Mervyn King has compromised the political neutrality of the Bank of England, has broken his own rules about keeping politics and economics separate, and should resign. At least, that is the view of the New Statesman‘s economics columnist, David Blanchflower, who has written a stinging attack on King for the Guardian in the light of leaked documents concerning his relationship with the coalition government.
Documents published by WikiLeaks and on the Guardian‘s website today show that King revealed his grave reservations about the Conservative deficit reduction plans in conversation with the US ambassador before the general election. Blanchflower writes:
King confirmed my long-standing view that on economic policy the coalition is totally out of its depth. In a devastating critique he told US ambassador Louis Susman that David Cameron and George Osborne lacked experience, dealt in broad generalities, tended to think about issues only in terms of their political rather than their economic impact and surrounded themselves with a very narrow and weak team of young advisers. That is a recipe for bad economic policymaking.
But it is King’s apparent affinity with Conservative Party policy that provoked Blanchflower’s call for his resignation:
There were insights in the embassy documents that I found truly shocking, not least the details of King’s attempts to co-author the coalition’s strategy on the deficit. That is definitely not part of his job description.
And this information emerged only a few days after revelations by Adam Posen at the Treasury select committee that members of the MPC were uncomfortable that statements King had made were overly political. The Financial Times, in a recent article, made it clear that others on the staff at the Bank shared that view. The governor of the Bank of England should not be in the business of shaping one political party’s macroeconomic policy.
Blanchflower points out that dealing with a governor of the Bank of England who is all but a card-carrying Tory would be rather awkward for any future Labour government.
He has now committed the unforgivable sin of compromising the independence of the Bank of England by involving himself in the economic policy of the coalition. He is expected to be politically neutral but has shown himself to be politically biased and as a result is now in an untenable position. King must go.
During my time on the Monetary Policy Committee (MPC), King made it abundantly clear that members should not comment on fiscal policy and should stay out of party political matters. He has failed to follow his own advice. How could Ed Miliband or Alan Johnson ever trust King to give them advice on economic policy, now he has shown his true party political colours? Once independence has been compromised it can never be restored.
This attack on King is far from Blanchflower’s first. In his debut article for the New Statesman, last September, he described his time working with King on the Bank of England’s Monetary Policy Committee (MPC) during the financial crisis.
In particular, he singled out the MPC’s unwillingness to countenance the possibility of a recession in late 2007 – a reluctance that led to the arguably catastrophic decision to keep interest rates high until October 2008. Blanchflower found himself a lone voice when he predicted that the MPC’s decisions were a recipe for years of economic hardship.
So why did the committee get it so wrong? From my perspective, it was hobbled by “group think” – or the “tyranny of the consensus”. Governor Mervyn King, the old iron fist of the Bank of England, with his hawkish views on rates, dominated the MPC. Short shrift was given to alternative, dovish views such as mine. I focused on the empirical data suggesting Britain was heading for recession; Mervyn and the rest of the committee focused on their theoretical models and the (invisible) threat of inflation. In fact, the Bank of England may more suitably be called “the Bank of Economic Theory”. Unfortunately, the economic theories failed just when we needed them most.
Throughout this crisis the MPC needed the advice of experienced bankers, lawyers, businessmen and market-watchers. Unfortunately, practical folk who knew how to spot and cope with banking crises were in short supply at the Bank of England. There were too few regulators on the staff. Instead, the Bank was stocked full of mathematical modellers who had never seen the inside of a commercial bank or a hedge fund – and the models they used failed to pick up on the greatest financial crisis in a century. Yet, in my view, it was clear from roughly six months before the Lehman’s crash in September 2008 that a financial tsunami was heading our way from the United States.
Clever as Mervyn King may be, he missed the crash and the subsequent recession, and hence, so did the consensual MPC on which I sat. In August 2008, the MPC’s quarterly Inflation Report did not even contain the word “recession”; it saw the economy standing still over the next year. I very nearly quit the committee at that point. In an interview that month with Reuters, I called the forecast “wishful thinking”. Mervyn called me into his office to admonish me for that one.
King would have good reason to be feeling insecure in his position at the moment – and not just because of an attack by a former colleague.
Asked how the government would react to King’s pre-election comments about the Conservatives, a Downing Street spokesman answered that the Prime Minister believes the governor is doing a “good job” – but hedged on the question of whether or not Cameron still has any confidence in King.
“The issue of confidence simply doesn’t arise,” he said.