Questions arising from Mervyn King's important testimony to the Treasury Select Committee

This morning Mervyn King gave evidence to a Treasury Select Committee concerning his handling of the Northern Rock crisis and the credit crunch more generally.  His view was that it would have been irresponsible to act earlier, as it would have undermined, rather than underpinned, confidence in the banking system.  Of particular interest was his claim that "The bank would have preferred to have acted covertly as lender as last resort, to have lent to Northern Rock without publishing it", but was prevented from doing so by the EU's market abuses directive.  He criticized the regulatory framework more generally:

"We're hemmed in by four pieces of legislation...The interaction between different pieces of unconnected legislation made it almost impossible for us to act as a lender of last resort in the way that I would prefer."

There is significant policy and political interest in this area - more perhaps than in matters related to the Bank of England for many years.  Amongst the important issues are:

• Should Mervyn King be re-appointed by the Chancellor next June when his five-year term as Governor ends?  This is an important political decision to which our Treasury team might legitimately contribute.
• Gordon Brown's widely-lauded monetary policy and financial regulation arrangements have, in this event, failed.  He made large political gains when matters seemed to be going well and his system appeared strong.  Will he be made to pay the price now that weaknesses in his system have been exposed?
• Is it sustainable for the FSA to have oversight of banking supervision whilst the Bank of England has responsibility over lending money to banks if needed?  Won't the public naturally listen to FSA claims that a bank under pressure is solvent and all is well and respond, with Mandy Rice-Davies, "Well, they would say that, wouldn't they?"
• Given the natural public cynicism over the assurances given in these situations, are the transparency provisions of the EU directives really appropriate for the UK's situation?  Transparency provisions that might be useful in many parts of Europe may not be appropriate here.
• There is growing pressure to introduce increased deposit insurance for retail savers - perhaps along the lines of the US system.  But increased deposit insurance is naturally accompanied by (indeed must be accompanied by) a slew of additional regulation that is not currently necessary in the UK.  Is a massive extension of UK banking regulation really the best response to political mishandling of a mini-crisis brought on by the excessive transparency inappropriately introduced by a combination of New Labour orthodoxy and European meddling?

Andrew Lilico

Comments

[Iain]

Mervyn King has clearly been pencilled in as the fall guy, for a very simple reason. If Labour don't put the Bank of England Governor up as the hapless fall guy, people might go looking to find the real culprit, and that is Gordon Brown, and as we all know there are no limits Labour will go to to blame anybody and everybody else as long as its not them. But as we know it was Gordon Brown who was the one to separate banking supervision from the Bank of England and placed it with the FSA, and he was the one who created the economic climate where his attack on pensions and savings made property speculation the only investment in town, and the dearth of savings requiring banks to access the international money markets for funds for mortgages and to keep the who housing bubble economy afloat.

Question is, will the Shadow Treasury team allow Labour to get away with blaming Mervyn King?

[HF]

Mervyn stated that the legislation stopped them from being able to avert the NRock crisis, compared to how they would have acted in the past.

Presumably they told the Govt this at the time the legislation (EC directive) was being passed? Why did Brown overlook the impact on the BOE?

If the BOE did spell it out then Brown is solely fault. If they did not spell it out at the time, then the BOE is at fault along with Brown since his finance people should have spotted this.

Our Treasury cabinet need to get out there and ask the questions. Just follow the paper trail on this and some Govt heads may roll.

Come on George, pull your finger out and get a scalp!

[Teck]

Iain, from past experience, whether in this instance in Treasury or other departments such as justice, health, etc., I think our attack will be cork shots and off-target.

So far, the 1pm News on BBC Radio 2 has not shown any signs of a pulverising attack.

[Tony Makara]

The whole situation has been handled badly and different messages has been coming out of the BOE and the Labour government. That tells us that the BOE had one way of looking at the problem and Labour had another. Gordon Brown has clearly called the shots and directed the BOE to act. So much for the so-called independence of the BOE. However if we look back to Gordon Brown's letter to the BOE back in June 1997 he wrote that:

"The legislation will provide that if, in extreme economic circumstances, the national interest demands it, the Government will have the power to give instructions to the Bank on interest rates."

So the much vauted independence has been a myth and will always be subject to political imput. Gordon Brown will do anything to prop up his credit-economy.

Personally I think the BOE and government of the day should work together in the best interests of the nation. However for Brown to claim the BOE is independent and then to oversee a 180 degree turn in policy undermines confidence in the BOE.

[Veritas]

I am very much in two minds on this issue: balancing the political and the economic implications. What I would observe is how impressive the MP Michael Fallon was both last night on the BBC and today at the Select Committee. Someone please explain to me why he is not Shadow Chancellor? Come on, Dave, raise your game: ditch Boy George and put a serious player in charge of the Treasury brief.

[David]

I don't think it really matters; the public have made up their mind, and it's not Brown they blame.

[Dave Bartlett]

@David 13:56

"I don't think it really matters; the public have made up their mind, and it's not Brown they blame."

The ones I talk to do.

[Malcolm Dunn]

Not sure you're right there David. This story may have much longer to run (a bit like Brown's budgets which always get good headlines until the small print is read and the truth comes out).
I watched the King interview and although he did his best he grew quite uncomfortable when questioned about the tripartite relationship between the Bank, the FSA and the Treasury.Clearly this relationship failed on this ocassion.
As Andrew Lilico has already mentioned the '4 pieces of unconnected legislation' also made it impossible for the BOE to act in the way that King would have liked to.
I cannot believe the Bank will simply continue as if nothing untoward had happened.

[chrisc]

King performed very well this morning while most of the committee seemed in blissful ignorance of the relevant legislation.
Hell, they only vote on it; what do they know?
King must not be allowed to go down.
It's fair enough to ask where's Gordon.
But where on earth is Osborne?
Pathetic.

[Bruges Group]

Which is more likely.

Mervyn King being reappointed for a second term as Governor of the B.O.E, or George Osborne standing on the steps of No.11 in a few weeks time with a red box in his hand?

......Or Elvis being found alive on the moon.....

[Dave Bartlett]

@Bruges Group 14:33

The editorial in today's FT puts the blame for the Northern Rock fiasco on the system Mr Brown established when Chancellor. I like the Conservatives chances at a general election myself.

[HF]

I saw George on BBC News on this matter an hour ago and he waffled on without landing a punch. The interviewer prompted him with the question about Merv saying the legislation stopped him. So George came back with the response that he had offered to help the Govt change it.

:-0

George, instead of helping the Govt, how about attacking the Govt for putting in awful legislation (albeit an EC directive) that stopped the BOE doing its job?

Completely clueless. Someone please tell George he is supposed to represent the opposition.

[Dave Bartlett]

"I'm in Brighton for Ming Campbell's speech but I'm gripped by Mervyn King's appearance before the Treasury Select Committee. He's effectively giving ministers a lecture on the importance of sticking to the framekwork for long-term stability championed by Gordon Brown. The sub-text is that it's gone out the window, and it's Mr Brown's fault. " Ben Brogan, Daily Mail

[Yet Another Anon]

A lot of the problem is due to Homebuyers in the Developed World (especially the USA) having borrowed more than they can afford to repay, in addition to that a takeover bid for Northern Rock.

If the Bank of England were to step in early and provide loans then this would encourage Financial Institutions to be dependent on the Bank of England and resort to such a measure as a first course.

Surely there is a question as to whether the State through the Bank of England should be lending money to Banks, or whether it should be up to Banks to support themselves where neccessary borrowing through private organisations. Northern Rock still has the advantage of having a customer portfolio that has value simply through access; the question is whether allowing a single bank to possibly go down leaving vast numbers of people out of pocket could ever be acceptable economically or politically.

It's something that none of the political parties have really considered for some time - at least certainly not publicly anyway.

[Yet Another Anon]

If the UK Central Bank were renamed to the UK Reserve or UK Central Bank rather than the Banl of England I rather think that would defuse a lot of Scottish & Welsh Nationalist sentiment and help foster a United Kingdom Nationalist position, coupled with a balance of devolution across a new Federal Structure.

[Tony Makara]

"King performed very well this morning while most of the committee seemed in blissful ignorance of the relevant legislation."

ChrisC, very true. Actually it might surprise the general public to how how few politicans are actually knowledgable on ecomomic matters beyond the basic macro level.

John Redwood is very well clued up on wider economics, but believe me when I say that he is very much an exception among MPs.

All new MPs should be sent on a day-release to work in the city and take notes on how the markets operate so that they have a real understanding of what is happening.

[Mike H]

It's pretty clear that the guilty party here is Brown aided and abetted by the ever-meddling Eurocrats.

Mervyn King should stay in office - it's Brown who should lose his job. But we all know what the outcome will be. It will be no fault of the government - when is anything ever their fault - the blame will be placed at King's door. Like the turkeys, he'll be gone after Christmas.

[Iain]

"If the BOE did spell it out then Brown is solely fault. "

HF, I understand Eddie George threatened to resign on the issue. I think that goes beyond spelling it out.

"Dave, raise your game: ditch Boy George and put a serious player in charge of the Treasury brief."

Now we know why Cameron said the next election wouldn't be about economics but social breakdown, for the very simple reason, the people he put in the Shadow Treasry team can't carry an argument, let alone land any blows on the Government.

[Scotty]

"Completely clueless. Someone please tell George he is supposed to represent the opposition."

HF, I must have watched a different BBC interview with Osborne!
As for landing punches I think that he made the important point about connecting the BoE's actions to those of the FSA and the Treasury, and as he rightly pointed out we still don't have enough details of the sequence of events to make any solid judgements.
As of this moment we do not know exactly what happened between the BoE, FSA and the Treasury, and until we do I think Osborne took the wise course of setting up the relevant questions that need answers. At this moment we need him to be acting like a future Chancellor not an opportunistic politician. As I said on an early thread both he and Cameron have to take a very careful line on what is an ongoing crisis.
If he makes rash assumptions or accusations that turn out to be wrong then his and our credibility is trashed, a bit like that of the NR board at the moment.

[David Cooper]

Never mind if our Shadow Chancellor has missed a golden opportunity in a news interview. The Question Time lineup tonight has John Redwood up against Geoff Hoon. Let's see who wins the most applause when Northern Rock is discussed.

[Tony Makara]

David Cooper, thanks for tip on question time. I actually stopped watching that show years back after they began dumbing down but Redwood Vs Hoon sounds entertaining. Tonight I will definately tune in.

[MHDH]

Look if there's one fairly unifying theme, it's that Boy George is not up to the job (also doesn't his voive get higher and squeakier when he's under pressure). Realpolitik shows that economic matters most often determine people's votes. As such, will someone close to the leader, please urge him to ditch / move Osborne before the gulf on economic competence between Brown-Darling and Cameron-Osborne REALLY gets out of hand. Refer to the Times poll if anyone needs any food for thought on this one.

[Dave Bartlett]

@David Cooper 16:01

I think the BBC recruit their Question Time audiences via the Socialist Worker. I wouldn't hold your breath waiting for a Conservative MP to get a fair hearing with that audience.

[Malcolm Dunn]

No Dave, much as I dislike the BBC's political coverage they do try to get a balanced audience. I was in the audience about eighteen months ago (sitting next to Chad Noble of all people) Ed Balls was the politician who was given the hardest time.

[GU (Given Up)]

It's perfectly obvious that the B o E is being set up as the fall guy, for Brown's crazy idea of giving mkt oversight to the FSA. He broke a perfectly good system.

Northern Rock broke rule 1 in banking, you don't borrow short and lend long, they were an accident waiting to happen, once mkt conditions went against them, but the FSA never stopped them.

The FSA keeps bleating that Northern Rock was solvent, it wasn't, as it had been shut out of the mkts, that provided all it's funding. It was only a matter of time before it went belly up....yet that business model had been aproved by the FSA, which is part of it's remit.

So either the FSA knows nothing about banking and the risks involved, or it missed the problem from incompetence.

Market oversight should be given back to the Bank, where at least there is experience and ability.

As for little George, if he had ever run anything bigger than his tuck box, he might understand what has been going on.

[Scotty]

"Look if there's one fairly unifying theme, it's that Boy George is not up to the job"

Why?? Because I am trying to think of one chancellor who did appear up to the job before they sat behind the desk in No11.
Alastair Darling looks far more out of his depth than Osborne this week, in fact he is looking very nervous and has at times stumbled over his brief when interviewed.
Are we totally incapable of letting someone grow into their brief??
It really is a joke on here sometimes, at the first sign of trouble we shout for the head of one of our politicians, that in the end does the damage to our credibility. We demand that our leaders win elections, but we always start the rumblings, undermine them and then wonder why the public and the media don't find them credible!!
How ironic and so bl**dy typical of the Conservative party. The BoE, FSA, The Treasury and NR all under the spotlight in the middle of a crisis and some on here want to use this as a platform to dump our shadow Chancellor, you could not make it up if your tried! Will you look at yourselves?
Trust, confidence and a bit of loyalty is what will finally give the public the confidence to trust us.

[Iain]

"and as he rightly pointed out we still don't have enough details of the sequence of events to make any solid judgements."

If George Osborne is waiting to get all the facts in place before he makes any telling comments, well sorry that's a cop out, for you will never get all the facts, and when you do its histroy. The fact is we have had the first run on a bank in centuary, if George Osborne can't land any blows with that amunition, well he should be sacked as being useless.

[HF]

An economist on BBC said that the key legislation (no secret lending) was changed in 2002. The "Eddie threatened to resign" issue was over the move of Bank supervision to FSA.

George's point on the tripartite failings does not get us a smoking gun, it just looks like a bureaucratic muddle and he did not even say "it failed and Brown set it up" (as the FT stated).

The removal from the Bank of the ability to lend on the quiet, was what stopped Mervyn.

[Scotty]

"As such, will someone close to the leader, please urge him to ditch / move Osborne before the gulf on economic competence between Brown-Darling and Cameron-Osborne REALLY gets out of hand. Refer to the Times poll if anyone needs any food for thought on this one."

One other point I would like to make is that if there is one politician which Brown does not like its Osborne, and he would delight in seeing yet another shadow chancellors scalp being added to his belt. In fact who has the higher score in that department, Blair or Brown??
If there was one thing that could deflect from the pressure on Brown, Darling, the FSA, BoE or NR it would be the usual own goal of the Conservatives shooting themselves in the foot.

[MHDH]

Scotty, chill, and get your candidates' list application in the post. Some of us who work in banking have to review and judge the politico-economic performance of key players. Darling is inadequate, I grant you. in the City, we always liked Ed Balls. However, Osborne is intellectually and politically out of his depth. The Times showed the only voters moving towards the Government after NR were Conservatives. He does not look or sound the part.

Oh yes, on people who have looked the part prior to assuming the role who have looked impressive, I would mention in the last 20 years: Brown, Ken Clarke, Nigel Lawson, Geoffrey Howe for a start.

[Tony Makara]

MHDH, as someone who works in banking what exactly do you look for? What in your opinion gives a person that added gravitas and sets them apart from an underperformer? Is it strategy, presentation, even linguaeconomica that gives a person the cutting edge?

[MHDH]

Fair qs. Lingua, presentation and strategy are all in there. We don't like surprises (like NR), but neither do we like the I haven't a clue / startled rabbit in the headlights look. Stability, calm and confidence performance all helps loads.

[HF]

Scotty, when Blair & Brown were in opposition they dedicated themselves to wounding the Tory Govt. They did not offer help with legislation.

George has open goals and he is failing to score.

[Martin Wright]

Some technical comment while on holiday in Canada:

Andrew Lillico -re your third bullet, I have no doubt that Northern Rock is solvent. Its problem has been liquidity, not solvency. Example: Supposing you had a house worth GBP 1m and no debt. At the same time all your income is used to pay monthly bills. You would clearly be solvent. If you were suddenly faced with an unexpected bill for GBP 10k that could not be met from your income, you would face a liquidity crisis not a solvency crisis. It could take at least 3 months to sell the house, but the creditor is pressing. The normal alternative is to take a secured loan but that is the current problem - the interbank lending market has dried up because of the contagion fron those notorious American CDOs.

GU @ 16.36 I don't know where you got your No.1 rule in banking from. Since banking first began, it has always been a feature that deposits tend to be of shorter duration than much of the lending and that is why there is always a risk of a liquidity crisis if there is a run on a bank. Banks have 3 main sources of funds. The first and most permanent is shareholders' capital, but this is only a small proportion of funds. The second source is customer deposits - these tend to be of short life but in normal circumstances withdrwals and deposits balance each other out. By far the largest source of funds is from the capital markets whether through the issue of long term bonds or shorter term borrowing in the interbank market, issue of commercial paper etc.

Northern Rock's problem seems to have been the aggressive rate of expansion - 20% against on overall growth of the market of only half that. Its business model was to bundle new mortgages and sell the packages as bonds in the capital markets. That worked fine until the music stopped this summer.

This is where the Bank of England comes in as lender of last resort. Given that liquidity in the interbank market has become very tight, the Bank has a role in providing temporary liquidity until the works are ungummed.

It is most unfortunate that the Bank was forced to announce the availability of the line of credit.

[Chad Noble]

"I was in the audience about eighteen months ago (sitting next to Chad Noble of all people)"

Well, it's a bit discourteous of you to fail to mention that was simply because I let you take a free ride in the taxi I was in Malcolm.

Ungrateful free-loader ;-)

[Scotty]

"Stability, calm and confidence performance all helps loads."

We have had that from Osborne this week, but not sadly from Darling!

"George has open goals and he is failing to score."
HF, did you listen to what was said this morning at the Treasury Select Committee this morning??
Who put the present system in place and which laws restricted Mervyn King from acting as he would have wished to avert this crisis? Osborne has *helpfully* thrown done the gauntlet to Darling, will he pick it up and allow the Conservative party to help clean up the mess made by Brown and this government?
Osborne might even be able to offer some advice on what to do about restrictive EU legislation as well.
What Osborne should not do is run around causing yet more uncertainty by fuelling the crisis for cheap political opportunism, it would backfire, and deservedly so.

[Traditional Tory]

Michael Fallon's contributions to the NR debate have been well-informed and valuable.

Isn't it amazing that his talents remain largely untapped by Cameron while the walking joke Osborne remains Shadaw Chancellor?

[Iain]

"Osborne has *helpfully* thrown done the gauntlet to Darling, will he pick it up and allow the Conservative party to help clean up the mess made by Brown and this government?"

Such generosity might be fine if George Osborne had laid down some markers before and had critically challenged Gordon Brown's economic record, but he hadn't, so what we have is nothing, from him, then generously seeking to help the Labour Government. At no point has he made it clear to the electorate who is to blame, so not surprising that with the first run on a bank in 166 years we find the Labour Government escaping from the debacle without a stain on their economic management.

Look at the bare bones of the situation. First run on a bank in 166 years, and the Labour Government doesn’t suffer in the polls. This can only mean the Shadow Chancelor hasn't been doing his job, and its beyond him to do the job.

Good Lord what does it need for the Shadow Treasury team to put one over on Labour if they can't do it with when handed a once in a 166 year event?

[Malcolm Dunn]

If I've been discourteous to you Chad then of course I apologise.

[Chad Noble]

:-) You're welcome Malcolm. You can buy me a pint after the next election as I think we may be on the same side then!

[James Maskell]

King is sunk and is out at the end of his term. We know he was pushed by the Chancellor and Brown. Theres no way he would throw away his credibility in the way he did during this. He was completely in the right by saying no to Northern Rock in the first time of asking.