It’s the end of an era on Threadneedle Street, the narrow street in the City of London from which the Bank of England has for centuries lorded over the British economy. When the bank’s Monetary Policy Committee announced no change to its policies Thursday morning, it marked the end of a remarkable run for the most consequential shaper of Britain’s economic policy of the last generation, Sir Mervyn King.
His decade as governor of the bank concludes June 30. So what is the legacy of this particular king?
First things first. He is an honorable public servant who has worked tirelessly for more than two decades at the bank, applying a keen intellect to the problems facing the United Kingdom and the world economies. When he became the bank’s chief economist in 1991, its credibility was in tatters, and King — first as chief economist, then deputy governor, then governor — built it into a modern, credible, cutting-edge central bank.
It is also impossible to separate the miserable state of the British economy from the man who has guided it for the last generation. And it is impossible to separate the mistakes the bank has made from the high-handed style that has repeatedly led King into clashes with colleagues and politicians.
There is little doubt that the British economy is a mess. During the global economic collapse of late 2008 and the first half of 2009, the UK economy contracted by about as much in percentage terms as other Western nations. But since the second quarter of 2009, the British economy has grown less than half as much as the U.S., Canadian, or German economies. Average hourly earnings for Britons are actually below their inflation-adjusted level when King assumed the governorship in 2003. The human cost of this is massive.
But central bankers are far from omnipotent. How much of this is attributable to King’s decisions as governor?
In my book on the crisis, I gave voice to those who clashed with King in the months before the 2008 Lehman Brothers crisis (most vividly David Blanchflower), arguing he was asleep at the wheel and insufficiently attuned to the looming storm.
The more charitable view of that time period, though, is this: Yes, King failed to see the depth of the crisis that was ahead, but so did most everyone. And it’s not as if there was much that could be done in the summer 2008 to radically change the course of things. At the time, the UK economy was a car careening toward a brick wall, and the argument over interest rates was the equivalent of deciding whether to slow from 100 mph to 95; no matter what the bank had done, the impact was going to happen, and it was going to be destructive. To King’s credit, when the crisis hit, he moved as aggressively as any central banker to ease policy and try to reduce the damage to the British economy.
For those reasons, I don’t include the mistakes of 2007 and 2008 as worthy of pillorying King for. Those were messy, difficult situations in which King and the other figures involved had no good options. The Brits didn’t blunder the way their American counterparts did in failing to prevent Lehman Brothers or a bank of its size from going under. They did prohibit Barclays from buying Lehman that fateful weekend of Sept. 14, 2008, but I’ve come to believe that if they had allowed that deal to go through, it would have merely relocated the nexus of the financial crisis from the U.S. to Britain, rather than prevent it altogether.
There is more reason to fault the governor for the Bank of England failing to do more to stop the rise of an outsized banking sector to begin with.
The governor is a crisp and clear thinker, drawn to the elegance of theoretical economic models with which he grappled as an academic and as the bank’s chief economist in the 1990s. He is far less interested in the messy, legalistic business of regulating banks; people who have worked with him told me he viscerally dislikes bankers.
As part of Tony Blair and Gordon Brown’s overhaul of financial regulation in the late 1990s, the Bank of England would gain true independence on monetary policy. It was the remaking of the bank in King’s image, making it much more credible as a setter of monetary policy. That was all well and good, but the flip side of the bank being remade in King’s image was that the bank supervision that didn’t fit into King's models for how a modern central bank ought to act were disposable. King and the bank leadership at the time readily acquiesced as supervision duties were shipped over to the Financial Services Authority.
The FSA famously was focused on the small questions of banking supervision — making sure banks didn’t defraud investors, for example — and not the big ones: whether their overall size with assets a multiple of GDP endangered the entire UK economy. King, many former colleagues told me, evidenced little interest in deploying the powers that the bank retained over the British banking system. They described bank oversight as a career-stopper, a place that the most ambitious young bank employees were to avoid at all cost.
King encouraged the bank to engage the city less on its own terms — understanding how things were working or not working, and where the bodies were buried — and more as what an academic economist might want the banking sector to be. I’m told that when there was a question of studying how gilts were to be issued, for example, King instructed his staff to consult some of the leading academic students of auction theory, not the people who actually traded UK government bonds all day.
None of this is to say that a governor more attuned to the financial sector and its workings would have prevented the crisis that arrived in 2007. But he could have lessened the damage, and left the bank better positioned to deal with the fallout.
Then there are the governor’s persistent interventions into the political sphere, particularly fiscal policy.
In the months leading up to the 2010 election, King was perhaps the most credible, vocal advocate of fiscal austerity, which exasperated Labour politicians who found it a tacit endorsement of the conservatives and a violation of the precept of central bank independence. As the Tories and Lib Dems negotiated to form their coalition the weekend of May 8, 2010, conservatives, David Laws wrote, were ready to bring in King to impress upon the Lib Dems the importance of deficit reduction as the coalition’s policy.
King went to extraordinary lengths to suggest that one set of risks — that markets would turn on Britain the way they had on Greece — was predominant. He soft-pedaled the other set of risks — that an overly aggressive turn to austerity would undermine economic growth for years on end. At a time when the economists at the IMF were starting to grapple with new evidence that, in a deep recession, austerity can make the public debt burden worse rather than better, he rang the bell for immediate deficit reduction — even as those who warned that it was too much too fast were sidelined.
In the nearly three years since, the economic drag from budget tightening in a depression has become more evident, and the flat economy has led Britain’s debt-to-GDP ratio to rise rather than fall. King has characterized it as the necessary and inevitable pain of adjustment.
It is true that Britain has dealt with uncomfortably high inflation even amid its economic weakness, limiting King’s ability to offset the pain with more aggressive monetary easing. But at a time that the Federal Reserve, the ECB and the Bank of Japan have showed a new eagerness to experiment, adapting their tools to a world of zero interest rates, the Bank of England under King's watch has been sitting on its hands.
It’s early yet for history’s ultimate judgment of the man who led the British economy through this perilous time. But as he steps into retirement, the signs aren’t looking very good.
For further reading: My colleague David Ignatius has a more pro-King take on the governor's reign here.