much larger sums of money, but not all – for example, Malcolm Calvert, theformer Cazenove stockbroker, got 21 months in jail for offences that netted him £104,000.

The FSA does not have the option of a prison sentence if it chooses to prosecute insider-dealing cases via its own regulatory procedures, as it did with Mr Massey, rather than asking the Crown Prosecution Service to pursue a criminal case. The regulator decides which is the best option on a case-by-case basis – it has to decide whether a criminal prosecution would be successful, given the complexities of some insider dealing matters and the potential vagaries of a jury.

Still, as the FSA discoveredyesterday, the regulatory course is not without risks either. It had wanted to fine Mr Massey £280,000, but an appeals tribunal cut the penalty almost in half. While this body had no doubt Mr Massey was guilty of market abuse, it rather generously decided he did not think he was breaking the rules, a view it said he had arrived at "by a process of wishful thinking". In other words, the tribunal cut Mr Massey some slack because it thought he had deluded himself about the rules.

In response to which, one can only say that perhaps the FSA will show a little more confidence in the jury system when it next has to make this sort of decision.

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