Stephen Fay
Dan Conaghan
THE BANK
Inside the Bank of England
324pp. Biteback. £18.99 (US $30).
978 1 84954 287 6
Times Literary Supplement, 4 July 2012
Being Governor of the Bank of England can give a man a fine opinion of himself. In the mid-1980s, Gordon Richardson could say without a hint of irony: “I do think [the office of Governor] commands a certain amount of respect and goodwill. It’s true of Prime Ministers and Popes, isn’t it?”. His successors, Robin Leigh-Pemberton and Eddie George, were not imperial figures, but the tradition has been fully restored by the present incumbent, Sir Mervyn King. Alistair Darling, Labour’s last Chancellor, describes him “as some sort of Sun King”. King has worked at the Bank of England for twenty-two years, nine as Governor, long enough for Dan Conaghan to make a credible preliminary judgement on his role during a turbulent period in the Bank’s history, when the Governor had his way. An unintended consequence of his power play was to signal the end of the reign of Sun Kings.
King is an academic governor: initially, he interpreted his role narrowly, using the freedom granted by the new Chancellor of the Exchequer Gordon Brown in 1997 to set interest rates and concentrating on controlling inflation to the exclusion of other responsibilities. But after the horrors of the banking crisis between 2007 and 2009 there was a dramatic change in direction. Instead of shedding powers, King insisted that the Bank should once more play a leading role in bank regulation and economic intelligence.
Eddie liked argument. With Mervyn, absolutely not
Conaghan, a former journalist who now works in the City, is no economist (no use looking here for an analysis of quantitative easing). His grasp of the history of the Bank before King is sometimes uncertain. He tells the story of an influential Governor and gives him a mixed review. He suggests that since the credit crunch and the bail-out of the Royal Bank of Scotland and the Bank of Scotland, the Bank’s mystique, which it has always cultivated so carefully, has been reinterpreted as arrogance. Conaghan quotes a revealing though anonymous judgement by a former colleague: “Eddie liked argument. With Mervyn, absolutely not. If you argued against him you were cast out like a naughty boy . . . . A colleague recalls how a young analyst making a presentation on the Spanish banking system was asked impatiently ‘how is this relevant?’ He could make someone feel pretty stupid”. (King has since appreciated the relevance of Spanish banking.) Conaghan is not the first to peer behind Sir John Soane’s curtain wall on Threadneedle Street and observe King’s personality and politics. Howard Davies and David Green’s Banking in the Future delicately exposed some of King’s failings: “He is not, perhaps, a natural manager”, they wrote. But King’s most stinging critic is the Labour Government’s last Chancellor. Alistair Darling is not an impartial witness by any means, but in his memoir Back from the Brink, he provides Conaghan with damning evidence of King’s stubbornness and uncompromising attitudes. Recently, long and unflattering profiles of King have appeared in the Financial Times and The Times. They seemed slightly shocking, like acts of lèse-majesté. What is perhaps more surprising is that the academic Governor has proved to be a ruthless opportunist. When the Financial Services Bill is enacted at the end of 2012, the Bank’s imperial reach will embrace more authority in banking and finance than it has had at any time since its foundation in 1694.
King was an ambitious and energetic young economist who preferred to work on the real economy than debate among the left-wingers in the Cambridge economics faculty. At thirty-six, he became Professor of Economics at the LSE, where he took an interest in the City. When he was seconded to the Bank of England in 1991, as its chief economist, he joined an organization that had prided itself on not hiring economists. King was determined to alter that: he wanted economics to be the language of the Bank. Arriving during a severe crisis he influenced the decision to make the Bank’s principal objective the control of inflation. After five years, he contemplated his return to academia.
Gordon Brown caused him to change his mind. He conferred independence on the central bank and established the Monetary Policy Committee. Conaghan reports that when Eddie George asked King to organize the Monetary Policy Committee he said: “So you can’t leave now, can you?” Promoted to Deputy Governor, King became George’s obvious successor, taking on the role in 2003.
King described what followed as a period of “unusual serenity”, though by the summer of 2007 he had begun to notice that banks were making more money by taking greater risks. However, on August 6, the day the credit crunch started, King was at the Oval watching England piling on runs against India (he really loves cricket). He reacted crossly when he was disturbed by his worried staff, who wanted to tell him of crisis measures taken by the Federal Reserve and the European Central Bank.
It was not King’s finest hour. Darling was anxious to provide Northern Rock with the liquidity to see it through the crisis. When King obstinately disagreed with the Chancellor’s diagnosis, Darling discovered that the Treasury was not empowered to command the Bank to do as he wished. When RBS and the Bank of Scotland turned into disaster, Conaghan says that King accepted that there was a crisis but that he wanted it to be “a small crisis”. A very expensive deal was eventually cobbled together, but the Tripartite system of regulation, dividing responsibility among the Financial Services Authority, the Treasury and the Bank, had badly flunked its first great test.
King, reluctantly given a second five-year term by Darling, deftly demolished the Tripartite agreement at the Mansion House in 2009: “The Bank finds itself in a position rather like a church whose congregation attends weddings and burials but ignores the sermons in between”, he said. Conaghan recalls Darling’s anger. “I felt Mervyn had decided that, because of the Government’s weakness, he had licence to roam in a way he would never have done if he had thought he would still have to deal with us after the next election . . . dangerous territory for any Bank Governor.”
King had sensed that a new government would create another opportunity for the Bank. When the new Chancellor, George Osborne, made his own Mansion House speech in 2010, he argued that, if an independent central bank was to make monetary policy, it needed to have a more general influence over banking and finance. Conaghan describes this as a moment of no less significance than Brown’s reforms in 1997.
The Bank will require a shift in culture
The Bank had no leisure for self-congratulation. The reaction to its sweeping new powers was a wave of discontented criticism. The principal objection made by various Parliamentary committees concerned the Bank’s lack of accountability. In the Lords debate, King was described as “an overmighty subject”. One proposal to transform the Bank’s passive Court into an active supervisory body was brushed aside. But it was King’s refusal to initiate a rigorous internal inquiry into its role in the crisis, as the Treasury and the FSA had done, that focused attention on the Bank’s habitual reluctance to respond to criticism. The Treasury’s own inquiry quotes an anonymous Treasury official who said: “The Bank will require a shift in culture”.
King did not have it all his own way. One significant new rule was a direct consequence of the run on Northern Rock. Under the Financial Services Bill, ultimate responsibility for dealing with another banking disaster that involves spending public money will no longer rest with the Governor, but with the Chancellor. The new Financial Monetary Committee has been given a wider remit than King might have liked. Moreover, the man chosen to run banking supervision, Hector Sants of the FSA, decided he would rather not. In May 2012 the Bank grudgingly, without a hint of remorse, announced that three separate inquiries would judge whether it had anything to learn from the experience.
King’s opportunistic expansion of the Bank’s power and influence comes at a cost to the office of Governor, however. His successor will need to be as skilled a manager as a policy-maker. The necessary change in its culture makes it unlikely that Mervyn King’s successor will be chosen from within the Bank. Conaghan’s is the story of an influential autocrat who will be the last of his line. It is hard to imagine the next Governor sitting in the light, airy office overlooking a garden court and thinking of himself as a Sun King or a Pope – or having time to do so.
Stephen Fay’s books include Portrait of an Old Lady: Turmoil at the Bank of England, 1988, and The Collapse of Barings, 1996.
