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7 March 2016

Mervyn King and the Maradona mystery

How the global financial crisis changed the former Bank of England governor’s thinking about economics.

By Ed Smith

The career of Mervyn King, now Lord King of Lothbury, has been played out in gilt-edged establishment institutions: the University of Cambridge, Harvard, the Bank of England (where he was governor from 2003 to 2013) and now the House of Lords, where he sits as a crossbencher. But King is far harder to “place” than his CV suggests. He likes to put complex ideas into plain language, often using sporting metaphors, a characteristic of English anti-pretentiousness. Yet his Englishness is not so deep that he hides his intellectualism, his delight in ideas and the energy they provide. The witty don, the technocrat, the pure intellectual: each strand seems equally central.

We are having morning coffee in King’s library at his house in east Kent and discussing his new book, The End of Alchemy: Money, Banking and the Future of the Global Economy (Little, Brown). It is nearly three years since he left the Bank of England and, not untypically for someone who has left high office, he looks as though he spends more time outdoors these days. Perhaps less typically, he seems to be enjoying his life of freedom and thinking.

The library is inside the frame of an old barn next to his oast house, but King’s wife, Barbara, added huge windows and beech wood from eastern Germany for the bookcases and central table. It is bright and modern rather than country-house tweedy.

King was born in 1948, in what he calls the “golden age of English meritocracy”. The son of a railway worker who retrained as a teacher, he passed the eleven-plus and went to Wolverhampton Grammar School. Having gained a place at Cambridge to study mathematics, King changed to read economics at King’s College. He chose the college because of its celebrated alumnus John Maynard Keynes, and witnessed at first hand the tensions between old-school “Keynesians” and the advocates of a novel, more mathematical approach to economics.

His educational journey was less unusual among that postwar generation, and the arc of his career encompasses a particular chapter in English social history. “I belong to this fortunate generation, too young to have had to fight in the Second World War or do national service, but old enough not to have paid anything for my education,” he told me.

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After his finals, King planned to do a doctorate at Warwick. But one day, under the door of his undergraduate rooms at Cambridge, he found a letter from the head of the department of applied economics offering him a job. After two years in the department, he won a Kennedy scholarship to Harvard. “That link into US academic life was fundamentally important,” he says. The experience led him into new intellectual circles – at Harvard, he was taught by Janet Yellen, now the chair of the US Federal Reserve – and encouraged in him the sense of greater challenges than climbing the Oxbridge ladder. In 1991, having alternated between posts at universities in the US and the UK, King left academia to join the Bank of England as its chief economist.

There are seven busts sitting on his ­bookcases: Shakespeare, Goethe, Charles James Fox, Gladstone, Adam Smith, Cicero and Matthew Boulton, the Birmingham entrepreneur whom, together with his business partner James Watt, King put on the £50 note. Next he wants statues of Benjamin Franklin and Alexander Hamilton.

Nearest to King’s chair is Gladstone. “There are two extraordinary things about Gladstone,” he explains. “One, he spent far more time in the chamber of the House of Commons than any modern politician: he’d sit through most of the debates. And then he’d also spend six months abroad, writing great books of theology and philosophy. His hinterland – those ideas, that thinking – is what made him.”

But with busyness so celebrated today, isn’t it impossible to preserve your thinking
time and also keep your job? “Not if you have the top job. Before I became governor, I was frustrated that other people determined my diary. As governor, I made a very clear decision: apart from a very limited number of meetings, I would keep mornings free for thinking, reading and writing speeches. I scheduled all meetings for the afternoon. If you’ve already had a half-day of meetings, the emotional result is that it is very hard to go away and think dispassionately.”

He quotes from a conversation that took place between John F Kennedy and Gore Vidal in 1961. Kennedy said that he was relatively unimpressed by the brightest of his own generation, but had found that when he entered the intellectual world of the 18th century and the men who wrote the constitution – a bunch of farmers, essentially, living miles from any intellectual centre – he was intellectually dazzled. The young president asked Vidal why he thought this might be.

“It’s very simple,” Vidal replied. “The people you meet now are so busy that they never have time to read and think and write. Those 18th-century farmers spent an awful lot of time reading, thinking and writing. And that’s why America produced such a good constitution.”

If the trajectory of “reading and thinking” was declining even in the 1960s, where has it reached in the age of rolling news and social media? The value of reflectiveness and long-term thinking are King’s recurring themes. One accusation is that he reacted too slowly during the world financial crisis that began in 2007. The Bank of England’s Monetary Policy Committee, for instance, was criticised for not cutting interest rates faster.

Is it possible, then, that his temperament and style (“We didn’t give lots of announcements”) influenced that perception?


In spring 2011, King had a pointed conversation with a Chinese central banker. “We . . . have learned a great deal from the West about how competition and a market economy support industrialisation and create higher living standards,” his counterpart began. “We want to emulate that.” Then the sting in the tail: “But I don’t think you’ve quite got the hang of money and banking yet.” This remark inspired him to write The End of Alchemy.

“I had to think carefully about what kind of book it would be,” King says. “It couldn’t be a memoir: how could I be considered objective? The right people to write an account of the crisis are either dispassionate historians, many years on, or the private secretaries of the people involved.”

The book is intellectual rather than gossipy, but it is unblinking. King’s criticisms are targeted not only at the usual suspects (greedy bankers), but also towards his old profession – academic economists. He takes aim at the whole system, asking why money and banking turned into the Achilles heel of the market economy.

One of King’s specific suggestions is that central banks should move from being, in the theory defined by Walter Bagehot, the “lender of last resort” (LOLR) to a position that King advocates and that he terms a “pawnbroker for all seasons”.

The economic and moral objection to LOLR is that when large banks urgently require money, as happened during the financial crisis, it is the taxpayer who stands behind the losses of an allegedly privately run and privately profitable industry. So the banks get the upside in good times and the state bears the cost during bad times. This has led some critics (including the Financial Times columnist Martin Wolf and King’s former co-author John Kay) to propose an outright end to “fractional reserve banking”, under which banks create deposits to finance risky lending and so have insufficient safe cash reserves to back their deposits. The proposed move would separate safe retail banks (handling current accounts and so on) from banks that take greater risks.

King, however, thinks it is possible to ­retain some advantages of modern banking while removing the pre-crisis imbalance of risks and rewards. As private individuals, we are all familiar with the idea that we are prepared to pay more to borrow money when we desperately need it. That sustains the business model of the pawnbroker. King’s argument is that central banks, when a crisis hits, should be able to provide emergency money to distressed institutions, but only by lending against collateral that has been examined and priced in advance, during the good times. The banks would have to stump up enough collateral to enable the central bank to provide the cash needed by a bank to pay its depositors in a future crisis. In effect, the banking sector would pay a fee upfront for the insurance that it currently gets for free.

Given that we appear to be entering another period of intense economic uncertainty, with the slowdown in China and the fall in commodity and share prices, the book addresses two pertinent questions: why has this recovery been weirdly slow and incomplete? And why do the old levers seem so ineffectual?

King thinks this downturn is taking a new form, one that conventional economics can’t cope with. He calls the slump a “narrative revision downturn”. In essence, we are pretty convinced we are going to be poorer than we thought was the case before the crash, and we won’t be persuaded otherwise by the usual tricks and sweeteners. “People aren’t pursuing optimising strategies – the assumption economists make; they are pursuing what I call ‘coping’ strategies. And there is no mathematical solution to that problem.”

King recalls sitting with his peers around the table in Washington, DC in October 2008. “No one round that table believed that by 2016 we would still be facing a very slow recovery.” But the old assumptions no longer apply. “Economic models presume that the world travels along some steady growth path, with the odd upward or downward shock – ‘headwinds’ or ‘tailwinds’. The problem is that the model has no room for the idea that the current headwind isn’t going to go away. Beliefs have changed. The idea that if we just wait long enough with low interest rates, then things will naturally recover. I think that’s fundamentally flawed.”

King, who trained academically in a highly technical and mathematical era of economics, now thinks that the discipline’s orthodoxies are not relevant to today’s problems. “Many economists won’t like this part of the book. Postwar economics is like Newtonian mechanics: very good in a wide range of situations. But it’s not a general theory. Einstein demonstrated the ways in which Newtonian mechanics doesn’t hold. Radical uncertainty [King’s phrase for today’s profound uncertainty about the future] is the equivalent for macroeconomics.”

King might not have become governor if he hadn’t been deeply schooled in the economic style of his era. But his experiences as governor led him to reassess the foundations of his own subject: “This is a book I could not have written before the crisis. And it’s not because I’m talking about the crisis. It’s because the experience of the crisis changed the way I thought about economics. Not just banks and markets, but much deeper than that.

“People’s beliefs and expectations simply cannot be captured by an economist’s view of how the world works.”

That being the case, if he could have his time again, would he seek to influence the economic outlook as a politician, as an independent commentator, or once again inside a central bank?

“As governor. You’re doing something. If I’d been a columnist, I’d have been frustrated. What if I thought I’d had a great idea every week, but after ten years none of my 500 ideas had been implemented?”

And politics? “What I observed among prime ministers is how hard they found it to step back and think things through. Across politics, you sense the focus on tomorrow’s headlines. Politicians are judged by smartness, articulateness, looks. But you don’t get the impression that they’ve thought deeply about the subject and have got something new to say on it and that’s what has motivated them.”

“The overwhelming burden of being a professional politician, King argues, extenuates short-termism and identikit style. “When I advised people to disappear for a fortnight, then come back and give a speech that would try to set the agenda for the next five years, it would be met with incredulity. They’d say: ‘We can’t disappear. We’ve got to be here to respond.’ But if all you’re doing is responding to the other side, you’re stuck just shouting at each other.”

King singles out Nigel Lawson and Frank Field as being unusually intellectually considered. “But it’s very hard for politicians to make time to think through the big issues. And we don’t make it easy for them.”


Mervyn King’s last day at the Bank of England, in June 2013, was occupied with the traditional Governor’s Day cricket match at the Bank’s ground in Roehampton, south-west London. As his successor, Mark Carney, watched from the boundary edge, King’s final few minutes in office were spent bowling a tidy over of well-flighted left-arm spin. Mike Brearley, the former England captain who was umpiring, called “Over!” before Andrew Strauss, another former England captain, ran over to offer a handshake and the injunction, “You can relax now.” And King’s innings as governor was closed.

He is devoted to sport. During the financial crisis, a senior Fleet Street journalist told me about a conversation he’d just had with the governor. How, the editor wondered, were things going? Terrible, King replied. Crikey, the editor wondered, how much worse could things get? A run on sterling? Another huge bank going down? “It’s a confidence issue,” King said. “We’re creating loads of chances, but just can’t find the back
of the net.” He was talking about the struggles of Aston Villa, his beloved football team (he is now a director of the club).

King enjoys mischief. He began one Mansion House speech arguing for deep and profound changes to the ECB. The status quo was indefensible; only structural reforms would do. What on Earth was the governor doing, laying in to the European Central Bank without warning? “Yes, it’s time to reform the England and Wales Cricket Board.” England’s cricket board shares the initials “ECB” (poor Wales is left out) with the eurozone’s central bank.

While King’s sporting tastes may be English, his willingness to utilise them intellectually is more American. In the work of the evolutionary biologist and essayist Stephen Jay Gould, for example, baseball can pop up almost anywhere, and one of King’s former students at the London School of Economics, Michael Lewis, struck gold with Moneyball, exploring how clever baseball managers can exploit inefficiencies in the transfer market.

King uses Diego Maradona’s second goal against England in the 1986 World Cup in Mexico as an analogy for setting interest rates. Maradona ran 60 yards, beating five players before scoring. “The truly remarkable thing is Maradona ran virtually in a straight line. English defenders reacted to what they expected Maradona to do. Because they expected him to move either left or right, he was able to go straight on.”

He points out that in 2002 the Bank of England met its inflation target with unchanged official rates, even though expectations of future interest rates (revealed in market interest rates) did move around. The point is not that interest rates need never change – far from it – but to illustrate the power of expectations as well as “actions”.

There is an irony here. In office, King often spoke about making central banking “more transparent”. But isn’t an element of mystery essential in order for the Bank – just like Maradona – to steer expectations, for the good of the economy, one would hope? Put differently, what do central bankers really do – crises notwithstanding – beyond projecting confidence while supplying subtle signals? King, for his part, quotes the view of Paul Volcker, the former American central banker, that mystique is the most important quality in the job. “There are limits to the desirable degree of transparency,” King writes in his book.


King has his critics, of course. In The Silo Effect, Gillian Tett of the Financial Times accuses him of promoting an “Econ tribe” inside the Bank of England, narrowing its intellectual range and perspective. King is happy to acknowledge that economics had to become more central to the Bank, especially after it achieved independence from the government in 1997, but he believes his intellectual efforts were directed against a blinkered Econ tribe.

“One of the first things I did as governor was to start a financial history dining club. Because I thought I learned more from history. And in the induction programme for people joining the Bank, I made financial history a serious component. Yes, there are economists, some at central banks, who think that their computer models capture it all. But more than anyone else on the MPC, I would say, ‘These models are not good enough. They don’t capture what goes on.’ And that’s what the book is about.”

Summarising his contribution over 22 years, King says it was “getting ideas into the Bank; just knowing the mechanics of how things work is not enough”.

What about the criticism that he reacted too slowly during the 2007-2008 financial crisis? “Look at the IMF statistics on which central bank expanded its balance sheet the fastest and the most. The answer is the Bank of England. A very odd myth persists about ECB [the European bank, not the cricket board]. They announced that they would lend over €100bn, and the next day they would lend €95bn. Everyone thought, ‘Gosh, they’re lending vast amounts.’ After one month, the amount of lending to the banking sector was precisely zero. They lent a hundred billion for one day, 95 billion for one day. After one month they had extended no net liquidity. The Bank of England had.”

So, why the perception that he dragged his heels? “Now I’m doing what I said I wouldn’t do in the book! We didn’t make any statements or get involved in PR. And more importantly, Northern Rock got into serious trouble [in late 2007]. The same thing happened in the US, but because of their resolution mechanism they were able to deal with it and prevent a run.”

The Northern Rock experience, he adds, “should not encourage the lesson ‘OK, these things happen from time to time’ but, instead, ‘we’ve got to redesign the system’. That’s why the ‘pawnbroker for all seasons’ is important. If you just treat the symptoms, the problems don’t go away.”

Others with greater economic expertise than I have will assess King’s contribution as governor and the reforms he advocates in his book. But I can offer a personal reading.

Many books on the “causes of the crisis” exploit their own kind of alchemy: glamourising catastrophe by turning it into breathless drama. King’s book is the opposite. It is elegant, yet deliberately anti-dramatic. It undersells and overachieves. You finish it with a clearer understanding that “fixing” our deep economic problems cannot reside in one epic meeting, nor even with one all-powerful figure: not a governor, not a prime minister. The threads are too numerous and too entangled. Sometimes influencing several constituencies – all of which have a necessary role to play – relies on intellectual exploration, not just specific reforms.

Superficially, King’s career appears to consist of two equal halves: 22 years an academic, then 22 years a central banker. He has returned to academia and spends the autumns as a professor at New York University. But I wonder if a third segment – the one devoted to writing, and not just within academia – will lend a different shape to the whole. The qualities King prizes are time and autonomy, with independence rated even more highly than acceptance: the natural apartness of the writer.

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