Sir Mervyn King's final outing

  • 25 June 2013
  • From the section Business
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Sir Mervyn King spent his last morning in Westminster as Bank of England governor as he had spent many others - complaining about the banks, and telling the financial markets they had got things wrong.

He thinks investors have jumped the gun in response to the Federal Reserve's talk of bringing policy back to normal. Ben Bernanke would probably agree with him.

But the governor's tone was softer than usual. He had the air of the long-suffering headmaster on the last day of term - conscious he had one last chance to get his message across, but also that the students' minds are turning to other things.

Sir Mervyn was a teacher before he came to the Bank and he has remained a teacher ever since. That has been his greatest strength as governor, which has served the country very well.

But that urge to educate probably also explains why quite a lot of people in the city - and some in Westminster - will not be sorry to see him go. There is a fine line between teaching and lecturing, and grand, successful people do not like feeling they are being lectured.

In more than 20 years at the Bank he has probably taught the public more about the economy - and more about central banking - than any other single individual.

That was crucial in the 1990s, when inflation targets were just starting and the Bank of England was moving towards independence. It has turned out to be no less vital in the past five years, as the Bank and the country have learned what it means to have a once-in-a-lifetime financial crisis.

I wrote quite a lot about that side of Sir Mervyn's legacy a few weeks ago, on the day of his last Inflation Report press conference.

Get to the heart

What may be less well understood here in the UK is how much Sir Mervyn King has also taught the world.

This was brought home to me, interviewing international figures for my final piece on his time as governor for the BBC. The former US Treasury Secretary, Larry Summers and the Governor of the Bank of Israel, Stanley Fischer, are distinguished economists themselves.

They each spoke of Sir Mervyn's determination, in every international meeting, to ask the difficult questions and get to the heart of what was going on.

Sir Mervyn King before the Treasury Committee, his last public appearance as Bank of England governor

"When he speaks, everyone puts down their blackberries and they listen", George Osborne told me, "because it's Mervyn King."

Both Stanley Fischer and Philipp Hildebrand, the former head of the Swiss central bank, said that Sir Mervyn had helped teach the rest of the world what independent central banking was all about.

He also played a key role, when the financial crisis was at its height, in an emergency meeting of G20 finance ministers and central bank governors in November 2008. They arrived, as usual, with a detailed communiqué to sign, running to several pages.

With the world waiting nervously to hear what policymakers were going to do, Sir Mervyn suggested they tear up that wordy draft and replace it with a short and emphatic statement that they were going to do what it took to restore stability to world markets.

Falling apart

That one gesture didn't end the crisis, of course. It did send a very important message that the grown-ups were on the case.

But, as I said earlier, the constant questioning, and constant teaching, has not always gone down so well, at home or abroad. G20 finance ministers and central bank governors don't like being lectured either.

When markets took fright in the summer of 2007 and credit for banks started to dry up, the big men and women in Wall Street and the City felt their world was starting to fall apart.

They did not want to hear a lecture from the governor of the Bank of England, about the importance of banks and investors taking responsibility for their decisions and the risks of moral hazard.

Defenders of the governor say those comments were overblown. They also point out that, in practice, the Bank of England injected more liquidity into the banking system in the summer and autumn of 2007 than either the US or the European central banks.

The Federal Reserve and the ECB made more money available up front than the Bank of England, but it was very short-term cash that had to be paid back.

That may be true, but even the Bank's supporters say the governor's public stance in this crucial early stage of the crisis was unhelpful, at best. Officials and Wall Street figures I spoke to on a trip to the US in September 2007 were openly exasperated. They felt he simply did not "get" how bad the situation was.

Astonishing

They also felt, with some justice, that the Bank of England did not have nearly enough technical understanding of the financial market developments that had given rise to it all. In effect, that had been left to the FSA, even though the Bank still had formal responsibility for preserving financial stability.

Some people say Sir Mervyn has little respect for what the 'masters of the universe' did to the City

It is astonishing, now, to think that there was only one vote to cut interest rates when the Monetary Policy Committee met in September 2008, and it wasn't the governor's. Sir Mervyn was not the only one to underestimate how serious the crisis would become. And when the Bank cut rates, it cut them quickly.

It also launched an historic experiment with quantitative easing, which probably helped prevent a Great Depression-style collapse of the money supply, even if it did not magically deliver growth.

Sir Mervyn himself says posterity will judge his record. But when people say he does not have a lot of respect for what the 'masters of the universe' have done to the City of the London, I suspect he doesn't mind that at all.

Certainly, Labour politicians don't mind that he was a bit contemptuous of the City. They do mind that he helped narrow the options for UK fiscal policy in 2010.

Game of two halves

Rightly or wrongly, Gordon Brown was considering another fiscal stimulus, in the 2010 Budget (without, it must be said, a lot of support from the Treasury itself). But that didn't last long, after Sir Mervyn said publicly that further stimulus was not on the table.

In May of that year, the governor publicly endorsed the government's strategy on the deficit, only hours after the coalition was formed. History will have its judgement on that too, but it's fair to say Labour's verdict is already in.

So, yes, Sir Mervyn King's time as governor has been a game of two halves, with the first five years a lot less divisive than the last.

But, when he leaves, he will have been at the Bank not ten years, but 22, first as its chief economist then later as deputy governor and governor.

We don't need to wait for the history books to be written to know that he made the Bank of England a very different place in those 22 years, and also did quite a bit to change the world.