Who is trying to sabotage Mervyn King?
We need to know who is is behind the campaign against the governor, writes Richard Northedge
Sunday 13 February 2011
The gossip in the corridors of the Bank of England last week was about just who is behind the whispering campaign against Mervyn King.
For private criticism went public on Sunday when The New York Times lashed the Governor's defence of his policies as "the last cry of the incredible shrinking central banker".
The governor is under attack for missing the Bank's inflation target and compromising its independence by endorsing the Government's deficit-cutting plans. The US newspaper added the accusation of presiding over the worst stagflation in any major developed economy while his demands for British banks to boost capital above international standards are ignored.
Such overseas criticism of Britain's leading banker threatens to damage the governor's reputation at global forums such as the International Monetary Fund, the Bank for International Settlements and the G20.
Mr King also has domestic detractors within the Monetary Policy Committee (MPC) and outside. At least two of the eight other economists at the two-day meeting he chaired last week are believed to have argued unsuccessfully for increasing the Bank's 0.5 per cent interest rate. Andrew Sentance and Martin Weale have pushed for a quarter-point rise while on the other side Adam Posen advocated extending the quantitative easing (QE) programme.
Mr Posen's accusation that the governor jeopardised the Bank's independence by publicly backing the controversial cuts of the Chancellor, George Osborne, was quoted by The New York Times, but it also carried criticisms from former colleague Michael Foot plus past MPC members David Blanchflower, a professor at Dartmouth College, New Hampshire, and DeAnne Julius, who began her career at the Central Intelligence Agency.
Professor Blanchflower said after the article appeared: "The New York Times had an important editorial criticising the UK government's fiscal austerity programme. I share that view. "The UK is now paying the consequences of King talking about moral hazard and dithering over rescuing Northern Rock, keeping rates low in 2004-06, not cutting rates soon enough in 2008 and being slothful in starting QE." And Professor Blanchflower added to his list of criticisms: "Having a governor who has spoken out about fiscal policy and who has gone as far, apparently, as helping to draft the coalition's economic policy. This has compromised the MPC's independence."
Officially the Bank is refusing to retaliate against such attacks, even when published in influential international papers. In past periods of financial crisis, public criticism could have hit sterling's value or Britain's ability to borrow. However, there is speculation in Threadneedle Street about who is briefing against the governor.
Whoever the finger points toward, The New York Times is closely reflecting the view of Nobel Prize winner Paul Krugman, a professor at the London School of Economics who has written a column for the paper since 1999 and who pens up to four blogs a day for its website. The economics professor at Princeton, another Ivy League university, is a self-confessed American liberal and Keynesian with little respect for Osborne.
Professor Krugman, a strong supporter of Posen, says: "The British government's plan is bold. But it boldly goes in exactly the wrong direction." He claims the wish to balance budgets immediately is a fad and that the UK has become a fashion victim. "The British government seems determined to ignore the lessons of history.
"The real reason has a lot to do with ideology," claims Professor Krugman. "The Tories are using the deficit as an excuse to downsize the welfare state."
The Government's policies and Mr King's support are being highlighted in the US by commentators such as Professor Krugman as a warning to Americans not to adopt similar strategies. Republican senator Rand Paul is currently arguing for a rapid, British-style reduction in the US deficit.
Professor Krugman says: "I guess the special relationship remains in Britain, as in America, but what we see politically is the survival of the wrongest."
Mr King has been dragged into the argument over the direction of US economic policy but he still has two years before he completes his second term as Bank governor and this government has no wish to replace a supporter. However, speculation has started on who might succeed him.
With all British banks replacing their chief executives and chairmen recently, there is a surfeit of senior former bankers available. But most are seen as tainted by the financial collapse. Lord Green, who recently left HSBC's chairmanship to become a Trade minister, is seen as a possible candidate. But John Varley, the former Barclays' chief executive who led the Project Merlin talks that agreed the sector's lending and bonus levels with government last week, is not seen as viable.
Internally, Paul Tucker, a deputy governor, is seen as a potential successor to Mr King. But Hector Sants, the former chief executive of the Financial Services Authority, is to head the new Prudential Regulatory Authority that will be part of the Bank, thus making him an insider too.
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