Taking as a whole the years 1997 to 2013 – the last six years of Eddie George’s governorship and all ten years of Mervyn King’s – one event dominates that historical landscape: the banking crisis that began in the summer of 2007 and peaked in the autumn of 2008. Its economic consequences were profound. Some six years later, King’s successor noted that if that crisis had not happened, UK output by 2014 would probably have been 15 per cent higher than it actually was; or put more intimately, each person would have been on average £3,750 a year richer. This postscript is different in kind to the preceding chapters. They are largely based on the Bank’s archives; this is not (with the exception of certain records released online in 2015 covering 2007–9). Instead, it is based on material already in the public domain and some two dozen conversations. ‘The important thing,’ observed King himself to The Times in 2012, ‘is that all the papers and documents will be available to the historians in 20 or 30 years’ time and they will be the people who will form the judgement. You have to have someone who wasn’t involved, who is dispassionate.’1 The present author trusts he is dispassionate; but, absent the key archives, any judgements can only be strictly provisional. The authoritative account of the Bank during this period remains to be written.
From 1997 the public centrepiece of the newly independent Bank was of course the Monetary Policy Committee. Initially, it proved a distinctly uncomfortable ride, especially during 1998 as the inflation-busting MPC stubbornly kept interest rates high despite the palpable damage being inflicted on some sectors of the British economy by a strong pound. The consequence was the Bank being uncomfortably exposed to forceful, at times even vicious, attacks – from both sides of industry, from columnists and cartoonists, even from trade union demonstrators gathered by the Duke of Wellington’s statue outside the Royal Exchange. By the new century, though, the tide had almost wholly turned. Polling by NOP in February 2001 revealed not only that 55 per cent of people were satisfied with the way the Bank was doing its job and just 10 per cent dissatisfied, but that four times as many people would prefer to see interest rates rather than prices go up – from the Bank’s perspective, a gratifying indication that inflationary expectations had at last been anchored. Later that year, an MPC member, Sushil Wadhwani, publicly noted that whereas inflation had averaged around 7 per cent during the 1980s, and around 4.25 per cent over the 1990–7 period, the average between May 1997 and March 2001 had been 2.4 per cent; soon afterwards, the shadow chancellor, Michael Howard, announced that the Conservative Party no longer opposed Bank independence; during 2002 the UK, unlike the US and Germany, avoided recession, prompting the chancellor, Gordon Brown, to assure fellow-MPs that ‘the Bank of England has the capacity to make the right decisions at the right time for the long-term interests of the British economy’; while in 2003, shortly before stepping down as governor, George reflected on how, since the start of inflation targeting in the wake of 1992’s Black Wednesday, ‘we’ve now had over 40 successive quarters of positive growth … you can’t ask for anything more really’.2
King’s first speech as governor was in October that year, at a dinner in Leicester co-hosted by the Bank and the East Midlands Development Agency. Looking back over the ten years since late 1992, following the adoption of an inflation target, he declared that the UK had ‘experienced a non-inflationary, consistently expansionary – or “nice” – decade’. And he went on to describe it as ‘a decade in which growth was a little above trend, unemployment fell steadily, and, supported by the improved terms of trade, real take-home pay rose without adding to employers’ costs, thus allowing consumption to grow at above trend rates without putting upward pressure on inflation’. A benign picture indeed. ‘Will the next ten years be as nice?’ King then asked, to which he answered, ‘That is unlikely,’ for reasons that included the probability of less favourable terms of trade and already a reduced margin of spare capacity. Even so, he emphasised that ‘the macroeconomic framework of this country is sound and proven’; while what most listeners and commentators took away from the speech was that seductive four-letter acronym.
Inevitably there was a temptation to believe that the magic formula had been found. Although fully conceding that ‘we cannot prevent boom and bust in particular sectors’, the Bank’s Paul Tucker, an MPC member since 2002, told the Treasury Committee in October 2005 that ‘we should be able to prevent boom and bust across the economy as a whole in the way that we experienced all too many times in the past’. The MPC’s tenth anniversary fell in 2007. In February the deputy governor for monetary policy, Rachel Lomax (who had moved from Whitehall), reflected in a speech at Leicester on how ‘the so-called Great Stability of the past decade has bestowed on the MPC the great gift of credibility – a golden halo which eluded monetary policy makers in the United Kingdom for most of the 20th century’; in May the governor, King, gave an address to the Society of Business Economists that similarly pointed to ‘our new-found stability’ (average growth over the ten years of 2.8 per cent, above the post-war average; ‘not a single quarter of negative growth’; average deviation of inflation from target of ‘just minus 0.08 percentage points’); and in September, in its formal assessment of the MPC’s first ten years, the Treasury Committee pronounced that ‘the monetary policy framework of the last decade has been broadly successful’ and that ‘while it is difficult to quantify the contribution made by the Monetary Policy Committee to maintaining a low inflation rate over the last decade as distinct from the effects of wider changes in the global economy, the Monetary Policy Committee deserves a significant amount of credit for ensuring that inflation over the last decade has been both lower, and less volatile, than in preceding decades’.3
That same September 2007 report noted ‘the recent rise in asset prices’, one of the ‘factors’ that had been drawn to the MPs’ attention ‘suggesting the possibility that the economic climate over the next ten years may not be as benign as that seen over the last decade’. And it went on:
One possible response by the Monetary Policy Committee would be to target such rising asset prices by ‘leaning against the wind’ – raising interest rates to deflate the bubble in those prices. However, such a move would presuppose the successful identification of such a bubble. On the evidence we have received, this is not possible with certainty. Furthermore, the only instrument available to the MPC is moving the interest rate, and increasing interest rates to counter a rise in certain asset prices could hamper economic growth across the economy, not just in the markets with rising prices. For such a policy to be worthwhile, therefore, the risk to the economy of a rapid fall in asset prices would have to exceed the actual cost of raising interest rates to counter the rising asset prices.
By this time the banking crisis was actually under way, and over the ensuing years the question was naturally raised – inevitably with the wisdom of hindsight – whether indeed the MPC should pre-crisis have curbed credit growth through having higher interest rates. Among those reflecting were Kate Barker (an external member of the MPC from 2001), the Bank’s Charles (Charlie) Bean (chief economist from 2000, before becoming deputy governor for monetary policy in 2008), and King himself. In a valedictory speech shortly before stepping down in 2010, Barker remained broadly unrepentant, but did accept that she had ‘seriously underestimated the scale of the downside risks from a potential financial crisis’; while soon afterwards she identified 2005 – when house prices kept rising, but there was only a single quarter-point move upwards – as the year when with ‘some signalling’, in the form of raising interest rates, ‘you would have sent out through doing that, that things weren’t quite right’, which ‘might have been helpful’. In that same interview, she also pointed to how the MPC’s unrelenting emphasis on medium-term inflation, central to its remit, ‘encouraged too much focus on exactly hitting the target at exactly the two-year horizon and I think that distracted us perhaps from wider strategic issues’. Bean, while not saying he would have done anything differently, likewise accepted there was a lesson to be learned from the pre-crisis experience. ‘Hitting the inflation target is not enough to guarantee economic stability,’ he observed in 2012 on the MPC’s fifteenth anniversary. ‘Long periods of stability encourage households, companies and investors to extrapolate such conditions into the future, to underprice risks, and to increase leverage, so increasing the vulnerabilities in the system.’ As for King, who during the pre-crisis period had more than a dozen times voted in a minority for higher interest rates, he emphasised the inherent difficulty of the policy-making situation. ‘We did talk in the Bank of England about whether we should have had much higher interest rates before the crisis,’ he told BBC radio listeners some six months after leaving office in 2013. ‘If we had done that, we undoubtedly would have had a downturn, probably a recession even, unemployment, and inflation well below the target.’ Moreover, he added, ‘we as one country could not have stopped the financial crisis occurring, so I think we should have been shooting ourselves in the foot, even if you could argue that if every country had done that it may be we would not have been in such a difficult position’. As he also put it, ‘the real problem was a shared intellectual view right across the entire political spectrum, and shared across the financial markets, that things were going pretty well’.
Even so, and as King fully acknowledged in his stimulating, elegantly written 2016 treatise The End of Alchemy (not a history of the crisis, but inevitably touching often on it), there had been pre-crisis a significant debate. Arguably the crucial years were the early 2000s, when overly loose monetary policy contributed significantly to the ensuing asset price bubble of the mid-2000s. ‘In the view of some members,’ recorded the MPC minutes for February 2002, ‘rising debt levels risked increasing the volatility of output and so of inflation,’ whereas ‘other members placed little or no weight on this’. The underlying problem was the two-speed UK economy: high domestic consumer demand, but weak global demand for British exports. ‘In effect we have taken the view that unbalanced growth in our present situation is better than no growth,’ George candidly stated that same year, while in early 2003, shortly before becoming governor, King looked ahead:
The challenge is that by building up the imbalances in order to have some average growth rate close to trend and keep inflation close to the target, you know that at some point a correction will come, and when it comes, it could be very sharp. The difficulty for us is that we simply don’t know how big that correction will be, when it will come, how sharp it will be and whether, in fact, it would be difficult to offset.
King was speaking to Institutional Investor; and he added that using monetary policy to control asset prices was ‘never likely to be successful, because you’ll never know by how much you need to raise interest rates in order to reduce asset prices’. And: ‘What is the theory that tells you how a small movement in interest rates affects irrational behaviour? There isn’t one.’4
Not everyone agreed. In particular, Andrew Crockett, former Bank man and now general manager of the Bank for International Settlements, warned in February 2003 that if the central bank, exclusively focused on ‘inflation control’, failed to ‘tighten monetary policy sufficiently preemptively to lean against excessive credit expansion and asset price increases’, then the overall consequence would be ‘insufficient protection against the build-up of financial imbalances that lies at the root of much of the financial instability we observe’ – a perspective on monetary policy almost immediately condemned by Bean, in a speech at Basel, as ‘the heterodox view’. That same year, an unidentified ‘senior and influential director’ of the Bank spoke to the journalist Robert Peston, though what he said would not become public until 2012:
My view on asset prices is pretty clear … The reason we care about these evolutions is that they have implications for inflation and activity further down the road. If you build up a bubble in asset prices now, when it implodes that is normally associated with a sharp fall-off in activity, financial distress, all that sort of stuff. You can encompass all those sort of things into what I think inflation targeting is all about. Some people have a narrow conception of what inflation targeting is all about, which is focusing on the target two years out. Now that is not something I would sign up to. Typically these sort of concerns about asset price bubbles leading to financial imbalances that create problems further down the road may require you looking beyond the two-year horizon. Often you know these things are going to unwind but you just don’t know when …
Eventually, in November 2003, after two years of rapidly rising house prices fuelled by low interest rates, monetary policy was somewhat tightened – but by then the horse had bolted.5
Over the next three and a half years, the issue broke cover every now and then. In March 2004 Sir Andrew Large, David Clementi’s successor as deputy governor for financial stability, publicly argued for a longer time-horizon than two years and noted that ‘each month when we on the MPC make our policy decision I am conscious of the debt situation’, in particular ‘the possibility that the potential vulnerabilities stemming from higher debt levels do in fact crystallise at some point and trigger a sharp demand slowdown’; during 2005, it was mainly he and Tucker who voted in vain for higher interest rates, while in August they were joined by Lomax and the governor himself in unsuccessfully voting against a 0.25 per cent reduction; and at the end of that year, Large gave another speech, this time valedictory but again arguing (and again, as far as one can tell, largely ignored in the Bank itself) that ‘there are circumstances which can justify monetary policy being tightened in advance of potential shocks, a form of insurance or risk management if you like’. So too in 2006. May’s Inflation Report noted that ‘broad money growth is currently well above its equilibrium rate’, but more or less left in the air how much that mattered; in September, nine economists, including Charles Goodhart, Gordon Pepper and Tim Congdon (the initial drafter), wrote a letter to the Financial Times, highlighting the dangers of high money growth; around the same time, John Nugée (a former Bank man, but now of State Street Global Advisors) observed in Central Banking that central banks stood ‘at the pinnacle of their reputation’ following a decade or more of low inflation, but drew on history – not least the Wall Street Crash of 1929 – to argue that ‘price stability is not sufficient to ensure general financial stability’; and in December, delivering the Roy Bridge Memorial Lecture at the Honourable Artillery Company, Tucker explained the rapid growth in UK broad money (up more than 25 per cent since the beginning of 2005), but did not really push through the implications in policy-making terms.6
What about the fateful year, 2007 itself? In January, after a surprise 0.25 per cent rise (to 5.25 per cent), the Independent’s Jeremy Warner wondered whether the move ‘might signal a generalised “get tough” stance by central bankers keen to stifle excess liquidity and overexuberance’, but was doubtful, noting also that ‘in real terms, British rates are not particularly high by international standards, even after yesterday’s rise’; in early May, in his ‘ten years on’ lecture about the MPC, King devoted a lengthy passage to ‘the practical problem facing all central banks’ of ‘how to distinguish between shocks to the demand for money and shocks to its supply’, but was unable to promise more than that the Bank was ‘trying to develop models’ to help it make that distinction and that ‘we shall be devoting more resources to this task, including our new Credit Conditions Survey’; later that month, when asked at the Inflation Report press conference whether central bankers generally were concerned that ‘they may have contributed to very frothy asset prices around the world through over-lax monetary policy’, the governor did not deny the broad concern, emphasising that ‘asset prices in the UK can be heavily influenced by what is happening overseas, independently of UK monetary policy’; in June he failed to persuade the MPC to vote for a 0.25 per cent rise, before soon afterwards making a Mansion House speech that only marginally addressed the monetary policy aspect of credit growth; in early July the MPC did raise interest rates by 0.25 per cent (to 5.75 per cent, at last making them relatively high in international terms); in early August it unanimously voted for no change; and on 8 August the quarterly Inflation Report press conference was held. Strikingly, in retrospect, only one journalist, Bloomberg’s Jennifer Ryan, focused at all closely on the credit aspect; and in his reply, King insisted that ‘monetary policy is set to meet the inflation target’, that ‘it’s based on a macroeconomic judgement of the outlook for inflation’, and that accordingly ‘developments in credit conditions’ would ‘matter only in so far as they affect the macroeconomic outlook’. Was that now the case? ‘I don’t think there’s any real evidence here,’ he observed after noting continuing signs of bad loans in the US sub-prime mortgage market, ‘of a fundamental challenge to the macroeconomic outlook.’7 The following day, the credit crunch began.
Inevitably, as the crisis played out, attention also turned to the pre-crisis performance of the Bank’s other wing, charged as it was with seeking to uphold financial stability, though of course no longer – since the 1997 tripartite settlement – undertaking banking supervision as such. As a largely negative consensus soon emerged and in due course became orthodoxy, the underlying assumption was that the Bank had been guilty of significant sins of omission. ‘It is now obvious’, declared the economic commentator Will Hutton in 2012 in words that relatively few observers would have disagreed with, ‘that the Bank should have pressed for controls on the amount banks themselves were borrowing, on the proportion of loans that could be lent against property collateral (loan-to-value ratios), and even on the crazy system of pay and bonuses that encouraged such wild risk taking.’ While that same year, giving his much publicised Today lecture (followed next morning by a lengthy interview on the radio programme itself), King for his part made a notable public confession: ‘With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called “light-touch” regulation hadn’t prevented any of this.’
The external explanation for the Bank’s pre-crisis failings has been predominantly threefold. Firstly, there has been the perception that not only were the 1997 tripartite arrangements intrinsically flawed, being embodied in a Memorandum of Understanding (MoU) that fudged crucial matters of objectives and responsibilities, but also that the Bank failed to communicate as much as it should have with the Financial Services Authority (FSA) – a failure that went to the highest level – and in general was unnecessarily nervous about stepping on the FSA’s toes. Adding to the picture of no one ultimately in charge was the 2016 revelation of Ed Balls, with Labour’s former City minister recalling the episode of ‘a dangerous and fast-changing financial war-game scenario’ during the winter of 2006–7, which showed a fundamental divergence of approach between on the one hand himself and the FSA’s head, Sir Callum McCarthy, and on the other hand the governor. The minister and McCarthy, according to Balls, wanted to guarantee the deposits and provide emergency resources to the fictional large British clearing bank that had become over-exposed to a near-bankrupt building society and now risked running out of money overnight; whereas King ‘was clear that bailing out the clearing bank risked what the economists call “moral hazard”’.8 It should be noted, though, that not all participants remember that particular episode the same way; while at least one recalls the governor urging the Treasury to start work on a legal resolution regime to deal with a failing bank (as in the US: arrangements for winding up banks without interfering with their ability to carry on day-to-day business) – work which the Treasury had failed to do by August 2007.
As for the second strand of explanation, it was crisply summarised as early as 2008 by the financial journalist Alex Brummer in his reading of why the Bank ‘fell short’: ‘Under Mervyn King the Bank became so wedded to its role of controlling inflation that ensuring financial stability assumed a secondary function, inadequately staffed and without real decision-making powers.’ The following year, a review of tripartism by Sir James Sassoon similarly found that during the mid-2000s the Bank ‘significantly downsized the resources devoted to monitoring and analysing changes in the structure of the financial system and assessing their implications for its stability, efficiency and effectiveness’; that it ‘lost and did not replace critical financial market expertise among its senior executive team’; and that it ‘narrowed the focus of its Financial Stability Reviews’, which in turn ‘meant that the Bank was actually, and mistakenly, lessening its engagement with the markets in the run-up to the financial crisis’. In November 2010, the FSA’s Hector Sants stated to the Treasury Committee that ‘the level of communication, and the level of interest, from the central bank in financial stability issues was recognised by all to have been very low, to say the least, in the pre-2007 period’; while in 2012 a close examination by the Daily Telegraph’s Philip Aldrick of the Bank’s annual reports revealed that whereas in 2003–4 the budget for financial stability was £30.6 million, two years later it was £1.5 million smaller (compared to the monetary policy budget’s £2.4 million increase) – and that even when in 2006–7 financial stability received a £6 million budget hike, it was only half that for monetary policy.
The final strand of explanation focused even more specifically on King: in essence, that his relations with the City – above all the leading bankers – became remote; and that almost irrespective of what the banks were or were not doing, his attitude towards them was somewhere on a spectrum between detached and unsympathetic. Tellingly, subsequent analysis by Goldman Sachs demonstrated that in the course of thirty-four speeches between 2000 and 2006, whether as deputy governor or governor, King spoke the words ‘banks’ or ‘banking’ a mere twenty-four times.9 Whatever the rights or wrongs of the matter – and King as governor consciously sought to distance the Bank from its traditional role as spokesman-cum-special-pleader for the City – this was an approach that most of his twentieth-century predecessors would have found almost wholly baffling.
King himself led the case for the defence. As early as April 2008, appearing before the Treasury Committee in the context of his re-appointment by the Labour government for a second term, he explained that ‘the big concern that I had before the events of last August, which led to the rewriting [in 2006] of the Memorandum of Understanding, was that the Bank was assumed to have responsibilities which it could not deliver because it had no powers or instruments to do so’ (with the new MoU saying no more than that the Bank sought to ‘contribute’ to financial stability); justified the reduction of staff numbers on the financial stability side, from 180 to 120 during his first term, by noting that ‘the only powers we had really were to make speeches, write reports and draw attention to the risks, so we re-organised the work in order to focus very much on how we would identify the main risks’; stated that ‘what we did in the Bank was in a generalised way to ask questions about what has happened to the banking sector as a whole and what were the characteristics of some of those developments that we thought most risky’; added that ‘we did write a number of reports and spelled out in our financial stability reports and our speeches that we did think excessive reliance on wholesale funding, for example, relying very much for funding on selling into markets for instruments that could become illiquid, was a risky strategy, and we made that clear on a number of occasions’, but at the same time emphasised that having raised such questions ‘it then requires the regulator [the FSA] to go into an institution and obtain much greater detail in order to find out how risky that institution actually is’; and finally, pointed to how ‘on day one when I was Governor, I said to Paul Tucker, “I want you to create a new market intelligence function”’, and added that Tucker had done this, creating a function that ‘is highly respected in the markets and has a lot of information that it makes available and feeds into all our decisions on this’.
The governor would continue to put forward these and similar arguments to the Treasury Committee on future occasions, while to The Times in 2012 he wondered aloud whether anyway the Bank pre-crisis would have been able to use interventionist, risk-reducing powers even if it had possessed them: ‘My guess is that that would have produced a chorus of complaints from banks, politicians and, dare I say, even the media about trying to restrain the extent to which our most successful industry wanted to expand.’ After leaving the Bank, he still reflected on the pre-crisis period. ‘Did anyone try to link what was happening in CDO [collateralised debt obligations] land to the macroeconomy? With hindsight, the answer is not enough,’ King observed to Gillian Tett for her 2015 book The Silo Effect. ‘But the question is what follows from that? It was not because people were not studying CDOs … [But] there were too many people focused on detail and there was so much paper produced that it was impossible to see the woods for the trees.’ And he went on: ‘Most public sector institutions suffer from the problem of an excess of bright young people and too few experienced people with the ability and perspective to see what detail matters and what does not. Our biggest problem with analysis was the difficulty in persuading young people to see the big picture and their managers to draw out the big picture.’
The other main internal defence-cum-explanation came from a rising younger colleague, Andrew (Andy) Haldane, by 2010 executive director for financial stability. Speaking that year to Central Banking’s Robert Pringle, he claimed that the Bank’s pre-crisis reports (first in the Financial Stability Review, then in the Financial Stability Report) ‘did a reasonable job of identifying the key financial fault lines’, and he continued:
At the Bank we even tried to quantify the impact of those fault lines using, at the time, a relatively untested approach – aggregate, system-wide stress tests. The estimated losses were large enough to chew up a chunk of the banking system’s capital. But, individually, those fault lines did not appear to be life-threatening for the global financial system.
So what went wrong?
Two things. First, the authorities perhaps discounted too easily the possibility of these fault lines being exposed if not simultaneously then at least sequentially. In the financial system, everything and everyone is connected. Those holding subprime securities also had exposures to various financial vehicles: structured investment vehicles, collateralised debt obligations, monolines and various other nasties. This interconnection across assets, institutions and countries is one reason Lehman’s failure [in 2008] brought the entire globe down to earth with a bump at precisely the same time.
Given this interconnectivity, the probability of simultaneous financial earthquakes is many times greater than if you simply multiplied their individual probabilities together. Cumulative pre-crisis losses of many of these financial earthquakes would have been life-threatening for the world’s banking system. For UK banks at the end of 2006, the Bank’s Financial Stability Report stress test estimated total losses in the region of £100 billion. We had the analysis, and even the numbers, roughly right. But pre-crisis, they were viewed through too rose-tinted a lens.
Second, even if we had had the right lens, this would probably not have altered the course of the crisis. The Bank, and others, spoke with increasing forcefulness about potential stresses in the system from 2003 onwards. We were dogs barking at the passing traffic. As the cars drove past at increasing speed, these barks grew louder. The drivers of some of the cars took notice, but they did not slow down. Why? Because they knew the dog’s bark was worse than its bite.
What was needed in this situation was someone to slow the traffic, all of the traffic, for the game being played was a collective mania. These manias are founded on a desire to keep one step ahead of the opposition. This results in a race to the bottom which, although individually rational, is collectively calamitous.
His insightful analysis might also have mentioned the sheer scale of derivative instruments in the system, seemingly impossible for the authorities to do anything about and making it very difficult to assess a bank’s true financial state. In any case, what, he asked rhetorically, was ‘the solution’? The answer to Haldane was clear: ‘A watchdog with teeth.’10
Prior to summer 2007, the Bank’s three loudest barking dogs were Andrew Large, his successor Sir John Gieve (coming, like Rachel Lomax before him, from Whitehall) and Paul Tucker. Speaking at the LSE in January 2004, Large warned about the financial system’s increasingly dangerous ‘opacity’ – the consequence ‘of the sheer complexity, speed of movement of risks, and in some cases obfuscation through Special Purpose Vehicles, or other off-balance sheet devices’. He went on: ‘The existence of new concentrations of risk might not matter if their new holders are fully aware of the risk. But new holders of such risk may not have the same understandings of what the risks consist of, as those who generate them. And accordingly they may behave in unexpected ways when shocks arise.’ Similar speeches and warnings followed over the next two years before Large left the Bank early, in January 2006. Shortly before doing so, he not only rang the Daily Mail’s Alex Brummer to (in Brummer’s words) ‘express concern that banks, given the volume of transactions in which they were now involved as well as the complexity of the transactions, did not hold enough liquidity in the event of a swing in mood in the credit markets or an unexpected calamity’; but he also wrote a piece for Central Banking about his growing anxiety that, behind the ‘benign exterior’ of the current ‘financial and economic environment’, there were ‘vulnerabilities mounting’ that might ‘one day crystallise when a bigger shock arrives that the market simply cannot absorb’, not least because of the increasing concentration of banking firms – and therefore risks – in the global financial system. Gieve’s main warning came at a July 2006 roundtable at the Centre for the Study of Financial Innovation. Vulnerabilities that he identified, potentially amounting to systemic risk, included new products like structured credit derivatives (‘we simply do not have experience of how they behave in the full range of market conditions’), rising competition between financial firms to establish positions in new and fast-growing markets (‘the business risk not just of losing profits this year but of being left behind in the longer term by competitors looms large at the moment’), ill-conceived bonus structures (‘rewards from generating “excess returns” far outstrip the penalties for poor performance’), and the way in which ‘the more aggressively management pursues short-term shareholder value in the form of rates of return on equity, the greater the motivation to build leverage to meet its targets’.
As for Tucker, the part of his December 2006 lecture at the Honourable Artillery Company where he focused on broad money growth included the revelation that almost half that recent growth ‘is accounted for by the money holdings of so-called Other Financial Corporations’; while four months later, addressing a Merrill Lynch conference, he sought to unpick what ‘Other Financial Corporations’ really meant:
The key intermediaries [in finance] are no longer just banks, securities dealers, insurance companies, mutual funds and pension funds. They include hedge funds of course, but also Collateralised Debt Obligations, specialist Monoline Financial Guarantors, Credit Derivative Product Companies, Structured Investment Vehicles, Commercial Paper conduits, Leverage Buyout Funds – and on and on … SIVs may hold monoline-wrapped AAA-tranches of CDOs, which may hold tranches of other CDOs … and hold LBO debt of all types as well as asset-backed securities bundling together household loans …
All these other-worldly terms and acronyms would soon become all too familiar; but in April 2007 this was pretty much terra incognita to the great majority of journalists and economists, not to mention central bankers. And as Tett would reflect in 2015, the reports of Tucker’s speech – which also dealt with such relatively straightforward matters as the housing market, inflation trends and interest rates – almost entirely missed that crucial dimension.11
What about King himself? The governor’s annual set-piece speech had long been at the lord mayor’s dinner for the merchants and bankers of the City of London, traditionally held in the autumn but from 1993 in June; and at the last one (as it turned out) before the crisis, on 20 June 2007, he gave – unlike in previous Mansion House speeches – full-frontal treatment to the stability or otherwise of the financial system. After he had explained how securitisation had been ‘a positive development’ because it had ‘reduced the market failure associated with traditional banking’, in other words ‘the mismatch between illiquid assets and liquid liabilities’, his central passage – giving rise at the time to some audible disapproval from parts of the audience – would become over the years much quoted:
But the historical model is only a partial description of banking today. New and ever more complex financial instruments create different risks. Exotic instruments are now issued for which the distribution of returns is considerably more complicated than that on the basic loans underlying them. A standard collateralised debt obligation divides the risk and return of a portfolio of bonds, or credit default swaps, into tranches. But what is known as a CDO-squared instrument invests in tranches of CDOs. It has a distribution of returns which is highly sensitive to small changes in the correlations of underlying returns which we do not understand with any great precision. The risk of the entire return being wiped out can be much greater than on simpler instruments. Higher returns come at the expense of higher risk.
Whether in banking, reinsurance or portfolio management, risk assessment is a matter of judgement as much as quantitative analysis. Ever more complex instruments are designed almost every day. Some of the important risks that could affect all instruments – from terrorist attacks, invasion of computer systems, or even the consequences of a flu pandemic – are almost impossible to quantify, and past experience offers little guide.
Be cautious about how much you borrow is not a bad maxim for each and every one of us here tonight …
The development of complex financial instruments and the spate of loan arrangements without traditional covenants suggest another maxim: be cautious about how much you lend, especially when you know rather little about the activities of the borrower. It may say champagne – AAA – on the label of an increasing number of structured credit instruments. But by the time investors get to what’s left in the bottle, it could taste rather flat. Assessing the effective degree of leverage in an ever-changing financial system is far from straightforward, and the liquidity of the markets in complex instruments, especially in conditions when many players would be trying to reduce the leverage of their portfolios at the same time, is unpredictable.
‘Excessive leverage is the common theme of many financial crises of the past,’ concluded King. ‘Are we really so much cleverer than the financiers of the past?’
Yet, whether from the governor or his colleagues, the barking was sometimes muffled, sometimes absent. Take half a dozen moments from the year or so before the crisis broke. In July 2006 the Bank’s Financial Stability Report (FSR) noted that ‘the UK financial system as a whole has been remarkably resilient over recent years’; and it added that ‘several structural developments have helped improve that over time, including high profits and capital, continued improvements in risk management and more sophisticated ways of distributing risk’. Two months later, in the course of an interview with the Banker in which he mentioned that the gathering of market intelligence absorbed up to a third of his time (‘the MPC obviously takes priority over everything else’), Tucker made positive noises about the risk-reducing potential of new products and the arrival of new market participants – ‘there is no doubt that hedge funds and leveraged players can offer a positive dynamic’ – before emphasising that he was not losing sleep over fears that the credit markets were over-extended: ‘Some people say that, at some point, those chickens must come home to roost in the form of defaults. That may well be true but there are now many more distressed funds out there to help absorb the situation … The truth is, it is impossible to predict. Global capital markets have changed a lot in the past 10 years.’ The following spring, the April 2007 FSR began with the most reassuring of statements – ‘the UK financial system remains highly resilient’ – and although it observed that since 2000 the balance sheets of large financial institutions had more than doubled, it failed to go on to urge that banks should significantly reduce those balance sheets and thereby their vulnerability to shocks, not least if the inter-bank market (for wholesale lending and borrowing) suddenly dried up. That same month, Tucker in his speech at the Merrill Lynch conference did indeed try to chart the murky world of what he called ‘vehicular finance’, in which risk was transferred beyond banks; but he confessed himself ‘not so sure’ as to whether ‘the variety of vehicles and their use of risk transfer instruments’ was necessarily ‘a bad thing’, leaving his listeners with the cautious prediction that ‘in ten years’ time … we may be better informed on whether the changes in the structure of our financial markets help or hinder the preservation of stability’.
The penultimate moment came on 11 July, when Haldane introduced to the Court’s committee of non-executive directors (NedCo) a paper on the Bank’s ‘restructured approach to its financial stability work’ – ‘aimed at providing a more analytical and rigorous approach to risk assessment’ and involving a set of carefully targeted modelling techniques. ‘In relation to the collaborative modelling work with commercial banks,’ recorded the minutes, ‘it was asked if the approach had revealed different insights about risks in the financial system. In response, it was highlighted that the work was at an early stage and there was considerable diversity in existing practices. It had not identified any looming gaps.’ Finally, there was the Inflation Report press conference of 8 August. A few minutes after replying to Jennifer Ryan about credit-related concerns, King took a question from the BBC’s Stephanie Flanders. ‘Is the greater complexity and international nature of financial instruments and the ways that risk is now being passed across the system,’ she asked, ‘making it harder for you to assess financial conditions here, liquidity conditions and indeed any systemic risk that might arise?’ ‘Yes and no,’ answered the governor:
Yes, because I think as I said in the Mansion House speech, a common theme in many financial crises in the past was excessive leverage. And it’s not entirely easy to work out precisely how much leverage there is in the financial system when the instruments have become so complicated. And the fragility of institutions becomes much more difficult to judge.
But I think against that it is very important to set a very, very key point here, which is that our banking system is much more resilient than in the past. Precisely because many of these risks are no longer on their balance sheets but have been sold off to people willing and probably more able to bear it.
Now some have always had a preference for a banking system in which all the risks are concentrated there. But I think then you create extraordinarily risky institutions with highly illiquid assets in the form of loans to households and medium-sized business, matched by highly illiquid liabilities. And that’s a very risky system …
We don’t have a system that is as fragile as that now. The growth of securitisation has reduced that fragility significantly. So that’s a very big plus to set aside the difficulty that we face in trying to assess the degree of leverage both because of the complexity of instruments and the wider ownership of those instruments, but also because as you say it’s become much more international.
And I think it’s quite difficult to imagine a major financial crisis now that would be relevant to us in a systemic sense that wouldn’t have a major international dimension. And that’s why both in international meetings but also in collaboration with our colleagues elsewhere we have tried to work together to think about how such a problem would be managed in exactly the same way that the Tripartite Standing Committee [Treasury, FSA and Bank] here has regularly carried out exercises to make sure that we are well equipped to co-operate and work together to manage any problems that might arise domestically.
These press conferences were not a forum for debate or even follow-up questions, and no one pressed him further.12
Irresistibly, one comes back to assumptions and mental parameters. Much would be said and written about the pre-crisis period – not all of it mindful that in history real-life people act and take decisions in real time – but one retrospective assessment had perhaps a particular resonance. It came from John Gieve, speaking four years after he had left the Bank in 2009, following a little over three years in charge of financial stability: ‘The big macro variables which we concentrated on, particularly inflation, were not sending signals of danger, and the truth is that we thought we had cracked it.’ And he added: ‘We were expecting a shower, not a hurricane.’ Few if any believed with more certainty that they had cracked it than the Bank’s new priesthood: the economists. ‘With focus comes clarity,’ an MPC external, Adam Posen, told Central Banking in the early summer of 2007 for a tenth-anniversary feature on independence. ‘Both internally and externally, the concentration of the Bank on its core role has given it greater authority to carry out its monetary policy mandate.’ Indeed, he went on to claim, the Bank’s ‘virtuous self-restraint’ in areas outside of monetary policy had ‘caused the rest of the government to raise its game’.13 No one is immune from wishful thinking; but events would soon prove that this was wishful thinking, almost certainly shared by his fellow-economists, on a heroic scale.
The credit crunch began on 9 August 2007, as risk-aversion gripped the international money market and fears about counter-party exposure to subprime assets led banks to stop lending to one another.14 Immediately at the European Central Bank (ECB), and very soon at the Fed, the reaction was to provide emergency liquidity; but the Bank declined to follow suit, refusing either to ease collateral requirements or to waive the traditional penalty rate of 1 percentage point above Bank rate (the term had come back into general use in 2006, very much on King’s initiative), but instead relying on its recently introduced system of liquidity facilities, by which commercial banks were able to determine the size of their own reserves with the Bank – in effect, a mechanism by which the Bank could routinely provide more liquidity to the banks as and when they needed it. On 14 August the FSA informed the Treasury and the Bank that it had serious concerns about Northern Rock, the Newcastle-based mortgage lender that had expanded rapidly on the back of heavy borrowing in the now seized-up inter-bank market and was now not only inadequately capitalised, but faced by a fundamentally broken business model. King at the outset informed Northern Rock’s chairman that the Bank would be prepared to act as lender of last resort, but emphasised that if Northern Rock was to have a long-term future it would have to find new sources of funding. By early September the possibility had emerged of Lloyds acquiring Northern Rock – though only if it (Lloyds) was guaranteed a hefty stand-by facility, something that neither the new chancellor, Alistair Darling, nor King thought was an acceptable use of public money, given that the motives of Lloyds were essentially commercial and that the offer would not be made available to other banks. On Sunday, 9 September a four-way telephone conversation – Darling and King plus McCarthy and Sants of the FSA – saw the Lloyds initiative removed from the table, while at the same time the governor confirmed that the Bank was prepared, if necessary, to give emergency support to Northern Rock in its capacity as lender of last resort.
Over the next couple of days, as Northern Rock’s share price plummeted and funds flowed out, King finalised a lengthy memorandum for the Treasury Committee, ahead of his scheduled appearance on 20 September with other members of the MPC. Entitled ‘Turmoil in Financial Markets: What Can Central Banks Do?’, it argued that ‘the source of the problems lies not in the state of the world economy, but in a mis-pricing of risk in the financial system’; it emphasised the importance of preserving the concept of moral hazard, noting tartly that ‘the provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises’; and it concluded that although ‘the current turmoil’ had ‘disturbed the unusual serenity of recent years’, nevertheless, ‘managed properly, it should not threaten our long-run economic stability’.
First thing on Wednesday, 12 September, shortly before King’s public statement was released at 10 am, the Court’s NedCo had the opportunity to discuss it with him and his executive colleagues. Although ‘several Directors congratulated the Governor for setting out a rigorous intellectual underpinning of his position’, the tone of the meeting was not entirely easy. One questioner from the non-execs ‘wondered if there was any thought about, or pressure to, accept lower-quality collateral’; another observed that ‘when the current market turmoil had subsided it would be important to assess whether the tripartite institutions were sufficiently alert to the development of non-banks through some conduits, SIVs and hedge funds that were not regulated but which were essentially providing banking-type functions’; and a third asked ‘if the risks associated with moral hazard vs the potential damage to the financial system were thought to be asymmetrical’. The minutes do not divulge the names of speakers, but the sentiments of the reply to that last question were undoubtedly the governor’s: ‘The Executive felt that was difficult to judge but suggested that in the careful assessment that needed to be done it was important that someone should ensure that there is a voice for the moral hazard concerns. There needed to be accountability by policy makers for decisions and the outcome not only in relation to the current crisis, but also for the longer-term consequences.’
Yet, for all that, King in his memo did leave the door slightly ajar, noting that central banks, in their traditional lender-of-last-resort role, could lend ‘against good collateral at a penalty rate to an individual bank facing temporary liquidity problems, but that is otherwise regarded as solvent’. By Thursday, 13 September, with Northern Rock’s situation deteriorating by the hour, a rescue plan was in place, agreed with the Treasury and the FSA, and to be announced before the markets opened on Friday the 14th. That evening, shortly after the BBC’s Robert Peston had revealed to the world that Northern Rock had successfully applied to the Bank for emergency aid, the Court met in emergency session formally to authorise the Bank to proceed, on the basis of a penalty rate of 1.5 percentage points over Bank rate as well as collateral ‘at an appropriate margin’. Members of the Court were ‘told that both the Bank and the FSA were in total agreement that if Northern Rock was allowed to fail it would create serious economic damage’; they were also informed that in the tripartite press statement first thing the following morning, the wording would say, ‘In its role as lender of last resort, the Bank of England stands ready to make available facilities in comparable circumstances, where institutions face short-term liquidity difficulties’; as to the ‘potential for some commentators to suggest that the Governor was doing a U turn’, there was ‘a clear distinction to be drawn between the moral hazard of a general bail-out to banks, e.g. by relaxing interest rates to try to influence inter-bank lending rates, and the type of collateralised assistance considered here’. Altogether, this would be, the executive told the Court before the latter gave its go-ahead, ‘the most significant lender of last resort facility since the lifeboat episode in the 70s – when times were very different’.
The memorable Friday the 14th saw powerful TV images of the run on the Rock, as alarmed depositors queued to get out their money. A difficult weekend ensued, with King pushing strongly the necessity of government giving a full guarantee to all Northern Rock deposits; and Darling duly announced that in the late afternoon of Monday the 17th, thereby ending the run. Two days later, in what the Economist immediately described as ‘a breathtaking volte-face’, the Bank announced not only that it would through an auction process be injecting £10 billion into the money market, but that it would be doing so ‘against a wider range of collateral, including mortgage collateral, than in the Bank’s weekly open market operations’.15 As for Northern Rock, it eventually passed in February 2008 – after several months of major liquidity assistance, with the Bank managing the Liquid Support Facility on the Treasury’s behalf – into reluctant public ownership.
In September 2007, the most wounding instant verdict came from the Economist. The front cover of its issue dated the 22nd featured a carefully chosen photograph of a rather anxious, slightly puzzled-looking King, alongside the words ‘The Bank that failed: How Mervyn King and the government lost their grip’. Inside, the editorial verdict was damning. The paper did not necessarily agree with the governor’s critics who claimed that if he had ‘acted more promptly to restart seized-up lending markets’, then ‘Northern Rock might have muddled through’, observing that ‘no one will ever know whether that is true’; but it did argue that ‘the lurches in the central bank’s policy leave Mr King looking either as if he made a mistake, or as if he cannot stand up for his views’, with ‘neither characteristic’ being ‘much sought after in a central banker’. And it concluded: ‘Nobody trusts politicians. Regulators are always disliked. But central bankers are held to a higher standard; which is why Mr King is the past week’s main victim. He has lost credibility; and a central banker without credibility is not much use.’ Four months later the Treasury Committee’s report, ‘The run on the Rock’, did not go so far as to argue that Northern Rock would not have needed specific emergency support in September if the Bank the previous month had undertaken the kind of open-market liquidity operation being asked for by at least several banks. Nevertheless: ‘We are unconvinced that the Bank of England’s focus on moral hazard was appropriate for the circumstances in August. In our view, the lack of confidence in the money markets was a practical problem and the Bank of England should have adopted a more proactive response.’ Later in 2008, Alex Brummer’s account of The Crunch did not spare the governor – ‘King’s early approach was quickly exposed as wrong-headed. It increased jittery nerves rather than calming them … Ultimately, King’s refusal to pump money into the markets after 9 August made a bad situation worse … Whatever excuses are made for King, the fact is that the hero of the fight against inflation had not proved adept at battling turmoil in the markets and the most dramatic run on a British bank seen in modern times …’ – while towards the end of his governorship, in 2012–13, retrospective verdicts on this episode remained generally critical. ‘Sir Mervyn’s [he had been knighted in 2011] response to the unfolding run on Northern Rock was tardy and unsure’ (Times). ‘His initial reaction was ill-judged … Talking about abstract economic concepts in the teeth of the crisis made him look out of touch’ (Economist). ‘The effect was rather like a fireman worrying about the moral implications of dousing an arsonist’s blaze: fine, until the entire street is engulfed in flames’ (Guardian).16
Unsurprisingly, that was not King’s perspective. On 20 September 2007 – only three days after Darling’s guarantee to Northern Rock depositors – he made a robust appearance before the Treasury Committee. In the face of some hostile questioning, he argued that for the Bank to have undertaken in August a large-scale liquidity operation ‘would undoubtedly have been a signal that the authorities were deeply concerned about the entire UK banking system’ – a signal that would have been ‘wholly unfounded’, given that ‘the UK banking system as a whole is well-capitalised’ and ‘there is no threat to the stability of the banking system’; in relation to Northern Rock specifically, he pointed out that the European Union’s Market Abuse Directive of 2005 meant that ‘we were unable to carry out a covert lender of last resort operation in the way that we would have done in the 1990s’; he denied that, during the past week, he had been leaned on by government (‘I can assure you that the operation we announced was designed in the Bank’); he also denied that moral hazard was ‘just some dry academic concept’, insisting that ‘it is moral hazard that has actually led us to where we are’; he linked his refusal to ‘provide ex post insurance’ to the banking system to how ‘the whole regime of monetary policy that we have put in place has been to demonstrate that taking the easy option and giving in in the short run without looking to the long-run consequences of those actions is damaging’; and he described the previous day’s announcement of a £10 billion liquidity facility as the result of ‘a balance of judgement’ – on the one hand, ‘designed and structured in a way that minimised the moral hazard’, on the other hand, providing ‘some liquidity to the markets’ in the context of ‘strains’ in those markets seeming ‘somewhat greater’.
Over the next year, until the crisis moved decisively to its climax, the governor continued to make his case. ‘Nothing would have been easier than for the Bank of England to lend freely without a penalty rate,’ he told the Northern Ireland Chamber of Commerce in October 2007. ‘Almost every actor in this drama saw advantage in cheap money and plenty of it. The role of the central bank is to ensure that the appropriate incentives are in place to discourage excessive risk-taking and the underpricing of risk, and in so doing to avoid sowing the seeds of an even greater crisis in the future.’ As for the analogy that commentators were drawing between the Bank and a fire service, he did not quarrel with fire departments who ‘put out fires started by people who smoke in bed’; but at the same time he observed that ‘fire services do not offer free insurance for people who smoke in bed or set fire to their own house, thereby encouraging them to take risks that endanger others’. In November, interviewed by Peston for a BBC radio File on Four special, the governor reiterated that ‘the role of the Bank of England is not to do what banks ask us to do, it’s to do what’s in the interest of the country as a whole’; appearing again in December before the Treasury Committee, he denied that there was ever a firm Lloyds bid for Northern Rock on the table and described the latter’s pre-crisis business model as ‘fatally flawed’ on the borrowing side, for all its excellence on the lending side; in April 2008 his reappointment session with the Treasury Committee included two explicit admissions – that ‘during August when the events in the financial markets started to unfold, I think I made a mistaken judgement that I did not want to add to the cacophony of voices which seemed to me not to be shedding light but raising concern’, and that he also regretted ‘the failure to press early enough for a guarantee to be announced when the lender of last resort operation for Northern Rock was implemented’ – but was otherwise unapologetic, with as usual an emphasis on how the Bank ‘had no responsibility for individual institutions’; while that July, appearing once more with feeling before the Treasury Committee, he stressed ‘the absence of any Special Resolution Regime’, which if it had been in place the previous year would have allowed Northern Rock ‘to have been dealt with immediately’. Almost eight years later, in March 2016, King was still fighting his corner. ‘A very odd myth persists about the ECB,’ he told the New Statesman’s Ed Smith. ‘They announced that they would lend over €100 billion, and the next day they would lend €95 billion. Everyone thought, “Gosh, they’re lending vast amounts.” After one month, the amount of lending to the banking sector was precisely zero. They lent a hundred billion for one day, 95 billion for one day. After one month they had extended no net liquidity. The Bank of England had.’17
Although much criticised by the press, King also had his defenders in the public prints. ‘For the top management of Northern Rock to seek to pin responsibility for the disaster that befell the institution for which they were responsible on others, such as the Bank of England, is an example of financial illiteracy,’ declared Central Banking at the outset, adding that ‘there was no justification for them to expect the Bank either to lower its lending rate or weaken its collateral just to help the stricken lender’; in the same magazine’s next issue, Charles Proctor (a partner in Bird & Bird, specialists in financial regulation) broadly backed King’s claim that various existing legislative or quasi-legislative aspects – including corporate insolvency laws, deposit-protection provision and the Takeover Code as well as the Market Abuse Directive – had collectively placed significant obstacles in the way of a properly structured solution to Northern Rock. In later years, writing the first drafts of history, the Telegraph stable offered the most sympathetic assessments. ‘In the end,’ asserted Jeremy Warner in 2011, ‘the debacle of bailing out Northern Rock had little to do with either a failure in judgement or the tripartite regime of split responsibility between the Bank, FSA and Treasury. Rather it was the absence of an effective resolution regime, compounded by inadequate deposit insurance.’ So too Liam Halligan. ‘I believe he was correct, when the credit crunch first hit, to make the banks sweat, questioning unconditional root-and-branch bail-outs,’ he argued the following year as he appraised King’s record. ‘“Moral hazard” isn’t an academic parlour game. It’s the reason why the Western banking system collapsed and why, unless drastic reforms happen, it will ultimately collapse again.’
The debate will no doubt continue to run, especially once full Bank records become available in the late 2020s. Yet, as many remarked – both at the time and subsequently, and often not unsympathetically – a sharp, unexpected crisis was probably not the ideal milieu for King. A deeply methodical man, and an intellectual thoroughbred, all his instincts were to think things through carefully and make sure he got them right, as opposed to taking any hasty, impromptu action. Hypothetical thoughts inevitably turned to his predecessor, Eddie George; and over the years it would become the conventional wisdom that if he had still been governor in 2007 he would have ignored tripartite constraints and forcibly banged heads together in order to get the Northern Rock situation sorted out quickly. It is a tempting scenario, but almost certainly exaggerates the freedom of manoeuvre available for finding a buyer for Northern Rock. Perhaps more tenable is the other aspect of the conventional wisdom: namely, that George as governor in 2007 would have had a more acute ‘nose’ for the banking system’s true condition, in comparison to King’s assertion that September to the Treasury Committee that it was ‘very well capitalised’ and ‘very strong’.18 Yet, as ever with counter-factual history, there is simply no way of knowing for certain.
‘Things have improved significantly since August,’ King told Peston in early November 2007. ‘We’re not back to normal in terms of a number of important financial markets, but things are improving. And I think that most people expect that we have several more months to get through before the banks have revealed all the losses that have occurred, have taken measures to finance their obligations that result from that. But we’re going in the right direction.’ For the bankers themselves, in some but not all cases struggling with lack of liquidity, this was not a mellow autumn, and often they directly blamed King – with one, half jokingly, claiming that it was the governor’s revenge for their failure to read his speeches. King himself denied that the Bank was not doing enough, assuring the Treasury Committee a week before Christmas that through its money market operations it was now supplying £6 billion more to the banking system each month than at the start of August, an increase of 37 per cent. Even so, the perception remained that lack of liquidity was a key issue; and indeed, earlier in December, five major central banks, including the Bank, came together in concerted action to try to unblock the world’s credit markets through an emergency injection of £50 billion (£10 billion from the Bank). Significantly, concerns by this point were not just about liquidity. ‘The action was being taken,’ the Bank’s executive informed NedCo on the day of the joint announcement, ‘to address the credible scenario that saw a serious downturn in the world economy inevitably leading to losses in the banking system. This, coming on top of the losses that may result from the current repricing of complex financial instruments, would pose a challenge to the capital base of the banks.’ Preceding weeks had already seen significant bank losses and write-downs (including Citi, Merrill Lynch and UBS), and King in his pre-Christmas evidence to the Treasury Committee twice mentioned the importance of the banks rebuilding their balance sheets; over Christmas, mulling things over, he came increasingly to the conclusion that what the West’s banking system faced was not just a liquidity problem, but in essence a solvency problem.
In early 2008 the liquidity aspect, though, did not go away; and eventually on 21 April – just over a month after a deputation of senior bankers had pleaded with King to inject further extra liquidity into the market (with one complaining to the press that the Bank had ‘a much tighter definition of the collateral that it will accept’ than other central banks), which in turn was just a few days after the collapse of the American investment bank Bear Stearns – the Bank announced its Special Liquidity Scheme (SLS). ‘The Bank,’ reported the Financial Times, ‘will offer to acquire asset-backed securities from banks in exchange for Treasury bills,’ with the Bank expecting to swap £50 billion of assets in the first couple of months. ‘Bank of England’s Clever Swap Shop’ ran the headline to the paper’s editorial, which joined in the generally warm response (albeit some critics wishing it had come significantly earlier) but reflected that the SLS was not necessarily the answer:
A moment of truth is arriving in the credit squeeze: a clear empirical test of whether it is a problem of bank liquidity or bank solvency is about to begin. The Bank of England’s new Special Liquidity Scheme is a cleverly designed and welcome move to ease liquidity troubles. It should lower the three-month interbank lending rate. But if the real fear is solvency – that too many bad loans were made at too low an interest rate – it will not make mortgages cheaper or release wholesale funding for the banks.
Indeed, King himself at the press conference announcing the scheme made much the same point: its purpose was ‘to take the liquidity issue off the table in a decisive way’; but it was ‘not available for failing institutions’ and would not, he insisted, address the solvency of banks.19
What would? By mid-March, increasingly frustrated by the G7’s quasi-dysfunctional meetings, King was talking about the US, the UK, Switzerland and perhaps Japan coming together to attempt a simultaneous recapitalisation of all major banks; while later that spring he sent a handwritten letter to the prime minister, Gordon Brown, urging recapitalisation of the British banks. At this point, undoubtedly, the governor was well ahead of the curve, having arguably been somewhat behind it during the early months of the crisis. Yet of course in practical political terms it required something truly alarming to happen – with Bear Stearns being not quite enough – for externally imposed recapitalisation to be a serious runner. And anyway, perhaps all would be well without it. ‘The most likely outcome,’ predicted the Bank’s April 2008 FSR (published shortly after the SLS announcement), ‘is that market conditions improve in the period ahead,’ though not denying that ‘tail risks’ to financial stability remained; and some four years later, looking back in his Today lecture, King reflected that ‘we tried, but should have tried harder, to persuade everyone of the need to recapitalise the banks sooner and by more’, adding that ‘we should have preached that the lessons of history were being forgotten – because banking crises have happened before’.
Over the summer of 2008, noises off were seldom reassuring. During the preceding month, noted the minutes of NedCo’s meeting on 11 June, ‘monoline insurers had been downgraded which had implications for some of the largest financial firms; Lehman’s had been the subject of rumour and speculation over a few days, which fortunately had been so far contained; and in the UK, Bradford and Bingley served as a reminder that the situation remained fragile’. Altogether: ‘Although there was still some sense that the worst had passed, it was liable to remain a bumpy ride and, depending on the scale of the bumps, the destination might be changed.’20 Further ominous news followed: later in June, 5 per cent of the rights issue made by Royal Bank of Scotland (RBS) being left with the underwriters and Lehman Brothers reporting a serious second-quarter loss; in July, the announcement by the US Treasury of a rescue plan for Fannie Mae and Freddie Mac; and in early September a complete bail-out for both those huge mortgage-providing institutions.
Domestically, the principal issue was whether, against gathering economic as well as financial storm clouds, the MPC was unduly prioritising the countering of inflation at the expense of the countering of recession. ‘I would gradually expect the events of the last few months to have an impact in reducing the growth rate of consumer spending,’ King told the Treasury Committee at the end of April. ‘Remember, this is something that I have been expecting, and, indeed, perhaps hoping for, for some time, a rebalancing of the economy, and I think we would expect over the next two years that there would be some rebalancing of the economy. But that would also be accompanied by a slowing of growth, so the economy would grow below its long-run average for a couple of years. But that is not a disaster in itself, we were growing above the long-run average for a number of years before that …’ In mid-June, in his Mansion House speech, the governor specifically addressed those commentators and others wanting monetary policy to be significantly eased:
Target growth not inflation is the cry. I could not disagree more. This is precisely the situation in which the framework of inflation targeting is so necessary. Without it, what should be a short-lived, albeit sharp, rise in inflation, could become sustained. Without a clear guide to the objective of monetary policy, and a credible commitment to meeting it, any rise in inflation might become a self-fulfilling and generalised increase in prices and wages. And surely the lesson of the past 50 years is that, when inflation becomes embedded, the cost of getting it back down again is a prolonged period of sluggish output and high unemployment. Price stability – returning inflation to the target – is a precondition for sustained growth, not an alternative.
Among the external critics was the Daily Telegraph’s Damian Reece, who in early July was prompted by grim manufacturing figures to assert that ‘it’s clear to me we’re headed for recession and as soon as that fact dawns on the MPC it should cut rates without delay’. The Bank, however, remained unmoved, with its Inflation Report in August not even mentioning the word ‘recession’ and arguing that although the risks ‘from a more pronounced slowdown in demand’ had become greater, nevertheless that was a lesser consideration than the ‘possible impact of elevated inflation on pay pressures and inflation expectations’. The MPC’s meeting on 5 September saw rates held at 5 per cent, and soon afterwards King uttered a striking pronouncement before the Treasury Committee: ‘I do not really know what will happen to unemployment. At least, the Almighty has not vouchsafed to me the path of unemployment data over the next year. He may have done to Danny, but he has not done to me.’
‘Danny’ (a reference to the legendary Spurs footballer of the 1960s) was David Blanchflower, a UK-born but US-based economist who had become an MPC external in June 2006 and, after a lengthy period of largely voting in vain for rate cuts, had gone public with his prediction that Britain was heading for mass unemployment. In September 2009, four months after leaving the MPC, Blanchflower wrote candidly in the New Statesman:
In my view, and as I have consistently argued over the past two years, the economy would have been in much better shape today had the MPC not kept interest rates so high, especially from the beginning of 2008. House prices had peaked by the end of 2007 and business and consumer confidence surveys had collapsed. By the second quarter of 2008, based on both output and employment, the UK economy had moved into recession. But my colleagues on the MPC did not join me in voting for rate cuts until October 2008.
So why did the Committee get it so wrong? From my perspective, it was hobbled by ‘group think’ – or the ‘tyranny of the consensus’. Mervyn King, with his hawkish views on rates, dominated the MPC. Short shrift was given to alternative, dovish views such as mine. I focused on the empirical data suggesting Britain was heading for recession; Mervyn and the rest of the Committee focused on their theoretical models and the (invisible) threat of inflation …21
To which, the defence would be that the inflationary threat was far from ‘invisible’ – approaching 5 per cent by the autumn – and that the all-important oil price was rising sharply. It was, as ever, a matter of judgement.
‘Presently there was considerable nervousness around Lehman Brothers which would announce results today,’ Tucker told NedCo on 10 September 2008. ‘Whatever those results, it was thought that markets would remain tense. No matter what actions were taken by the authorities, market participants appeared to think that there was always one more significant institution to worry about.’ There was indeed, and the headline events of that unforgettable early autumn amounted to the biggest financial crisis since the 1930s, perhaps even earlier. Five days later, on 15 September, Lehmans filed for bankruptcy and Bank of America rescued Merrill Lynch; next day, the Fed announced a rescue plan for the world’s biggest insurer, AIG; on the 18th, it was announced that Lloyds was taking over the struggling Halifax Bank of Scotland (HBOS), while the Bank concluded a reciprocal swap agreement with the Fed, enabling the former to provide US dollar funding to RBS without either central bank taking an exchange rate risk; on the 28th, Fortis was rescued by the Benelux governments; next day, the mortgage lender Bradford and Bingley was nationalised; in early October, a $700 billion rescue bill for the American financial system passed into law; on the 7th, the Icelandic government rescued that country’s second-largest bank; next day, the UK government announced its rescue package for the UK banking system – involving an injection of up to £50 billion capital into UK banks, a doubling of the SLS to £200 billion, and a new credit-guarantee scheme of up to £250 billion – while at the same time the leading central banks undertook co-ordinated rate cuts; and five days later, on the 13th, the UK government’s specific capital injections were announced, amounting to a total of £37 billion into the beleaguered RBS as well as Lloyds and HBOS. Two days afterwards, on 15 October, the Bank’s executive team told NedCo that ‘the corner had been turned in relation to the banking system’, but that there now existed ‘a significant macroeconomic risk as the major economies entered recession’.22
This is not the place for a blow-by-blow account of those charged weeks, but it is clear in retrospect that the Bank made two overwhelmingly important contributions: predictably enough, one relating to capital, the other to liquidity, with both being pushed hard by King towards the end of September. On the liquidity front, mattering hugely in the short term while recapitalising arrangements were negotiated and took effect, the crux was not just the doubling of the SLS (for which the Bank, two days after the Lehmans shock, had extended the drawdown period), but the Bank’s wholly covert Emergency Liquidity Assistance (ELA), coming into operation at the start of October. In the event, RBS’s use of the facility peaked on 17 October with some £36.6 billion being borrowed, while HBOS’s peaked on 13 November with £34.5 billion; and though initially the Bank lent against bank collateral, soon it had no alternative – given the numbers – but to seek a government indemnity. As for capital, it was very much the governor who continued to take the lead, persuading government (Brown perhaps more receptive than Darling) and helping to face down the often unconvinced, resentful commercial bankers, who continued to insist it was essentially a liquidity problem. He spoke quite frankly at the end of September:
We have been dealing with the gravest financial crisis since 1914. We have been on the precipice. When we started this crisis there was a widespread view that banks were well capitalised. But now we realise that the problem was that assets sitting on their balance sheets which were supposed to be risk-free, carried a lot of risk. Perceptions of the value of those assets and the risks changed radically. What has become clear is that you cannot deal with this problem just by providing more liquidity to the banks. That just addresses the symptoms …
Importantly, during the four days or so of intensive international meetings – national leaders, finance ministers, central bankers et al – following the UK’s 8 October announcement, it was King’s doctrine about the paramount necessity of recapitalising the banking system that was spectacularly taken to heart; and at NedCo’s meeting on the 15th, sober satisfaction was expressed that, ‘in the wake of the UK plan’, there had been at those meetings ‘a real sense of urgency’.
Six days later, the governor gave a well-publicised and very characteristic speech in Leeds. He began with some local flavour, recalling how as a boy, half a century earlier, he had been taken by his father to Headingley to see New Zealand bowled out for 67 by the English spinners; he took his listeners through the causes of the crisis; and he explained why the scale of support, from governments and central banks, had been ‘unprecedented’. King’s crucial passage focused on why ‘a major recapitalisation of the banking system was necessary, was the centrepiece of the UK plan (alongside a temporary guarantee of some wholesale funding instruments and provision of central bank liquidity), and was in turn followed by other European countries and the United States’:
Securitised mortgages – that is, collections of mortgages bundled together and sold as securities, including the now infamous US sub-prime mortgages – had been marketed during a period of rising house prices and low interest rates which had masked the riskiness of the underlying loans. By securitising mortgages on such a scale, banks transformed the liquidity of their lending book. They also financed it by short-term wholesale borrowing. But in the light of rising defaults and falling house prices – first in the United States and then elsewhere – investors reassessed the risks inherent in these securities. Perceived as riskier, their values fell and demand for securitisations dwindled. For the same reason, the value of banks’ mortgage books declined. Banks saw the value of their assets fall while their liabilities remained unchanged. The effect was magnified by the very high levels of borrowing relative to capital (or leverage) with which many banks were operating, and the fact that banks had purchased significant quantities of securitised and more complex financial instruments from each other. Not only were these assets difficult to value, but the distribution of losses across the financial system was uncertain. Banks’ share prices fell. Capital was squeezed.
Markets were sending a clear message to banks around the world: they did not have enough capital. At the Annual Meetings of the IMF and World Bank in Washington ten days ago, the message was reinforced by our colleagues from Japan, Sweden and Finland, who, with eloquence and not a little passion, reminded those present of their experience in dealing with a systemic banking failure in the 1990s. Recapitalise and do it now was the lesson. Recapitalisation requires a fiscal response, and that can be done only by governments.
Confidence in the banking system had eroded as the weakness of the capital position became more widely appreciated. But it took a crisis caused by the failure of Lehman Brothers to trigger the coordinated government plan to recapitalise the system. It would be a mistake, however, to think that had Lehman Brothers not failed, a crisis would have been averted. The underlying cause of inadequate capital would eventually have provoked a crisis of one kind or another somewhere else.
‘With the bank recapitalisation plan in place,’ the cricket-loving governor concluded, ‘we now face a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions. The past few weeks have been somewhat too exciting. The actions that were taken were not designed to save the banks as such, but to protect the rest of the economy from the banks. I hope banks will come to appreciate, just as the New Zealanders at Headingley in 1958, the Yorkshire virtues of patience and sound defence when batting on a sticky wicket.’23
The Bank received considerable plaudits for its role in the October measures, with King himself as the semi-acknowledged hero of the recapitalisation moment; but he himself was subsequently to express some regret. Would the UK, he was asked in May 2013 in his final press conference on the economy, be in a better position if that recapitalisation by government had been on a larger scale? ‘The answer to that is yes, and we did say so at the time,’ he replied. ‘Not publicly, but we did make it clear that a more radical recapitalisation was necessary.’ If that was a minority argument, given the political difficulties of tapping the taxpayer even more than was done, so too was the persistent criticism mounted by the economist Tim Congdon. ‘Is the Government’s rescue programme beast or beauty for Britain’s banks?’ he asked in The Times as early as 15 October, two days after the specific capital injections were announced. ‘The leap in share prices has been beautiful for short-term investors in the stock market. But a strong case can be made that the Government has been beastly to the banks, with dangerous long-term consequences for our financial sector.’ He went on to argue that ‘for all their faults Britain’s banks are not insolvent or unprofitable’; that the terms of the deal, with the UK banks being able to access capital only ‘if they handed over to the Government chunks of their equity’, meant that they would now ‘compete head-on with banks from other countries, where the governments are being more lenient’; that it ‘would have been better if the Bank of England had reacted to the recent troubles in the same way that it did, so brilliantly and effectively, in past crises’, which is to say ‘the support should have been pre-emptive and low-key, and it should have come as a traditional lender-of-last-resort loan’; and finally, that the consequence of hasty, ill-judged nationalisation was that Britain’s leadership in ‘international financial services’ was ‘now in extreme peril’. Congdon continued to beat his particular drum for at least the next seven years, culminating in a 2015 article in Standpoint in which he accused the October 2008 recapitalisation of ‘far from stimulating extra bank lending to the private sector’, but being instead ‘a vicious deflationary shock to the British economy, at just the wrong moment in the cycle’.24
Another retrospective strand of the autumn 2008 drama concerned LIBOR – the average interest rate calculated through submissions of interest rates by major banks. For quite some time there had been concern about the possibilities of manipulation. ‘The LIBOR rates are a bit of a fiction,’ the treasurer of a large UK bank told the Financial Times in September 2007; the following spring a Treasury Committee question to King referred to ‘the criticisms of the accuracy and credibility of LIBOR that have been raised by the Association of British Bankers’; and that May, RBS’s chief treasurer emailed Tucker as well as fellow-treasurers to suggest how the process could be reformed in order to prevent traders and managers from inputting artificially low or high figures in order to improve profits or give a misleading impression of their bank’s financial strength. Tucker himself, as head of markets, was in almost daily communication with the City’s CEOs; and on the announcement in late 2008 that he would be succeeding Gieve as next deputy governor for financial stability, the Financial Times noted that ‘he has been at the forefront of Bank efforts to ease the strains in the banking system as financial conditions deteriorated this year, repeatedly modifying the Bank’s money-market operations’.
He was still deputy governor when in summer 2012 a sudden storm broke above his head, prompted by the disclosure by Barclays – which had just been fined huge amounts for systematic misconduct relating to LIBOR – of an email sent on 29 October 2008 from its chief executive, Bob Diamond, to other senior officials at that bank. It read in part:
Further to our last call, Mr Tucker reiterated that he had received calls from a number of senior figures within Whitehall to question why Barclays was always toward the top end of the LIBOR pricing. His response ‘you have to pay what you have to pay’. I asked if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions, his response ‘oh, that would be worse’ …
Mr Tucker stated the level of calls he has received from Whitehall were ‘senior’ and that, while he was certain we did not need advice, it did not always need to be the case that we appeared as high as we have recently.
In July 2012, Tucker appeared twice in quick succession before a Treasury Committee investigation into what had become the LIBOR scandal. He stated that the email’s final sentence gave ‘the wrong impression’ (‘It should have said something along the lines of, “Are you ensuring that you, the senior management of Barclays, are following the day-to-day operations of your money market desk, your treasury? Are you ensuring that they don’t march you over the cliff inadvertently by giving signals that you need to pay up for funds?”’); he acknowledged that he and his colleagues at the Bank were anxious that October about the strength of Barclays, which had controversially refused to take capital support from the government, but he denied categorically that any minister or civil servant had asked him to get Barclays to lower their LIBOR submissions or that he had personally issued any such instruction; and after observing that the key message he wished to convey to Diamond was to make ‘sure that the senior management of Barclays was overseeing the day-to-day money-market operations and treasury operations and funding operations of Barclays so that Barclays’ money desk did not inadvertently send distress signals’, he explained: ‘In actual paying up for money in terms of what you borrow, you do not need to be at the top of the market all of the time. It is very important not to come across as desperate.’ It did not help Tucker’s cause that coinciding with his second tranche of evidence was the revelation of a warm email sent to him by Diamond in December 2008, the day after his appointment to the deputy governorship – a warmth at least partly explained by the fact that Diamond had been one of his two referees for the position.
The Treasury Committee reported in August 2012. ‘We will never know the details of the discussion between Mr Tucker and Mr Diamond,’ it noted. ‘What we do know is that Mr Tucker denied ever having issued an instruction to Barclays whilst Mr Diamond denied having received an instruction from Mr Tucker.’ And after regretting that Tucker had ‘failed to make a contemporaneous note of the conversation’ – an omission ‘explicable’ given the ‘unprecedented pressure on senior Bank of England staff at this time’ – the report concluded: ‘If Mr Tucker, Mr Diamond and Mr del Missier [Jerry del Missier, then president of Barclays Capital] are to be believed, an extraordinary, but conceivably plausible, series of misunderstandings and miscommunications occurred. The evidence that they separately gave describes a combination of circumstances which would excuse all the participants from the charge of deliberate wrongdoing.’25
Back in the autumn of 2008, it became indisputably clear during October that the UK economy was moving into extremely choppy waters. On 6 November the MPC unanimously voted for a 1.5 per cent cut to interest rates – the biggest cut since 1981, and taking them to 3 per cent. ‘Some MPC members were somewhat uncomfortable about their earlier judgements,’ the new chief economist, Spencer Dale, told NedCo the following week, though adding that ‘it was certainly not the case that a small reduction in Bank Rate over the summer would have prevented the financial crisis and its impact on the wider economy’. The new rate of 3 per cent was the lowest since the mid-1950s, but early December saw a further cut to 2 per cent, following a sharp deterioration in the global economy. ‘A nasty recession looks increasingly inevitable,’ observed The Times’s David Wighton. ‘Perhaps we will look back at yesterday’s cut as the beginning of the end of the downturn. More likely, it is the end of the beginning.’ He was correct. Output plunged during the first quarter of 2009, as the UK economy entered a deep recession; and in response, three successive cuts by the MPC took rates by 5 March to a record low of 0.5 per cent, amid general praise for the rapidity and decisiveness of its action. Yet during these unprecedented times – certainly in the working lifetime of anyone at the Bank – the need was palpable for unconventional (or at least apparently unconventional) as well as orthodox instruments of monetary policy.
‘Bank could inject cash directly into economy’ was the Daily Telegraph’s headline in December 2008, reporting that the Bank was considering ‘engaging in so-called “quantitative easing”’; and the following month the government paved the way for QE by announcing the Asset Purchase Facility, not only authorising the Bank to buy up to £50 billion of private sector assets in an attempt to unblock the supply of corporate credit, but also giving the MPC the option to extend the scheme at a later date and pay for assets not with Treasury bills but with newly created money. ‘In contrast to much of the post-war period when the need had been invariably to reduce the supply of money to bring inflation down,’ the governor explained at NedCo’s next meeting, ‘the problem was now a need to increase the money supply and nominal spending. The APF provided a framework to do that.’ That was on 12 February, and a fortnight later he told the Treasury Committee that he had formally asked the chancellor ‘for powers to engage in asset purchases in order to increase the amount of money in the economy’, while emphasising to the MPs that ‘we are not going to allow a great inflationary surge’. Decision day was 5 March 2009, when the MPC unanimously pressed the anti-deflationary QE button as well as making the historic interest rate cut. ‘Quantitative easing is new territory,’ noted the Economist later that week. ‘The Bank of England will buy gilt-edged government securities as well as private assets to the tune of £75 billion, and, crucially, will pay for this with its own money. That alarms many people, who fear that the border being crossed may be an inflationary rubicon. For though the Bank of England will pay for the purchases by crediting the accounts of commercial banks, it is creating money just as surely as if it were printing notes.’
‘New-fangled’ was a favourite term used by commentators to describe QE, but perhaps they exaggerated. ‘Open-market operations to exchange money for government securities have long been a traditional tool of central banks,’ King would point out in 2016, ‘and were used regularly in the UK during the 1980s, when they were given the descriptions “overfunding” and “underfunding”. What was new in the crisis was the sheer scale of the bond purchases …’ Would it work? Dale publicly admitted later in March to ‘considerable uncertainty over the timing of the impact of the monetary expansion on nominal spending’, while Vince Heaney offered in Financial World a sceptical analysis of the efficacy of creating new electronic money. The Japanese precedent, he argued, was far from conclusive evidence for this otherwise ‘untested policy tool, which some fear at its logical extreme could unleash Zimbabwe-style hyperinflation’; moreover, ‘nobody knows how much quantitative easing is required’, given that ‘increasing money supply in the hope of boosting nominal demand can only succeed if the rate at which money circulates (velocity) does not fall’; there was also the possibility that ‘banks looking to shrink their balance sheets might hoard a lot of the new money, rendering much of the potential stimulus ineffective’; ‘the impact on long-term borrowing rates is not clear-cut either’; and in short, concluded Heaney, ‘QE is no panacea and it will not ensure a return to growth at anything like the pace the Bank is hoping for.’ Among the cheerleaders, however, was Congdon, who as a veteran monetarist was pleased to see money back in the centre of the policy picture, albeit concluding that QE should have begun the previous autumn – instead of recapitalisation. ‘Although the cash injected into the economy by the Bank of England’s quantitative easing may in the first instance be held by pension funds, insurance companies and other financial institutions,’ he wrote in optimistic mood two months or so after QE was under way, ‘it soon passes to profitable companies with strong balance sheets and then to marginal businesses with weak balance sheets, and so on. The cash strains throughout the economy are eliminated, asset prices recover, and demand, output and employment all revive.’26
The financial-cum-banking crisis as such, which had started with the credit crunch and Northern Rock in August–September 2007, ended in spring 2009 when the dangerously exposed Dunfermline Building Society – Scotland’s largest – underwent a forced sale of much of its business to Nationwide, with the Bank deploying its recently granted Special Resolution Regime powers. Over the next few years, the question became increasingly insistent – especially from the Treasury Committee’s chairman, Andrew Tyrie – of whether the Bank would undertake a full-scale inquiry into how it had performed during the whole crisis, including the lead-up to it, while Tyrie also pressed for the Bank to reveal to him and his fellow-MPs the minutes of the Court between 2007 and 2009. In both cases the Bank declined to play ball, but it did in May 2012 announce that it was commissioning three reviews into specific aspects of the Bank and the crisis: by Ian Plenderleith (who had retired ten years earlier) into the Emergency Liquidity Assistance; by the banker Bill Winters into how the Bank’s money market operations had functioned; and by David Stockton, a former chief economist at the Fed, into the Bank’s record of forecasting inflation and growth. ‘The Court of the Bank of England believes it is important for the Bank,’ declared the Court’s chairman, Sir David Lees, ‘to learn practical lessons from past experience in order to improve the way it operates in the future.’ That threefold move failed to mollify Tyrie: ‘What is needed is a comprehensive review by the Bank of its performance through the course of the crisis from which we can all draw lessons. That review should have been done much earlier …’ Lord Myners, former City minister and once on the Court himself, agreed: ‘I would say there is a feeling of teeth being drawn and the governor selecting which teeth he’s allowing to be removed.’27 The trio of reviews duly appeared in October 2012; and for all their competence, they undoubtedly did not add up to a 360-degree conspectus of the Bank during the crisis years. As for Court minutes during that period, the Bank did eventually in January 2015 release them (online, in somewhat redacted form); but inevitably, in the absence of the record of the key meetings held between the key executives, and of day-to-day exchanges of views and information, their contribution is relatively marginal to our understanding of how it all unfolded in Threadneedle Street. For the moment, the rest is silence.
The financial crisis could not but have a raft of consequences, not least in relation to regulation and supervision. In early 2009 the shadow chancellor, George Osborne, commissioned the Sassoon report into the tripartite system that the current prime minister, Gordon Brown, had established in 1997. Sassoon’s verdict, delivered in March 2009, was as damning as perhaps Osborne had hoped for: poorly defined powers and responsibilities in terms of taking pre-emptive action; the absence of appropriate instruments to mitigate risks; inadequate enforcement of existing prudential regulation; and a glaring lack of co-ordination. His main proposal was that the Bank should have ‘the primary responsibility for evaluating systemic threats to financial stability’. Three months later, the City veteran Sir Martin Jacomb produced for the Centre for Policy Studies a report boldly entitled ‘Re-empower the Bank of England’ – calling tripartism ‘a disaster’ and arguing that ‘the central flaw in the restructuring was the removal of the Bank of England’s role in supervising individual banks’ – while in July the Tories published a ‘White Paper’ that declared the party’s intention to abolish the FSA and to give enhanced powers to the Bank, including the establishment there of a Financial Policy Committee (FPC) that would complement the existing MPC. The general election of May 2010 brought the Tories to power as the dominant coalition partner, and the following month the new chancellor used his Mansion House speech to confirm the abolition of the FSA and to explain that prudential regulation would return to the Bank (in the form of a subsidiary organisation), feeding intelligence back to the new FPC, which in turn would be given tools to halt a dangerous build-up of credit or asset bubbles. ‘Only independent central banks,’ declared Osborne, ‘have the broad macro-economic understanding, the authority and the knowledge required to make the kind of macro-prudential judgements that are required now and in the future.’
For all Bank-watchers, it was a dramatic turn of events. ‘Does the Bank of England Deserve More Power?’ asked Richard Northedge in the Spectator as early as June 2009 – a question he answered only marginally in the affirmative, while soon afterwards the Evening Standard’s Anthony Hilton responded to the ersatz ‘White Paper’ by not only itemising the Bank’s pre-1997 ‘disasters’ (secondary banking crisis, Johnson Matthey, BCCI, Barings) but also asking the pointed question of his own, ‘What Bank will jack up interest rates for the good of the economy if it thinks such an action will bust half the banks it is supposed to be supervising?’ The commentariat also offered a degree of scepticism after Osborne’s Mansion House speech, typified by Chris Blackhurst in the same paper. The Tory abolition of the FSA was, he surmised, ‘politically motivated’, with ‘Brown’s creation always going to be in their sights’; the Bank had done no better than the FSA in anticipating the banking meltdown, with the governor ‘appearing just as startled as anyone else by the swiftness of events, both here and in the US’; and altogether, ‘the nagging worry about the Osborne model is that it won’t change very much’. A month after Osborne’s speech, the Treasury produced a consultation paper. ‘The Bank will be pretty much in charge of everything,’ commented the Independent’s Sean O’Grady. ‘Indeed, this is much more than a return to the pre-1997 position, when the Bank was solely in charge of banks’ supervision. It now has insurance firms, hedge funds and who knows what else under its wing, bodies that were under an alphabet soup of “self-regulation” agencies in the old days.’ A last word at this point went to Charles Goodhart, by now a professor at the LSE. ‘There is a danger,’ he told the press in September 2010, ‘when you are putting so much power in one institution.’28
What part if any had the Bank played in the death sentence for the FSA and the return of supervision? The simple answer is that we will not know until the full records become available – and that assumptions of turf wars, power grabs and party-political manoeuvring may well be far from the whole truth. Indeed, the run of records we do have, primarily the NedCo minutes during the crisis, suggests a significant division of opinion at the Bank, at least at one stage. Those minutes for April 2008 reveal the non-executive directors ‘agreed that there was a powerful case for the Bank to take a greater role in prudential supervision’, but that ‘that was not supported by the executive management’. The latter, with King almost certainly to the fore, spelled out their case:
The potential reputational damage to monetary policy from a central bank having responsibility for supervising financial institutions was one of the main motivations behind the current UK regime. Although related, there were important differences between monetary and financial stability. In a fundamental sense, it was possible to achieve the former but not the latter. No regulatory regime could ensure that there would not be another financial crisis or bank failure. It was possible to limit the impact and improve regulation, but financial crises were endemic. A second argument was that it would be difficult to identify a set of institutions that the central bank could plausibly regulate on a day by day basis, while maintaining the focus of the senior team on monetary policy. It will always be likely that, in retrospect, the criteria were judged to be wrong …
Later that month, asked by the Treasury Committee about what he understood to be the government’s thinking, the governor answered carefully but firmly: ‘I think that there is agreement that, if the Bank is given powers, then it will require the resources and be held accountable for the exercise of those powers. What I think we cannot do is to accept a responsibility for something that we are in no position to deliver …’
Of course, that year’s autumn traumas still lay ahead, and it is possible that by the early months of 2009 there was a greater appetite at the Bank for an enhanced role, especially in the context of that year’s Banking Act giving statutory form to its existing financial stability functions. NedCo in February continued to discuss its concern about ‘the Bank’s ability to meet its responsibilities for financial stability with limited powers and without direct access to information’, noting that ‘the inability to drill down to the level of an individual institution’s accounts and balance sheet in order to build up a picture of the system as a whole remained a large deficiency’; Tucker the following month gave a speech addressing in some detail various key issues in micro-prudential regulation, including the need to have supervisors with the bottle to face down bank management where necessary; and at NedCo in April, ‘it was stressed that the Bank was in a hazardous position at present’, given that ‘it had to progress the debate without putting itself in the position of either being or being perceived to be a shadow supervisor’. Then in June 2009 came King’s controversial Mansion House speech, rightly or wrongly interpreted by the press as a bid for greater supervisory powers. One passage received particular attention:
To achieve financial stability the powers of the Bank are limited to those of voice and the new resolution powers. The Bank finds itself in a position rather like that of a church whose congregation attends weddings and burials but ignores the sermons in between. Like the church, we cannot promise that bad things won’t happen to our flock – the prevention of all financial crises is in neither our nor anyone else’s power, as a study of history or human nature would reveal. And experience suggests that attempts to encourage a better life through the power of voice is not enough. Warnings are unlikely to be effective when people are being asked to change behaviour which seems to them highly profitable. So it is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials.
Soon afterwards, the governor emphasised to the Treasury Committee that ‘what matters is that powers and responsibilities must be aligned’ and that ‘I am not forming any judgement about what powers the Bank of England should have at all.’ The Tory ‘White Paper’ démarche followed in July, and finally of course, eleven months later, the new chancellor’s Mansion House speech.
King in his response welcomed the announcements; promised that the Bank would ‘bring its own central banking culture’ to the new dispensation, seeking ‘to avoid an overly legalistic culture with its associated compliance-driven style of regulation’; and observed that ‘just as the role of a central bank in monetary policy is to take the punch bowl away just as the party gets going, its role in financial stability should be to turn down the music when the dancing gets a little too wild’. Did he have any qualms? Next month, the Treasury Committee’s Chuka Umunna asked him ‘to set the record straight as to whether you did actually want to take on oversight of financial regulation’ – to which the governor replied that ‘I changed my mind after the crisis when I saw that, first of all, despite the fact that we have absolutely no responsibility for banking supervision, it seemed to make absolutely no difference to the degree of reputational contamination and that, more importantly, when big banks did get into trouble, as a lender of last resort, the central bank was inextricably drawn into the minutiae of dealing with the regulation of liquidity and capital of those banks’. He responded to another questioner: ‘We have quite deliberately not put consumer protection or market conduct in and the responsibilities are limited to prudential because that is what a central bank can do, so I think it is clarity of responsibility … it is asking the central bank to do what the central bank can do and not go beyond that.’29
Although an interim Financial Policy Committee (a mixture, like the MPC, of internal and external members) started to meet in June 2011, it was not until April 2013 that the new set-up came fully into effect, with the Prudential Regulation Authority (headed by Andrew Bailey, private secretary to Eddie George back in those very different May 1997 days) open for business at 20 Moorgate, once belonging to Cazenove. Intimately involved at the Bank was Tucker as deputy governor for financial stability, and towards the end of May 2013 he spoke to the Institute for Government about the new system. The text released by the Bank made use of bullet points, around which he framed his remarks, first about the PRA:
• Bank of England is once again the prudential supervisor of banks. And this time of building societies and insurance companies too.
• Prominence given in public debate to the Bank absolutely not adopting a ‘tick box’ approach, but instead a ‘judgement-based’ approach. This has been widely applauded.
• In fact, market practitioners tend to be schizophrenic about it. For a couple of decades at least, they have called for ‘certainty’ whenever any specific, isolated policy area is being reformed; i.e. clear and complete rules. But taking the resulting monstrous rule books as a whole, senior practitioners rightly condemn the ‘tick box’ regulation that almost inevitably results.
• And leaders of firms have hardly stopped their staff from making a living finding ways around rules: endemic regulatory arbitrage was at the heart of so-called ‘shadow banking’ in the run up to the crisis.
• Step back to consider the public policy purpose. Contrast prudential supervision with securities regulation as traditionally conceived. Latter works on basis of: write rules; check compliance with those rules; punish breaches. If the rules proved to be flawed, they should still be enforced, for credibility’s sake; but later changes should be made to the rules.
• Animating spirit of ‘prudential supervision’ is completely different. Impossible to write down a complete (or even adequate) set of binding rules on the financial health of a bank (or on the substance of the professional competence of bankers). Instead, things like capital ratios or liquidity ratios are really indicators of financial health.
• This is reminiscent of an old debate in monetary policy. Thirty-odd years ago, policy was meant more or less mechanically to follow targets for broad or narrow monetary aggregates. It didn’t work: the economic world was not sufficiently stable. Since we adopted inflation targeting, central banks have had an eclectic approach to indicators. We are constrained by a clear medium-term objective (2% CPI target), but do not use a set of supposedly fool-proof core intermediate indicators.
• No more can we write down hard and fast rules on bank balance sheets.
• Nor, consistent with Parliament’s wishes, is the Prudential Regulation Authority seeking to achieve a zero-failure regime. The failure of individual firms has to be an acceptable outcome so long as they can be wound down in an orderly way.
• So the PRA’s approach to prudential supervision entails making judgements of the kind:
– your bank isn’t as strong as you think it is
– cut back on the risk in your book
– I’m afraid you’re not fit to run the bank
– your business could not be resolved in an orderly way if it fails.
• This shift from rules to judgement changes the relationship between the regulator and business.
• Challenge is how to make a judgement-based approach acceptable when we use it in earnest. Is our society really ready again for judgements from the Old Lady?
Later in his talk, he turned to macro-prudential policy, in the form of the FPC (no longer interim):
• … Can view the role of the FPC as being to ensure that the need for stability in the financial system is not overlooked. Looking ahead, this will mean keeping the regulatory regime up-to-date as the financial system evolves and, when the time comes, ‘taking away the punchbowl’ before the next party gets as dangerously out of control as the last one did.
• The case for operational independence here is just as strong as for monetary policy. Taking Away The Punchbowl is something that requires a medium-term orientation. Parliament can tie us to the mast and rely on us not to seek to wriggle free.
• But, as with monetary policy, this makes it vital that Parliament frames the objective and that we are sufficiently transparent to enable ex ante public accountability.
• Objective: The legislation governing the FPC is clear that resilience of the system as a whole is the primary goal but that we must not aim for the stability of the graveyard. Resilience is not quantified, however.
• Transparency: While respecting the confidentiality of data on individual firms, FPC is required by Parliament to be as transparent as possible – via the Published Record of our policy meetings and the twice-yearly Financial Stability Report.
• This is the background to the FPC calling on the Bank to develop a regime for stress testing to be used for both micro and macro prudential supervision.
• One possibility is for FPC to use stress tests to define the degree of resilience the system needs. Maybe that could become to financial stability what forecasting is to monetary policy. In the USA and elsewhere the results of such stress tests have been published.
• That represents quite a change in regime for regulated firms. But neither the markets nor the public was comfortable with the degree of secrecy on these matters in the past.
It all added up to a major moment. ‘Supervision and central banking grew apart in this country and they’re now being reconnected,’ Tucker told the Guardian earlier that spring. ‘Given where this country finds itself, that is a very good thing. It was always the historic mission of the Bank of England to look after stability.’ And in June, less than a fortnight before the end of King’s governorship, the impact was considerable when the PRA published its stress-test findings, revealing that five out of the eight major UK banks and building societies fell short of the PRA’s required standard for capital resources.30
The first four post-crisis years – summer 2009 to summer 2013 – also saw a sustained focus on the Bank’s role in seeking to support and nourish the British economy as it only slowly and patchily recovered. Three areas were arguably key, with each provoking significant external criticism: lending; QE; and monetary policy more generally.
‘It is heartbreaking sometimes,’ was how King in July 2010 described to the Treasury Committee his experience of hearing from small to medium-sized companies across the country how hard they were finding it to obtain bank loans, even if they had built long-term relationships with those banks. ‘It is a lot harder to run a business out there’, he added, ‘than it is to stay in London and just trade away and make what appears to be millions one day and minus millions the next.’ King did not blame the banks alone. By October 2011 he was criticising the Treasury for failing to insist that the big lenders it owned – RBS and Lloyds Banking Group – increased their lending to SMEs (Small and Medium Enterprises); while in March 2013 he reiterated an earlier call (expressed soon after the bank’s collapse) that RBS should be broken up, in effect into a ‘good’ bank doing normal business and a ‘bad’ bank housing the troublesome loans (inevitably involving for government a big, up-front loss), so that the ‘good’ bank could become ‘a major lender to the UK economy’ and rapidly return to private ownership. Largely off its own bat (though in collaboration with the Treasury), the Bank’s key initiative came in June 2012 with the announcement of a scheme known as ‘funding for lending’ that would come into operation in August and in essence provide banks with cheap funding in exchange for a commitment from lenders to provide cheap loans to ordinary businesses and households. ‘The question is whether the cost of funding is the binding constraint on lending by banks,’ observed the Financial Times’s Martin Wolf. ‘Far more important, I suspect, are the risk aversion of banks and the state of potential borrowers: those who are credit worthy do not wish to borrow; those who want to borrow are not credit worthy, at least in the current enfeebled state of the economy.’ In the event, the majority of the £80 billion scheme went during its first year to homebuyers, not small businesses – which was not quite the original intention. The Bank was also becoming vulnerable to criticism on the score that its insistence (whether through the FPC or the PRA) on banks holding sufficient capital perhaps acted as a significant deterrent to their lending. ‘The idea that banks should be forced to raise new capital during a period of recession is an erroneous one,’ declared Vince Cable in March 2013; but King was adamant that ‘a weak banking system does not expand lending’ and that ‘the better-capitalised banks are the ones expanding lending’. Some months later the business secretary would be using and endorsing the phrase ‘capital Taliban’ to describe Bank officials, though by then a new governor was in post.31
Elsewhere on the policy front, ‘new-fangled’ quantitative easing became during these years a semi-fixture. Having started in March 2009 with the Bank committing to the purchase of £75 billion in assets (mainly gilts) through the creation of electronic money, the programme continued later in 2009 with a further £50 billion in May, £50 billion in August and £25 billion in November – taking the QE total to a fairly staggering £200 billion, equivalent to 14 per cent of nominal GDP. Expert opinion was broadly, if far from unanimously, positive about this attempt to achieve higher asset prices, thereby reducing the cost of funding and increasing the wealth of asset holders, in turn boosting spending and increasing nominal demand. A typically measured assessment came in March 2010 from the City economist Roger Bootle, who concluded that the Bank had been right to launch QE (‘the only game in town’) and that it had helped significantly to strengthen asset prices and to counter the deflationary threat. In due course, the Bank itself offered some hard figures, claiming that its first full round of QE had boosted Britain’s GDP by up to 2 percentage points and inflation by up to 1.5 points.
‘Open the taps’ was the Economist’s cry at the start of October 2011, against the background of what it called ‘a sickly economy’. Within a week the MPC obliged, starting a new round of QE (soon known as QE2) with £75 billion of asset purchases, followed in February and July 2012 by two further tranches of £50 billion – taking the grand total, since March 2009, to £375 billion. A fresh round sparked fresh appraisals, prompting one economist, Richard Barwell, to devote an article in The Times in February 2012 to debunking five ‘QE myths’: namely, that ‘printing money inevitably leads to rampant inflation’; that QE was ‘a cunning plan concocted by the Bank and the Treasury to inflate away the Government’s debt on the sly’; that QE was ‘ineffective because asset purchases have no impact on the real economy’; that QE was ‘ineffective because the money that the MPC created is being hoarded in bank vaults’; and finally, that ‘asset purchases suffer from diminishing returns – that is, the more the Bank buys, the less impact each billion of purchases has’. Predictably enough, dissenting voices remained. Soon afterwards, Robert Skidelsky and Felix Martin argued that, although it had done good initial work to ‘stop the slide into another Great Depression’, QE’s fatal double flaw ‘as a recovery policy’ was that ‘its effect on aggregate demand is weak and uncertain’, with new money failing to be translated into increased spending, and that ‘QE does nothing to improve longer-term growth prospects’, given that it ‘simply freezes the existing [imbalanced] structure of the economy at a higher level of output’; while also that spring one of the most persistent attack dogs on QE, the Guardian columnist Simon Jenkins, was unequivocal that the policy had indeed done no more than fill bank vaults – ‘it has helped banks back to profitability but there is no sign the policy has had any impact on credit to businesses, let alone on domestic money supply’ – and he called it ‘the costliest fiasco in regulatory history’.32
In any case, there were before long increasing signs of a loss of confidence in QE at the Bank itself. QE had, Tucker publicly admitted in October 2012, ‘lost its bite’; and by June 2013 the MPC had voted against more QE for eleven consecutive months. Looking ahead that month to the policy options facing King’s successor, the prominent City economist George Magnus bluntly stated that ‘QE cannot address the dearth of investment, low productivity, weak trade or the handicapped financial system.’ What about King himself? Had QE, he was asked by Martin Wolf in a valedictory interview, worked as he had hoped? ‘I’ve always seen this as a way of increasing the broader money supply,’ replied the governor. ‘And the thing that’s so extraordinary is that, for the past few years, the banking system, which is normally responsible for creating 95 per cent of broad money, has been contracting its part of the money supply. And since we at the Bank only supply about 5 per cent of it, the proportional increase in our bid has to be massive to offset the contraction of the rest.’ Wolf then queried whether the Bank should have been more adventurous and purchased riskier assets. ‘No, right from the beginning I said that if other assets should be purchased, and I took no view as to whether they should or should not, then the government should decide on which assets are purchased, and we would finance it. I think that’s the right division of labour between central bank and the finance ministry.’
There was also the whole matter, when it came to assessing QE, of unintended consequences. ‘QE’, declared Ros Altmann (pension expert and director general of Saga) in November 2010, ‘is the worst thing that could happen to pensions, it is devaluing and destroying pensioners’ income’; and the following autumn, Tucker felt compelled to argue not only that pension assets would have been ‘potentially worth much less’ if the Bank had not acted, but also – in response to complaints from savers generally – that ‘to have allowed the economy to lurch down into a spiral or vortex would have been hugely destructive for savers’. Particularly outspoken was Nassim Taleb, author of the bestselling Black Swan. ‘Quantitative easing is a transfer of wealth from the poor to the rich,’ he asserted in February 2012. ‘It floods banks with money, which they use to pay themselves bonuses. The banks have money, and assets, so they can borrow easily. The poor guy, who is unemployed and can’t borrow, is not going to benefit from it. The state is subsidising the rich. It is the top 1 per cent who benefit from quantitative easing, not the 99 per cent.’ Indeed, that same year the Bank itself estimated that 40 per cent of the £600 billion increase in the value of stocks and bonds since 2009 had accrued to the richest 5 per cent of households. Or as Magnus would note, ‘QE has been called welfare for the rich.’33 At the least, that uncomfortable fact made it a policy with an uncertain future.
A further source of uneasiness during these last four years of King’s governorship was the Bank’s somewhat erratic forecasting record – usually underestimating inflation and overestimating growth. It was, moreover, that short-term relationship between those two concerns, inflation and growth, that provided perhaps the hardest judgement calls for King and his MPC colleagues. The early months of 2011 were especially testing. Commentators on the whole backed their decision to keep interest rates at the record low of 0.5 per cent, even as inflation pushed towards 4 per cent. ‘What would be absolutely disastrous,’ argued for instance Anthony Hilton, ‘would be for King and the other rate-setters to give in to the pressure from many who should know better, including the Prime Minister [David Cameron], and lift interest rates to try to stop the current round of price rises. Such an act would be more likely to stifle the economy.’ Even so, as The Times’s Sam Fleming pointed out, ‘the Bank is still living dangerously’:
For 20 years governments and central banks have been basing anti-inflation policy not on a backward-looking model of the economy that reacts to reported trends, but by looking forward. Shaping public and market inflation expectations so that prices do not spiral out of control has defined their strategy. So the suggestion that the credibility of the Bank of England is under question because of persistent inflation overshoots is not an academic debating point, it is a dagger aimed at the heart of monetary policy. Put simply, the longer that inflation exceeds the Bank’s 2 per cent target [reduced in 2003 from the original 2.5 per cent], the harder it becomes for Mervyn King and his committee to argue that that target has relevance. This could ‘de-anchor’ inflation expectations and undermine monetary stability.
Inside the MPC, the most hawkish noises came from an external member, Andrew Sentance, who from summer 2010 consistently voted for higher rates and in February 2011 publicly argued, with a nod to sterling’s declining external value and a 1973 Genesis album, that ‘by raising interest rates sooner rather than later to help offset global inflationary pressures, the MPC can help reassure the financial markets and the great British public that we remain true to our inflation target remit and are not intent on “Selling England by the Pound”’. King, equally publicly, disagreed. With his own cultural nod (to the Battle of Britain sketch in Beyond the Fringe), he declared that to put up interest rates too soon would be a comparable ‘futile gesture’. Or as he explained in June in his annual Mansion Speech: ‘We could have raised Bank rate significantly so that inflation today would be closer to the target. But that would not have prevented the squeeze on living standards arising from higher oil and commodity prices and the measures necessary to reduce our twin deficits. And it would have meant a weaker recovery, or even further falls in output, despite our having experienced the worst downturn in output and spending since the Depression.’ Two years later, on the eve of the governor’s departure, the Economist paid a notable tribute:
He has responded adeptly to a nasty combination of economic weakness and price pressures. Oil and regulated prices (things like VAT and university fees) have pushed inflation as high as 5%. Bringing inflation back to the 2% target by raising interest rates would kill Britain’s feeble recovery. Some brands of monetary policy, notably the European Central Bank’s, have been too hawkish. Sir Mervyn’s is more subtle. He has allowed inflation to remain above target for the past four years while frequently confirming his commitment to that target. Somehow this has worked. The Bank’s credibility as an inflation targeter is intact: firms and workers still expect inflation to be close to 2%.
All that said, the paper fully conceded that the next governor would find it ‘a difficult line to tread’.34
Would it be helpful, some wondered, to change the MPC’s remit? David Wighton offered in December 2012 a helpful commentary:
When the Bank of England got control of monetary policy in 1997, it was given a simple goal. It was to set interest rates to meet a 2 per cent target for inflation [in fact 2.5 per cent in 1997]. The arrangement arguably worked pretty well for the first decade. But now the problems facing the economy are so severe that there are increasing calls to change the goal from a simple focus on the control of inflation to one that includes growth.
While Sir Mervyn is against changing the target, the suspicion is that the Bank has already done so without telling anyone. Over the past three years inflation has been more than 3 per cent for 80 per cent of the time but the Bank has seemed more concerned about growth. At times it has appeared that the Bank’s target is not inflation but growth plus inflation, or in the jargon, nominal GDP growth. This is just what some top economists think it should do explicitly.
The governor was indeed opposed, telling a Belfast audience in January 2013 that ‘to drop the objective of low inflation would be to forget a lesson from our post-war history’, reminding them of how ‘the painful experience of the 1970s’ revealed the ‘illusion’ of the policy-makers of the 1960s in ‘trying to target an unrealistic growth rate for the economy as a whole, while pretending that its pursuit was consistent with stable inflation’. And he asserted unambiguously: ‘Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. So a long-run target of 2% inflation should be an essential part of our macroeconomic framework.’ Two months later, shortly before the March budget, King was still making similar noises – ‘I’m not sure there is any call for major change in the remit,’ he told ITV News, adding that ‘most important is the commitment to the [inflation] target of 2%’ – but the chancellor (whether or not influenced by the governor in waiting is impossible to know) decided otherwise, at least to a degree. ‘As we’ve seen over the past five years,’ observed Osborne in his budget speech, ‘low and stable inflation is a necessary but not sufficient condition for prosperity. The new remit explicitly tasks the MPC with setting out clearly the trade-offs it has made in deciding how long it will be before inflation returns to target.’ It was undeniably a change – but it was not as dramatic a change as some had expected, keeping as it did the 2 per cent inflation target and refraining from nominal GDP targeting in order to prioritise growth over inflation.35 In short, the cherished 1990s dispensation was still alive, if not exactly well.
Broadly speaking, the post-1997 Bank became not only a leaner organisation (well under 2,000 staff by 2006), but also a less paternalistic and less balanced organisation. In 1997 itself, that autumn saw the closure of the branches in Manchester, Birmingham, Bristol and Newcastle, with only the Leeds branch – becoming the Bank’s North of England cash centre – remaining; while the Bank’s dozen agents now concentrated on assessing the economy in their own areas, via a range of some 8,000 business contacts across the UK, and in turn reporting direct to the MPC. Six years later, marking the end in 2003 of George’s governorship, Elizabeth Hennessy noted some other domestic developments: the printing of banknotes had recently been contracted out (to De La Rue, leasing the Printing Works at Debden for an initial period of seven years); the registrar’s department, having moved to Gloucester, was under threat of closure (which duly happened in 2004, its work being outsourced to a normal registrar’s company called Computershare); and there was a significantly different daily environment:
While many of the outposts of the Bank have been closed or, like the staff dining rooms which used to be housed in a building in nearby King’s Arms Yard, brought back into Threadneedle Street, the physical workplace has been much improved for the decreasing numbers of staff. Many of the warrens of small offices housing clerks in strict hierarchies have been thrown open into large, light workspaces – no mean achievement considering the feet-thick walls which have to be demolished or penetrated by cabling.
Paternalism had of course been in decline for quite a time, but it now almost vanished. Indicators included the closure in 1998 of the Staff Library; the end around the turn of the century of such key perks as assistance with mortgages and school fees; and in December 2007 the final issue of the Old Lady, still loyally read by pensioners but of relatively little interest to current employees. The imbalance, meanwhile, came partly from the loss of banking supervision and debt management, partly from what felt to some like the almost complete dominance of Monetary Analysis. ‘I recognise that there are morale issues in Banking Services,’ observed in 2004 the new chief cashier, Andrew Bailey. ‘Job insecurity has followed from the perception that Banking Services is a declining, fringe area that has suffered from attritional cutting and cutting.’ He also reflected that ‘the Bank has not served its non-graduate staff well – we have not invested in them as we should have done’. Two years later, an outside consultant, Valerie Hamilton, recorded a telling episode:
I had been leading a workshop on change management for a group of workers who were confronted with a significant increase in the use of technology in their jobs and a huge shift in the nature of their relationship with the Economists they supported. They were resisting, angry and hostile. When I eventually managed to engage them, one woman thumped the table and declared in opposition to something I had said regarding the needs of ‘the Bank’, ‘We are the Bank, not the graduates who come and go, get Bank of England on their c.v. and then disappear. We are the Bank.’ She of course had a point.36
In fact, on the domestic front, there were some positive signs during King’s governorship. The Banking Department started to return more to the centre of the Bank; more systematic attention began to be paid to the careers of non-graduates, including career planning for secretaries and a new induction programme; and there was even an apprenticeship scheme for engineers working in the Bank’s power plant. As for the economists, they were not exactly returned to the ranks as a result of the crisis, but it was undoubtedly a salutary experience.
What about the thorny issue of diversity? Merlyn Lowther was appointed in 1998 as the twenty-ninth chief cashier – the first woman to fill that time-honoured if no longer so powerful position; while Rachel Lomax in 2003 became deputy governor, the most senior woman yet in the Bank’s history. Across the board, however, there was an undeniably long way still to go. ‘There aren’t enough women at the top; nor are we well represented among the ethnic minorities,’ the HR director, Louise Redmond, told the Old Lady in 2006. And she explained how a staff consultation survey had highlighted two problems: ‘a long-hours culture’ and inadequate ‘career opportunities and development for our A-level entrants’. Two years later she presented to NedCo the latest staff survey, which to judge by the discussion had produced mixed results. Not so good in terms of recruitment from ethnic minorities (with possible factors including ‘some resistance within the British Asian community about entering the public sector in view of the lower earnings potential’ and ‘the low proportion of Afro-Caribbean students at UK universities’); but greater optimism ‘about progress around gender, where the new flexible working programme was due to be launched’. Change then did seem to speed up. ‘I recently met with the 2012 new recruits at the Bank of England, and noticed that almost half the people in the room were women and many were also non-white,’ noted Gillian Tett in 2013. ‘Strikingly,’ she added, ‘there was also a large number of people who had not studied economics.’ Even so, as of late 2012, the facts were that all nine members of the MPC were men; ditto all eleven members of the FPC; of the Bank’s three governors (that is, King and two deputies) and ten other executive directors, only one was a woman, and predictably she was in charge of HR; while on the twelve-strong Court the sole non-male was Lady Rice. There was also the much publicised matter of the £5 note and who would replace Elizabeth Fry, herself one of only two women on banknotes since historical figures had been introduced over forty years earlier. By the early summer of 2013 a brilliantly effective feminist campaign, led by Caroline Criado-Perez, was under way protesting about the choice of yet another man – admittedly Winston Churchill – as Fry’s successor. Ultimately, a compromise was achieved: Churchill stayed, but that July it was announced that Jane Austen would become the new face of the £10 note. ‘Without this campaign, without the 35,000 people who signed our Change.org petition,’ responded Criado-Perez, ‘the Bank of England would have unthinkingly airbrushed women out of history. We warmly welcome this move from the Bank …’37
A direct consequence of independence in 1997 was a sustained attempt to become significantly more outward facing, not least through the MPC’s members. ‘Slowing down demand by raising interest rates involves costs,’ Willem Buiter told the Old Lady in 1998. ‘People are going to be adversely affected, they’re going to have bear the costs – and they have a right to complain. We have to be capable of answering their complaints. You cannot just give a “mind your own business, we’re looking after the good of the economy, we feel your pain” kind of answer. You have to take these things very seriously and be ready to stand up and explain and defend yourselves.’ Ten years later, the outgoing director in charge of communications, Peter Rodgers, summarised for NedCo the broadly encouraging bigger picture since those early days of independence:
It was notable that understanding about monetary policy had increased significantly amongst market and media commentators. In 1998, the MPC had faced intense criticism about its response to the threat of recession. That contrasted with the present debate which, although often critical, was centred on an understanding about the dilemma facing the MPC. The fact that the MPC had undertaken visits around the UK for over a decade had helped establish that it was setting policy for the country as a whole, and was not an ivory tower or representing the City.
The direction of travel was more or less one way. ‘A transformation in the Bank’s approach to external communications and transparency,’ was how Andy Haldane would put it in a 2012 speech:
Think back twenty years. Then, there were no quarterly Inflation Reports, no six-monthly Financial Stability Reports and certainly no press conferences to accompany both. Twenty years ago, there were no minutes of the deliberations of the Bank’s policy committees. Back then, press interviews were rare and scripted to within an inch of their life. In the past year, Bank officials gave around 65 speeches and over 200 press interviews. In Montagu Norman’s day, the combined total was one … Earlier this year, the Governor gave the Bank’s first live peacetime radio address to the nation for 73 years. The Bank tweets, fortunately with rather less vigour than your average premiership footballer. Soon we will have, for the first time in history, published minutes of the Bank’s Court of Directors … In 2011, a word search of ‘Mervyn King’ in the press revealed more hits than ‘Kylie Minogue’ …38
King himself took the third word – England – of the Bank’s name very seriously, undertaking more frequent engagements in the provinces (and of course Scotland, Wales and Northern Ireland) than any of his predecessors, not to mention speaking at the TUC and appearing on Test Match Special. Almost certainly, and accentuated by the crisis, there had been no previous governor as well known to the public at large, with perhaps Norman and George in their very different ways having run him closest.
Central to the repositioning of the Bank was, as Rodgers mentioned, the new distance from the City – the refusal to continue to be identified as the financial sector’s invariably protective, sometimes one-eyed ‘mother hen’. The key announcement, although to King’s subsequent regret not quite spelling out how the Bank was moving away more generally from its ‘third’ core purpose (essentially interventionist) as established in the early 1990s, came in June 2004 in his first Mansion House speech. After reflecting on how the loss of banking supervision in 1997 had ‘inevitably changed the Bank’s relationship with the City and the financial sector more generally’, he argued that the opportunity now existed to ‘restate’ how the Bank saw that relationship:
Since Big Bang in 1986, the City has changed beyond all recognition. The so-called ‘Wimbledonisation’ of the City – hosting a successful tournament where most of the winners come from overseas – has proceeded apace. Some have blamed the Bank, among others, for failing to engineer the promotion of more British institutions to the top ranks of global financial institutions. But in fact there are now some home players in the top ten in the world. And there is little evidence that it makes sense for the public sector to try to identify national champions, as opposed to creating an environment which encourages innovation and provides first-rate infrastructure.
The Bank is, and always will be, deeply involved in the City and those who work here. We operate in markets daily; we stand at the centre of – indeed underpin – the payments system; we have a close interest in settlement systems. But our involvement is from the perspective of the public interest, not the defence of particular private interests …
If those remarks suggested a new degree of objectivity in relation to the City, that objectivity was taken to a higher level by the crisis. The crucial pronouncement was in October 2009, when the governor told businessmen in Edinburgh not only that ‘never in the field of financial endeavour has so much money been owed by so few to so many’ (that is, following the bail-outs), but that if banks were ‘too big to fail’, then there was no alternative but to split them up – remarks that found greater favour with the Tory opposition than with the Labour government, though without a commitment from the former that the UK would strike a unilateral path for narrow banking. King’s greatest unpopularity, persisting for the rest of his governorship, was with the bankers themselves. In October 2010 he declared that ‘of all the many ways of organising banking, the worst is the one we have today’; the following spring, in a frank interview with Charles Moore, he accused the banks of in effect continuing to be bonus-driven, behaving in risky ways in the knowledge that the state would bail them out – the ultimate one-way bet; in July 2012, something not wholly unadjacent to a raising of the governor’s eyebrows played a role in the dramatic departure of Bob Diamond from Barclays; and in June 2013, only days before stepping down, he had strong words to the Treasury Committee for banks which deployed their formidable lobbying powers to put ‘tremendous pressure’ on politicians to interfere with decisions made by the Bank’s newly empowered supervisors.39 All this, to reiterate, amounted to almost entirely unusual behaviour on the part of a governor.
The crisis, followed soon afterwards by the prospect of the return of banking supervision arguably making the Bank more powerful than at any time in its history, inevitably raised serious questions of governance and accountability. The main focus was on two key areas: the role of the governor; and the role of the Court.
Both areas naturally formed part of the Treasury Committee’s November 2011 report on Accountability of the Bank of England. As far as the governorship was concerned, it made a trio of recommendations: that instead of a maximum of two five-year terms, future governors be appointed for a single eight-year term, based on the argument that the existing renewal process was vulnerable to ‘at least the perception of political interference in the Bank’; that, ‘in order to safeguard his or her independence’, the Treasury Committee be given ‘a statutory power of veto’ over the governor’s appointment and dismissal; and that, in a crisis situation, the ultimate statutory responsibility for managing that crisis should rest with the chancellor, ‘after the formal notification by the Bank of a material risk to public funds’. In due course, the new Financial Services Act, eventually coming into force in April 2013, did incorporate the first and third of the Treasury Committee’s recommendations, but – perhaps unsurprisingly – not the second.
Fundamental questions, however, remained open. ‘The danger of the proposed expansion of the governor’s responsibilities,’ reflected Samuel Brittan in April 2012 as speculation grew about the identity of King’s successor, ‘is that we will end up with a bureaucratic chairman figure, dependent on advice from below that will reflect the conventional wisdom of the moment. The alternative of a dictatorial figure, who claims to know it all, might be even worse.’ Some believed that King himself was such a dictatorial figure; and when the Financial Times’s Chris Giles sought in May 2012 to examine that issue, involving interviews with almost two dozen current and former Bank officials, he concluded that while King was certainly not ‘a tyrant, shouting and banging his fist’, nevertheless the reality was ‘a Bank honed to deliver to the governor what he wants’, accordingly rather different from ‘an open organisation with open discussion’. In any case, what was crystal clear was that under the new dispensation the governor of the day would hold formidable powers – chairing the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority board. He would also be the chief executive; though at a time when the size of the Bank’s staff had quite suddenly almost doubled (up to some 3,500, compared to just under 2,000 at the start of 2012), few quibbled in June 2013 about the appointment of Charlotte Hogg as the Bank’s first chief operating officer, assuming from July day-to-day responsibility for matters like divisional performance and organisational structure, leaving the governor in his chief executive role free to focus on strategy. What about the deputy governors, of whom by spring 2013 there were three? James Barty’s searching report the previous year for Policy Exchange had called on the next governor ‘to become more of a chairman, overseeing the coordination between monetary policy, financial stability and prudential regulation’, while the deputy governors became ‘the CEO’s of the respective parts of the Bank’, running them on a day-to-day basis and ‘enabling the Governor to take an overview of everything the Bank does’.40 Only time would tell if that became the new reality at the top.
As for the role of the Court – responsible for ‘the affairs of the Bank’, as the 1946 Act nicely put it – it had of course become increasingly marginal during the second half of the previous century. ‘We only used to meet for about an hour,’ recalled Sir David Lees about his time as a non-executive director during the 1990s. ‘There were presentations by the executive and then we, lambs to the slaughter, were offered five or ten minutes to talk about that part of industry we represented. I spoke for the motor industry in those days. How much they listened, I don’t know. Lunch was good.’ From 1998 the Court’s main forum for oversight (including of the MPC) was the newly created NedCo, with its own chairman (appointed by the chancellor) and drawing on increased representation from the regions; in 2009, post-crisis, new legislation – in effect initiated by King – saw a non-executive director (Lees) replacing the governor as chairman of the Court; but the external impression remained that the Court still had some way to go on its journey from a lunch club to a properly functioning, properly scrutinising Plc-style board.
In November 2011 the Treasury Committee’s report ‘strongly’ recommended that the term ‘Court’ be abolished and suggested that it be renamed the ‘Supervisory Board of the Bank of England’ – a board that in essence would be leaner, more expert, better staffed and in general fully empowered to hold the Bank’s executive to account. King’s response in early 2012 was to meet the Treasury Committee halfway: the Court to set up an oversight committee to review the way the executive made its decisions, but not to become a supervisory board as such. ‘I don’t think it makes any sense to have another group of unelected officials to say “actually, we want to second-guess the decisions taken by the first group,”’ he told the Treasury Committee. ‘If you really believe they are better, you should put them in the first group to start with.’ As the new legislation took shape during 2012, the governor largely got his way. The Court’s name was not abolished; it remained a unitary body, in other words a mixture of executives (the governor and deputy governors) and non-executives (the majority, but no more than nine, with one of them still as chair); and NedCo was replaced by the Oversight Committee, to be chaired by the chair of Court and accorded statutory responsibility for keeping under review the performance of the Bank in relation to its objectives and strategy. ‘The chairman of the Court is not first fiddle, he’s second fiddle,’ Lees would observe in 2014 shortly before stepping down from his three-days-a-week position. ‘The Governor, because of all the policy issues, is first fiddle. The next chairman of the Court has to accept that. It’s lower down the pecking order than you would be used to in the corporate sector.’41
In 2011–12 neither King nor the Treasury Committee’s chairman, the redoubtable and zealous Andrew Tyrie, underestimated what was at stake. ‘The Bank of England will play an even more vital role in preventing future crises, yet aspects of its governance appear antiquated,’ Tyrie remarked at the time of his report. ‘Scrutiny of the Bank should reflect the needs of 21st-century democracy. That means clear lines of accountability and more information made available to Parliament.’ Of course, the Bank had become significantly more accountable to Parliament since independence in 1997, including with the Treasury Committee holding confirmation hearings (though not with the power of veto) for MPC and subsequently FPC appointments; but what Tyrie now wanted – and what King more or less successfully resisted – was in effect, as Alex Brummer noted after the report, to turn the Court from ‘an extension of the Bank’ into ‘a conduit to Parliament’, including through undertaking and publishing reviews of policy. Inevitably, quite apart from the imminent prospect of the Bank’s significantly enhanced powers, there was also a specific political context: in this case, the familiar issue of what degree of authority the governor enjoyed to venture – or, some would say, trespass – on to fiscal domain.
A controversial year and a half or so began in June 2009 with King’s Mansion House speech. Before he came to his ecclesiastical analogy in relation to the Bank’s financial-stability powers, he included a passage that also made headlines. ‘As we emerge from recession, fiscal policy will have to change,’ declared the governor. ‘Five years from now national debt, as a proportion of national income, is expected to be more than double its level before the crisis. So it is necessary to produce a clear plan to show how prospective deficits will be reduced during the next Parliament …’ The Daily Telegraph’s take was predictable – ‘Put your books in order, and soon, King warns Darling’ – while the following week King himself, appearing before the Treasury Committee, had more to say: ‘We are confronted with a situation where the scale of deficits is truly extraordinary. This reflects the scale of the global downturn, but it also reflects the fact that we came into this crisis with fiscal policy on a path that wasn’t sustainable and a correction was needed.’ And: ‘Although we are finding it easy now to finance those deficits by issuing gilts, there could be problems down the road. We need a credible statement of what will guide the deficit reduction.’ Given that the Labour government was planning to fight the following year’s election on the terrain of investment in public services versus ‘Tory cuts’, it was hardly surprising that the shadow chancellor, Osborne, seized on King’s words to claim that they had ‘demolished for good any claim that this discredited government ever had to a credible plan for the recovery’.42
The election itself in May 2010 saw the Tories becoming the largest party but without an overall majority. It would later be claimed that, during the ensuing days of talks and negotiations that eventually led to the coalition with the Liberal Democrats, and as markets faltered in the additional context of the Greek sovereign-debt crisis, the governor had played an active role in encouraging that political outcome; but such claims lack any evidence. What was undoubtedly true, though, was that in the immediate wake of the coalition being formed his was a particularly prominent voice for deficit reduction, aka austerity. King’s Mansion House speech on 16 June could hardly have been more explicit:
Monetary policy must be set in the light of the fiscal tightening over the coming years, the continuing fragility in financial markets and the state of the banking system. I know there are those who worry that too rapid a fiscal consolidation will endanger recovery. But the steady reduction in the very large structural deficit over a period of a Parliament cannot credibly be postponed indefinitely. If prospects for growth were to weaken, the outlook for inflation would probably be lower and monetary policy could then respond. I do, therefore, Chancellor, welcome your commitment to put the UK’s public finances on a sound footing. It is important that, in the medium term, national debt as a proportion of GDP returns to a declining path.
The following week, Osborne turned his ‘commitment’ into action, with a budget – described by the Financial Times’s George Parker as ‘audacious’ – setting out how he intended to fill the hole in Britain’s finances in one Parliament; and according to Parker, it was the governor who ‘played a decisive role in persuading the chancellor that the Budget’s priority had to be the elimination of the $155bn deficit’: ‘The chancellor’s team say Mr Osborne’s most agonising Budget decision was over the risks to the economy from cutting too deeply and too soon. Mr King insisted it was vital to take questions of Britain’s creditworthiness off the table for good.’ Certainly, irrespective of the question of his direct influence, King continued through 2010 to bang the drum hard and insistently. Public borrowing, he told the TUC in September, was ‘clearly unsustainable’, and any government had to have a ‘clear and credible’ deficit-reduction plan; and he added that he would be ‘shirking’ his responsibilities if he did not warn his somewhat sceptical audience of the risks – including ‘a damaging rise in long-term interest rates’ – of failing to tackle the deficit.
The storm came in November. ‘Concern as King blurs line on policy’ was the Financial Times’s main headline on the 10th, with the paper reporting that ‘some senior staff at the Bank of England are uncomfortable with Mervyn King’s endorsement of the government’s public spending cuts, suggesting he has over-stepped the line separating monetary and fiscal policy’. Six days later, appearing before the House of Lords Select Committee on Economic Affairs, the governor sought to brush aside the story:
I would be concerned if people felt that I or the Bank was behaving politically. I don’t believe we are. We are facing the largest fiscal deficit in our peacetime history. I think the surprising thing would be if the central bank had no view that this was a matter of concern. We do believe it is a matter of concern. Of course, in terms of the Bank, I am sure everyone has their own view about the right path. They do on monetary policy; it would be surprising if they didn’t on fiscal policy … I have never commented on anything beyond the overall level of the deficit. I did not endorse the spending review, I did not comment on the balance between spending and taxes as the best way to deal with a fiscal deficit, let alone comment on the individual measures. I have never commented on any other aspect of fiscal policy, other than the concern about the size of the deficit and the need, for monetary policy purposes, to have in place a truly credible, medium-term path – not inflexible, but credible – for reducing the deficit over a horizon which is credible to markets, that is a horizon over which an elected Government can claim to have sway, namely, the length of the Parliament.
Just over a fortnight later, the MPC’s Adam Posen, well known as its leading dove, spoke to the Treasury Committee of how back in May, during the preparation of the Inflation Report, a minority on the MPC had felt concern about the paragraph ‘talking about the particular speed with which to deal with fiscal policy’. ‘We were concerned,’ explained Posen, ‘that the statement could be seen as excessively political in the context of the election. That language was too political, too much of a statement.’ Next day, the Financial Times quoted a former MPC member, Sushil Wadhwani. ‘I think that, rightly or wrongly, Mervyn has come to be seen as being much closer to the Conservative Party than the Labour Party,’ he observed. ‘No central bank governor should allow this to occur. In the years ahead, we are likely to need a Bank that is seen to be independent. It is a great pity that the perception of independence has been put at risk.’ The criticism continued into 2011. ‘The last thing you ever want is for the Bank of England to be drawn into the political arena,’ the shadow chancellor, Ed Balls, told the Financial Times in February, and soon afterwards the prominent American economist Paul Krugman accused King of acting as a ‘cheerleader’ for the coalition’s policies: ‘He’s wrong on the economics – front-loaded spending cuts are the wrong policy for a still depressed economy – but that’s not the key point; rather, the point is that if you’re going to have an independent central bank, the people running that bank have to be careful to stay above the political fray.’
The row died down, but the inherent fundamentals of the situation did not magically disappear. ‘When fiscal and monetary policy start to merge into one,’ Rod Price observed in a May 2012 letter to the Financial Times about central banks generally, ‘governors are no longer apolitical.’ King himself was intensely aware – perhaps no one more – of the preciousness of the 1997 independence prize and the prime importance of not having it tarnished or threatened. His 2016 book, The End of Alchemy, included what was clearly a heartfelt anecdote relating to 2007: ‘At 12 noon on Thursday 10 May, Tony Blair announced his resignation as Prime Minister after ten years at Number Ten. At exactly the same moment the Bank of England announced an increase in interest rates of 0.25 percentage points. Nothing could symbolise more vividly the change in the monetary regime in Britain than that conjunction.’ For, as he explained with his well-developed sense of history, ‘before the Bank of England became independent it would have been inconceivable that interest rates would have risen on a day when there was an important government announcement’.43
Who would succeed King? Paddy Power offered in April 2012 some odds: Paul Tucker and the FSA’s chairman, Lord (Adair) Turner, as joint 5/2 favourites; Lord (Stephen) Green, former HSBC chairman and now trade minister, closely behind at 11/4; Lord (Gus) O’Donnell, former Cabinet secretary, at 5/1; and Mark Carney, governor of the Bank of Canada, at 10/1; while out-and-out long shots included Gordon Brown (200/1) and Fred Goodwin (300/1). In June the Evening Standard’s James Ashton saw it as ‘a straight fight’ between Turner and Tucker; by July, O’Donnell had shortened to 9/4 and Green lengthened to 6/1; in August the Spectator called on Osborne to ‘scour the globe’; in September the position was, for the first time ever, formally advertised; by October the Treasury had denied reports that Carney had been sounded out, while O’Donnell had dropped out; in its issue dated 24 November, the Economist recommended Tucker, given Carney’s apparent unavailability; and on Monday the 26th, Osborne made his announcement.
It was, after all the smoke and mirrors, Carney. ‘He is quite simply the best, most experienced and most qualified person in the world to do the job,’ explained the chancellor about the Canadian, who had accepted the position for a five-year term only and would be the first foreigner to become governor. Press reaction was almost unanimously positive. ‘A resounding statement that Britain is ready to hire the best talent for top posts’ (Financial Times); ‘ticks virtually all the boxes’ (Times); ‘as an outsider with fresh ideas, he will be perfectly placed to spur open debate and new thinking’ (Daily Telegraph). Some seven months later, 30 June 2013, a Sunday, was King’s last day, coinciding with the Bank’s annual sports day at Roehampton. Cricket that afternoon featured a recent England captain, Andrew Strauss, and an over or two of the governor’s teasing slows. Next morning, coming in by tube from west London, the new man was at Bank Station shortly before seven o’clock. Unlike Montagu Norman, he did not have a hat – let alone in the electronic age a ticket attached to it. An understandable topographical struggle ensued about which exit to take, but soon enough the 119th person to be governor had his feet under the table.44
The Bank over the previous 319 years had had its share of criticism, but also its share of praise. The greatest of writers on the Bank usually dished out the former, but occasionally the latter. ‘Nothing would persuade the English people,’ declared Walter Bagehot in Lombard Street, ‘to abolish the Bank of England; and if some calamity swept it away, generations must elapse before at all the same trust would be placed in any other equivalent.’ While still deputy governor, King quoted those words at the August 1999 gathering of central bankers at Jackson Hole, Wyoming. And he went on with words of his own that any governor in any era might usefully have pondered:
Central banks may be at the peak of their power. There may well be fewer central banks in the future, and their extinction cannot be ruled out. Societies have managed without central banks in the past. They may well do so again in the future. The website of my favourite football team [Aston Villa] has the banner ‘heroes and villains’. For some, central bankers are heroes – more powerful and responsible than political leaders – and for others they are villains – too fanatical to be entrusted with the world economy. For all our sakes, it is important that central bankers are seen neither as heroes nor villains. They should be modest technicians, striving to improve the way they use the tools of their trade, and always eager to learn. Openness of mind and fleetness of foot will be the best way to avoid extinction.45