It’s never easy replacing a tyrant but there are huge benefits from doing so. The pain is usually worth it. A tyrant looks to his own advantage rather than that of his subjects and uses extreme and cruel tactics – which pretty much sums up how I feel Mervyn King has run the Bank of England in his role as governor since 2003. His second five-year term is up at the end of June 2013 and, at long last, a replacement is being sought. The Labour government reappointed him for a second term in 2008 and subsequently regretted it. Then there were no obvious candidates to replace him but there are now.
The terms of both Charlie Bean, deputy governor for monetary policy, and Spencer Dale, chief economist, are coming to an end as well. They have been in charge of forecasting, which has been pretty hopeless these many years. It’s time to start again on the forecasting front, so this is a great opportunity to put them both out to pasture. A great opportunity, then, to clean the house and bring in new blood.
Moral hazards
King has controlled the Bank with an iron fist, slaying any dissenters in his path. He follows in the tradition established by Montagu Norman, who was governor from 1920 to 1944: it’s his way or the highway. I recall a meeting in which King told the Treasury representative to tell the then prime minister to shut up. I have never worked at a place that had such low morale. I clashed with King many times when I was a member of the Monetary Policy Committee (MPC) but I had an endowed professorship to go back to at Dartmouth College. Fortunately, my career didn’t depend on him.
King made it clear to everyone at the Bank that I was not his choice and that they should stay clear. He was especially unhappy, apparently, that I was to be an international commuter, even though Gordon Brown had approved it. One reliable source told me people at the Bank were briefing against me. It was hard to find staff and I was always the outsider. This was nothing new. There was a very public fight when the external members were added to the MPC about providing them with staff. External members were not told about the emergency loans to HBOS or the Royal Bank of Scotland in 2008. Surely they needed to know, given they were voting on interest rates and quantitative easing (QE)? I read about what was happening years later in the newspapers. This was all about power and control.
No wonder King, the economic theorist, has resisted calls for an investigation of the Bank’s performance before, during and after the financial crisis. He has given short shrift to the Treasury select committee’s requests for a full inquiry into the Bank’s failures, presumably because of what it might uncover. In my view, King was unprepared for the crisis and, even as late as the summer of 2008, did not even see it coming. In my early years at the Bank, I expressed concerns about the crisis developing in the US housing market. He wasn’t interested and argued that what I was saying was irrelevant because the UK had decoupled from the US. It hadn’t.
For many months, even through 2008 and 2009, he kept expecting a wage explosion in the UK that was never going to happen, given that globalisation had weakened workers’ bargaining power. King was also unprepared for the bank run on Northern Rock in August 2007, even though there were obvious signs that banks that depended on wholesale money markets were in trouble. All the academic talk of “moral hazard” seriously damaged King. The concern with moral hazard is that investors should not be protected from the consequences of their own risky actions but it was too late for that and King should have acted sooner. Moreover, his dalliance with fiscal policy, as revealed by WikiLeaks, was a major mistake. The governor of the Bank of England is responsible for monetary policy, not fiscal policy, and King crossed the line by endorsing the coalition’s failed austerity programme.
I have a number of criteria for determining his replacement. It is crucial that he or she is NOT MERVYN and has practical skills of leading organisations, preferably but (not necessarily) banks, and isn’t tainted by the crisis. An outsider, not a Bank insider, is needed. It would help if he or she has some understanding of economics but that isn’t essential – a deputy governor and chief economist can be hired to do that.
Out with the old
The bookies’ favourite is Adair Turner, who has been chairman of the Financial Services Authority (FSA), the financial regulator, since September 2008. But he is implicated to some extent because of the FSA’s many failings during the crisis – and his claim that the financial system is “socially useless” probably rules him out.
Another contender is Paul Tucker, deputy governor for financial stability at the Bank and the favoured insider, but he failed to spot the crisis until he fell over it. He seems to have little leadership skills and, in my view, is intellectually not up to the task. In the days when he and I were on the MPC, I kept a “Tucker brown-nose score”, whereby I awarded him a point if he said any of the following: “I couldn’t agree with you more, Governor”; “Absolutely right, Governor”; “I agree with you completely Governor” or some such sycophantic nonsense. At some meetings, he would get into double figures. Above all, the Bank needs a change in the culture that Tucker could never deliver.
It’s time for a heavyweight at the Old Lady of Threadneedle Street. My preference is for a banker, such as Stephen Green, the current minister of state for trade and investment and former group chairman of HSBC, or John Varley, former chief executive of Barclays. I certainly would not rule out Gus O’Donnell, the recently retired cabinet secretary, if he wanted the job. All three have proven credentials in running huge organisations and would be able to lift morale, because that’s what they have had to do before. Most importantly, it would not be about them. I don’t know any of them personally and so couldn’t pick one. A crucial test would be whether the new governor would be prepared to purchase private-sector assets as part of QE, especially to small firms. This was ruled out by King. A new broom needs to sweep the Bank clean.
David Blanchflower was an external member of the MPC from 2006 to 2009