Jeremy Warner's Outlook: A dirty business, but Darling may have got it about right on Bank of England reform
Friday 20 June 2008
Downing Street has yet to forgive Mervyn King for upstaging a relatively positive message on the economy in the Queen's Speech with a warning on the same day that "the nice decade" of non-inflationary growth was over.
So either the Prime Minister, the Treasury, or both, were plainly getting their own back by leaking news of Sir John Gieve's resignation as deputy governor of the Bank of England at the Mansion House dinner on Wednesday night. A more cynical piece of news manipulation is hard to imagine.
Sir John's agreement to leave early was all lined up to be announced the following day while he was away from the gaze of the London media giving a speech to the local chambers of commerce in Newcastle. Instead it was leaked to the BBC even as Sir John was taking his seat alongside the Chancellor and City dignitaries at the Mansion House banquet.
The leak served the triple purpose of rubbing the Bank of England's nose in it, humiliating Sir John in front of the City's great and the good, and deflecting attention from the uncompromisingly bleak message the Governor of the Bank of England had for the British public.
You may think this too Machiavellian an explanation to be true, but I wouldn't put anything past this lot and, perhaps regrettably, it's only too plausible. To the contrary, it is actually quite difficult to think of a better explanation for the way the news emerged. This is politics, and it's a dirty business.
It also partially achieved its purpose. The Governor's speech was in truth a reasonably nuanced affair which was careful not to lay the blame for what's going wrong in the economy at the Government's door, tempting though it must have been. Yet the message was an alarming one. He warned of the most difficult economic conditions in a decade, with the worst of the squeeze on disposable incomes yet to come.
You could almost see the Chancellor wince as Mr King quoted that well-known ditty by Robert Frost – "Some say the world will end in fire, Some say in ice. But whichever it is, It won't be NICE". It is the job of central bankers to tell it as it is, but it was hardly likely to raise a laugh from Alistair Darling. The politician is always going to prefer spin to the uncomfortable truth.
As for Sir John's departure, and the accompanying package of reforms at the Bank of England, the horse trading is so transparent as to be almost comical. Mr King gets his way in seeing his chief economist, Charlie Bean, promoted into the deputy governor's position being vacated by Rachel Lomax. Meanwhile, Sir John is thrown to the wolves so as to leave the other deputy governor's job vacant for Paul Tucker, the Treasury's favoured man at the Bank. The Governor becomes constrained in his decision making on financial stability through the creation of a new Financial Stability Committee, but the Bank's blushes are spared by drawing the committee's members exclusively from the Court of the Bank of England.
The Bank meanwhile gets responsibility for administering the special resolution scheme for failed banks, but the Financial Services Authority is left with sole responsibility for supervision as well as pulling the trigger. So everyone happy then? Well perhaps not quite, but in the round this is a reasonable stab at curing the manifest failings in the old tripartite arrangements.
The City looks to the Bank of England to provide clear leadership in a banking crisis. This didn't happen in the initial stages of the present credit crunch. The new arrangements bolster the Bank's authority and the tools it has to play with, which in theory should make for more convincing response and resolution. But there's always a fall guy. Unfortunately for Sir John, he happened to be in the way when the bulldozers moved in.
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