As Sir Mervyn King enters his final days as Governor of the Bank of England, the time is right to assess his overall record over the past 10 years.
1. Monetary policy before the credit crunch. The initial phase of his tenure, between 2003 and 2007, appeared at the time to be a period of monetary stability. But as events transpired, serious problems were beginning to build up in the monetary system. The Bank of England presided over rates of monetary growth well in excess of the growth of output, with the increase in two standard measures of money supply – M3 and M4 – accelerating from approximately 6% per annum when Sir Mervyn took the reins to 15% per annum by 2007. The Bank of England could and should have taken measures to restrict monetary growth, most obviously by raising the Base Rate, but failed to do so. Mark for Sir Mervyn = -1.
2. Banking regulation before the credit crunch. The consequence of rapid monetary growth was an increase in leverage throughout the banking system, a bubble in asset prices, and an escalation in the UK’s external Balance of Payments deficit from less than £1 billion in 1997 to more than £50 billion by 2007. In a public statement in 2012, Sir Mervyn acknowledged that the Bank of England had failed to take account of the dangers of rising bank leverage, let alone take any measures to restrain it. Mark = -1.
3. The Bank of England’s immediate response to the credit crunch of late 2007 was badly fumbled. The first victim of the freeze in international money markets was Northern Rock, but Sir Mervyn vetoed a “white knight” approach from Lloyds TSB to rescue it, opting instead to spend his time lecturing the City on the dangers of moral hazard. Technically he was correct, but his timing could not have been worse. To take an analogy from the world of cricket so beloved of the Governor – it was rather as though the batsman had executed a cover drive that was technically beautiful, but appallingly mistimed, with the result that, instead of the ball flying to the boundary, it lobbed gently up into the air to offer an easy catch to the fielder.
Mark = -1.
In this case, the fielder did not take the catch. Sir Mervyn was fortunate indeed not to be sent back to the pavilion, and to have his mandate renewed. He was a beneficiary of the “camel in the tent” syndrome. The Prime Minister, Gordon Brown, apparently decided that it was safer to retain Sir Mervyn as Governor than to have him as a disgruntled ex-Governor outside the tent criticising the Labour Government’s own distinctly mixed record.
4. Banking regulation after the crisis. In his second term, Sir Mervyn’s record on banking issues improved. He was a strong advocate of the separation of investment banking and retail banking. He recommended restructuring the broken banking behemoths, in particular RBS – “if a bank is too big to fail, it is too big”, as he quite correctly stated. The Bank of England was also reasonably supportive of the entry of new banks into the market, increasing competition and customer choice. Mark = +1.
5. Monetary policy after the crisis. After 2008, the Bank of England aggressively cut Base Rates to an historic low of just 0.5% in early 2009, where they have remained ever since. In my view, quite correctly. Mark = +1.
6. The Introduction of Quantitative Easing. In early 2009, the Bank of England introduced a new measure to stimulate recovery – Quantitative Easing (QE) – in simple English, printing money. I would not criticise the initial decision to attempt QE in the context of early 2009, when there was a general desire that “something must be done”. Mark = 0
7. Later rounds of QE. Where I do criticise the Bank of England, however, is that it persisted with QE long after its damaging effects became all too evident. The mechanism by which QE reduced the real incomes of savers, pensioners, the low-paid and those on fixed incomes and stifled economic recovery has been set out in other comments on this site and in The Golden Guinea, and will not be repeated here. Yet, like an alcoholic who can’t keep off the drink, Sir Mervyn persisted in repeating the dose again and again. In late 2012, he seemed to accept that QE was not stimulating the recovery in output and jobs for which its advocates had hoped, but by early 2013 he was again pressing for a further round. Fortunately, he found himself in a minority on the Bank of England’s Monetary Policy Committee, so it didn’t happen.
As I wrote in my forecasts for 2013 on December 28th 2012
“If the Bank of England responds with yet more quantitative easing, my prediction is that it will have precisely the same effects as QE has had already – driving down real incomes, driving up inflation and sending the British economy back into a stagflationary recession. However, if QE is consigned to the dustbin of history, then there is a realistic prospect for a recovery in the UK economy in 2013.”
Such has indeed proved to be the case, but no thanks to Sir Mervyn.
Mark = -3 for each round of QE supported by Sir Mervyn after the initial round.
In summary, Sir Mervyn King’s tenure at the Bank of England has been distinctly mixed. Yes, it has been a period of turbulence and not all the problems were of his making. But having said that, he presided over an excessively loose monetary policy before the credit crunch, fumbled his response to Northern Rock crisis, and persisted in pursuing the economically destructive policy of Quantitative Easing despite its comprehensive failure to achieve any of the objectives that the Bank of England set for it when it was introduced in March 2009.
Applying a starting mark of 10 – by definition, his record as Governor on taking up the post was unblemished – by my reckoning he finished with a mark of 6 (= 10-1-1-1+1+1-3). A 9 or 10 would be the mark of a great Governor. A 7 or 8 would mark a “safe pair of hands”. A mark of 6 must be judged as only fair.