Investment Markets » Banking and Finance
Who Should Carry The Can For Northern Rock?
There have been calls for Mervyn King's resignation. Is he merely a convenient scapegoat?
The governor of the Bank of England used to be second only to the Archbishop of Canterbury in Establishment sanctity... no longer. Did we enjoy watching Mervyn King squirm? Oh yes we did. We were thrilled by Sir John Gieve, the deputy governor, writhing as he was told by MPs that he was "asleep on the job", but why? Because we assumed the nation's finances were ultimately safe in the hands of these lofty chaps.
So did the rest of the world. Banks and financiers have flocked to London because of the depth and sophistication of it’s markets and its sure touch regulation, until now.
Neither the Financial Services Authority (FSA), nor the treasury emerges well from Northern Rock, but it is the Bank of England, which emerges the worst. King has lost credibility; and a central banker without credibility is not much use. His attempt to talk tough early on in the crisis exposed him to charges of inconsistency when the Bank performed a volte-face, but he shouldn't be made a scapegoat for the debacle.
The seeds were sown ten years ago when Gordon Brown stripped the Bank of its responsibility for banking supervision and passed it to the FSA. The then governor, Eddie George, considered the tripartite arrangement a sufficiently serious mistake to contemplate resigning. Events have proved him right.
King's hands were tied in other ways too. The disclosure rules of the EU's aptly named Market Abuse Directive (MAD) made a covert rescue bid impossible.
The run on Northern Rock recalls a similar incident in Mary Poppins, yet surely we should be suspicious of heaping the blame on central bankers. Consider the contradictory criticisms. The Bank stands accused of having delayed too long in injecting liquidity into the system because of King's "unworldly" view that it would encourage reckless behaviour. The Fed, meanwhile is criticised for having done the opposite, so which is it? The banks can't be damned if they did... and damned if they didn't.
The truth is that they are no more to be blamed for this crisis than the fire brigade is to be blamed for a blazing house, particularly given the restrictions on their powers. Fed chairman Ben Bernanke was reluctant to offer a blanket bailout, but the risk that the crunch may lead to recession could no longer be ignored.
The crisis isn't over and there'll be further calls for the heads of central bankers, but it was not the bankers who put the "fragile" back into "supercalifragilistic".
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