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Has Mervyn King done enough? | |||||||
But has he done enough to reassure the public, the banking industry, and the government to keep his job? Mr King told the committee that he has had a difficult balancing act between restoring public confidence in the banking system, and creating a "moral hazard," where banks believe that they will be always be bailed out even if they behave recklessly. But in truth, Mr King's difficulty is that he has several constituencies to satisfy, all with different expectations of the role of the Bank in the crisis. Banks in trouble First of all, the Bank of England has the responsibility to ensure the stability of the UK banking sector and to act as a lender of last resort in the case of a crisis. Mr King has come under strong criticism from commercial bankers for not realising early enough the extent of the problems they were facing, and not intervening early enough to stop the credit markets from seizing up. They contrast his behaviour with that of other central bankers, such as Ben Bernanke of the Federal Reserve, and Jean-Claude Trichet of the European Central Bank, who flooded the credit markets with cash as soon as the crisis developed.
Mr King may have been right that UK banks were in a stronger position than US or European banks - and that therefore he could afford to wait longer before intervening. But he may have been naive to think that the UK financial sector could ultimately escape from the financial whirlwind sweeping the markets. And the high degree of deregulation in the UK banking sector meant that there was more likely to be some bank that was engaging in unusually risky practices.
Panic and the public Meanwhile, Mr King also has to reassure the public that the banking system is sound. He has come under sharp criticism from MPs for not being aware of the problem, or taking action, early enough. Some MPs also blame the banks for their lax lending regime. But, as Mr King pointed out, the very act of intervening to help the stricken bank is what precipitated the crisis. The governor admitted that the public was not acting irresponsibly in rushing to take their money out of the Northern Rock - it was the only way they could act once it was obvious the bank was in difficulty. He said that if the Bank had been able to mount its rescue secretly, it might have been able to sort things out before the public realised there was a problem. But this may be an unrealistic hope in today's 24-hour news world. And Mr King also criticised the UK's system of financial protection for savers, saying that it was "wholly inadequate" and much worse than the system in other countries. If that system was broken, it seems that it took a crisis for either the Bank or the Financial Services Authority to realise there was a problem. In any case, Mr King's argument about "moral hazard" also applies to individual savers. Indeed the deposit protection scheme was designed to pay out less than the full amount in order to create a moral hazard for individuals so that they would take the trouble to become informed about the risks of just going for the highest returns. Political fall-out Most importantly, Mr King has to satisfy his ultimate employer, the chancellor, and Prime Minister Gordon Brown. Although the Bank of England has been granted operational independence by the Treasury, it is still responsible to the government, who decides on the rules by which the financial system is run. It is no secret that the government was not pleased by the way the crisis developed, and the sight of savers queuing outside the Northern Rock was damaging to its reputation.. Given the importance the Labour Party has placed on its economic record in the last three elections, it is keen to ensure that, after an unprecedented guarantee to protect the potential victims of the crisis, things should return to normal.
Officials at Downing Street pledged their support for the chancellor, and during the crisis - and while he is under fire from MPs - there is little doubt they have to back him. But the blame game has already started in earnest.
It is not clear whether the FSA, the Bank of England or the government will ultimately have to take responsibility for what Mr King made clear was a broken system of regulation. The Tories called on the regulator and the government to clarify their respective roles in the build-up to the Northern Rock bailout. "We need to hear from the Chancellor of the Exchequer - and he has been notably silent on what he knew and when he knew it," said shadow chancellor George Osborne.
According to Ian Kernohan, an economist at RLAM, Mr King put in a "creditable performance: he has shifted the blame onto the legislation". "I think he will come out stronger from all this. He has had no end of a lesson: it will do him no end of good, " he added. Further reassurance for Mr King came in the form of a Populus poll for the Times which showed just 15% of those asked primarily blame the Bank of England for the crisis. Nearly 30% blamed Northern Rock's management for its own problems while 20% believed ministers were principally responsible. But most of those questioned - more than 40% - pointed to problems in the US mortgage market as the main culprit. The real economy One of the biggest problems for Mr King is that his fate is not really in his own hands. If the UK economy stays strong, and there are no further problems with UK banks, then his stand will have been vindicated and he may well be reappointed. But already many forecasters are sharply downgrading their forecast for the UK economy, with Lehman predicting growth of just 1.7% next year, compared to 2.8% this year. That is because the fate of the UK economy depends on whether the world enters an economic slowdown - and that in turn depends on how the US Federal Reserve and the Bush administration manage the crisis. Nor is the fate of the UK financial sector solely in his hands. The UK banking sector is extremely international, and if there are more hidden problems with bad debts, it is unlikely that the UK will escape unscathed. In truth, it will take time to put in place new legislation and new international regulation that Mr King would like to prevent the recurrence of this crisis. So in the short-term, it is not at all clear that the crisis has peaked. BBC News 24 is running a special day of programming looking at the credit crunch, on Thursday, 20 September.
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I think he will come out stronger from all this 
