Sir Mervyn King bows out as bank governor

There are not many Bank of England governors who have endured what Sir Mervyn King has been through: the 2008 financial crisis that saw billions of pounds of taxpayers’ money used to rescue the banks, and a long economic downturn that only now looks as though it may be coming to an end.

The latest official figures show there was a not a double-dip recession, as many people had assumed, but they also reveal that the downturn was deeper than thought. Not too much to crow about.

Sir Mervyn has been criticised for failing to foresee the crisis and not acting sooner to pump money into the economy as it sank into recession, although action was finally taken in the form of a £375bn quantitative easing (QE) programme.

Inflation

The bank’s main role when Sir Mervyn was at the helm was price stability: keeping a lid on inflation using interest rates.

Under a model devised by Gordon Brown when he was chancellor, consumer prices index (CPI) inflation should be kept at 2 per cent.

If this target is missed by more than 1 per cent, the governor has to write an open letter to the chancellor explaining why it has been missed and what will be done to resolve matters.

Sir Mervyn has dispatched 14 of these letters since April 2007, always because CPI has exceeded the target by more than 1 per cent.

But these have been extraordinarily difficult times for the British economy and the emphasis has been on nursing it through the crisis by cutting interest rates rather than hawkishly bearing down on inflation.

As such, the bank base rate has been at a record low of 0.5 per cent for more than four years.

This has meant cheaper mortgages, but higher inflation than would have been the case if the base rate had been higher.

It has also damaged people’s savings, apparently a deliberate move by the bank. In 2010, Charlie Bean, deputy governor, told Channel 4 News the low interest rate strategy was meant to send a message that “in the short term, we want to see households not saving more, but spending more”.

Equally dramatic has been the QE programme, which has been used to boost borrowing.

‘Too big to fail’

When it comes to culpability for the banks becoming “too big to fail”, Sir Mervyn can legitimately point out that the bank was not responsible for regulating the financial sector. That was the job of the Financial Services Authority. But he cannot completely wash his hands of the matter.

Regulation has now changed. A unit within the bank, the Prudential Regulation Authority, has been created to fulfil this role.

JP Morgan economist Malcom Barr said: “The central bank that King leaves behind will be orders of magnitude more powerful than the one he joined in 1991.

“While King’s record is far from faultless, his personal commitment to rigour and objectivity in analysis has played no small part in establishing the Bank of England in that position.”

‘Autocratic’

Others have described Sir Mervyn as “autocratic”. David Blanchflower, his former colleague on the rate-seting monetary policy committee, called him “old iron fist”, saying he was too reluctant to cut rates and print money.

In an article in the New Statesman, Mr Blanchflower wrote: “Clever as Mervyn King may be, he missed the crash and subsequent recession, and hence, so did the consensual MPC on which I sat.”

Sir Mervyn courted controversy before the 2010 election by giving his backing to the Conservatives’ deficit cutting plans.

The Tory chairman of the Treasury select committee, Andrew Tyrie, told him during an appearance before it: “You have certainly always said what you think, which can sometimes be a scarce commodity in public life.”

Sir Mervyn obliged by lambasting the banks for lobbying politicians to give them an easier ride.