Hamish McRae: Right for the job in 1992 and 2003 – but maybe the wrong man in 2008
Economic View: The Bank retained the overall responsibility for financial stability - and, on this, it seems its performance was weak
Thursday 20 June 2013
Luck matters in careers, and not just in the sense of coming into a job at a time when it is easy to be a success. It matters also in having appropriate skills and temperament to meet different challenges.
If you stand back and look at challenges that central banks have faced over the past generation, they fall into two periods: from the late 1970s through to the late 1990s, the over-riding need was to take control of inflation; from the late 1990s to the present, it has been maintaining the stability of the financial system.
Sir Mervyn King's career at the Bank of England encompassed both periods. He became its chief economist in 1991 before becoming Governor in 2003. In the first period, he was highly successful; in the second, much less so.
We tend to forget just how bad inflation had become during the 1970s, how it reached double digits and threatened the entire Western economic system. Some progress had been made in the 1980s, notably in the US, but the UK was still struggling to control it in 1991. In the 1980s, we had tried monetary targets; we tried shadowing the German mark and then pegging the pound in the European Exchange Rate Mechanism. When sterling was ejected from the ERM in 1992 we had to find another anchor for policy.
Mervyn King, the eminent economist who had just arrived at the Bank, was crucial in es- tablishing the inflation target regime that has lasted to this day – the main modification being the one introduced by Gordon Brown to give the Bank independence to set interest rates to meet the target.
Curbing inflation was a global effort, but as far as the UK was concerned, instead of having a relatively bad performance compared with other countries, we started to have a pretty good one.
We also had very good growth performance too, giving rise to what the Governor described as the "nice" decade – non-inflationary continuous expansion – which ran from about 1997 to 2007. But with hindsight we can now see there was a fatal flaw in inflation targeting. It only concerned current inflation – inflation in goods and services – and did not take into account asset inflation, in particular the rise in house prices. So the central banks unwittingly stoked up an asset bubble. Coupled with lax regulation of banking, the disaster of the banking collapses duly unrolled.
Any assessment of Sir Mervyn's stewardship at the Bank has to take into account the two periods. The first, notwithstanding the fatal flaw, was in general terms a success, and a lot of that has been a product of his intellect. His role as chief economist was particularly important.
Some have argued that as Governor he could have nudged the Monetary Policy Committee to take more notice of the growing property price bubble, and that would have been possible even within the narrow mandate of the inflation target. While commercial bank supervision had been taken away from the Bank by the Labour government, it still retained an overall responsibility for financial stability.
It is hard to know, when something as complex as the banking crisis occurs, how to attribute responsibility. We will not have full access to the documents for another 15 or so years. But it does seem that, on this second area –financial stability – the Bank of England's performance was weak.
The charge against the Governor is that he was slow to appreciate quite how serious the banking crisis was, even when the run began on Northern Rock that brought it down. The judgement of an acquaintance closely involved with that rescue was that "we didn't do it well, but we did it well enough". That seems about right, and the question therefore is this: had we had a Governor who was more sensitive to banking problems, might we have come through the crisis with less damage not just to the banks but to the whole economy?
That is difficult. We know that personal relations between the Governor and the then Chancellor, Alistair Darling, were bad. He was reappointed in 2008, but many thought because the Prime Minister and Chancellor were too worried about the market consequences of not appointing him that they did not dare to do anything else. Some members of the Monetary Policy Committee have also been very critical of the way the Governor managed several aspects of its work. But you don't want popular central bank governors; you want ones with good judgement.
That is where the most telling criticism comes: that despite the experience of the collapse of Northern Rock, he was slow to realise the danger of a complete banking meltdown, something that very nearly occurred the weekend when Royal Bank of Scotland was on the brink of going bust. As it happened, the Treasury took charge and the job was indeed done "well enough".
The unanswerable question is whether a true central banker, such as his predecessor, Sir Eddie George, rather than a former academic economist, would have done better. Maybe he was the right person to do the job in 1992 and 2003, but the wrong one in 2008. But until we see all the documents, and can trace through the decision-making process, it really is not fair to blame any one person for what was a mega-mess.
My own feeling is that we are lucky in Britain to have good, honourable, hard-working, competent public servants, and Sir Mervyn has been all of that.
He has been, however, a central banker who did not, by his own admission, like commercial bankers. You may say his dislike has been amply justified by what has occurred, but to control people in difficult situations you do need a certain empathy with them.
"The trouble," a former top banker said to me the other day, "is that you can't have a shepherd who hates sheep."
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