ALEX BRUMMER: King's critics are off beam

By ALEX BRUMMER, CITY EDITOR
Updated: 17:46 EST, 1 December 2010

It has been an odd ten days for Mervyn King. Last week the Bank of England governor was assailed by external Monetary Policy Committee member Adam Posen - before the Treasury Select Committee - for being too close to the Tories on fiscal policy.

Now it has been revealed by WikiLeaks that he was fearful in February, when he met the US ambassador Louis Susman, that the Tories (then in opposition) did not have a credible fiscal policy in place.

Actually there is not much inconsistency in what he has been saying.

Under pressure: By all accounts King is not a naturally collegiate figure and this has nurtured enemies even though paradoxically he was an extremely good university teacher, says Brummer

Those who have attended his Inflation Report press conferences and have studied the transcripts of his testimony before both the Commons and Lords select committees will find little new.

In the run up to the election, King - rightly as it has turned out - was concerned that while both Labour and the Conservatives were aware of the nation's looming deficit and debt problems, no one had spelled out a credible plan for putting them right. As the Chancellor George Osborne observed in a CNBC interview just released, if the Tories had not come out of their corner fighting in the emergency budget, with a multi-year deficit reduction plan, then there was a danger that the UK could have lost its AAA credit rating.

And while it might have been an exaggeration for Osborne to suggest - as he did at his first press conference on cuts - that failure to act quickly might have turned the UK into the next Greece, we can now see how important it was to bring order to our fiscal affairs.

Those countries that have failed to satisfy the markets that they are serious about addressing budgetary and banking difficulties - Ireland, Portugal, Spain and now Belgium and Italy - are feeling the full force of speculative activity. The new 'gnomes of Europe', to use Harold Wilson's famous description of speculators, have found the weak spot in financial markets (as they did after Lehman's collapse in 2008) and are exploiting it.

King's entry into the fiscal debate is entirely legitimate. The Bank has seen it as a duty to try and keep the balance sheets of the banks and corporate Britain liquid at a time when the government is pulling up the drawbridge on spending.

But it can only keep bank rates low and leave open the option of further 'quantitative easing' (something that Adam Posen has regularly voted for) if sensible medium-term economies are made in Whitehall.

One of the attractive elements of having an independent Bank of England is that the governor can say publicly what he thinks without fear that he will be immediately sacked or reprimanded. King has not been shy about that at all.

He was among the first officials to suggest (in the early part of 2008) that the banks might need to be recapitalised. He had learnt from the lessons of Northern Rock - it had neither sufficient capital or liquidity at the time of the run in September 2007 - and knew what needed to be done.

After the banking crisis he has been the leading critic of the universal banking model under which the deposits of ordinary customers are placed at risk by the casino-style activities which came close to bringing the financial system down.

King, who previously had preferred a narrower model of the Bank of England as a monetary institution (similar to the old Bundesbank), actually had the wisdom to learn something from the financial crisis.

With the benefit of hindsight it was probably not the wisest thing to express his misgivings about David Cameron and Mr Osborne's economic experience and that of their colleagues to a U.S. diplomat.

Clearly, there will be critics (mostly on the Left) who see King as a bounder and want him removed. Disgruntled former MPC member David Blanchflower, who feared mass unemployment if interest rates were not lowered earlier, is among them.

By all accounts King is not a naturally collegiate figure and this has nurtured enemies even though paradoxically he was an extremely good university teacher.

The recent high-profile coverage could potentially, however, do the Bank harm. It might well encourage the politicians, who have to appoint a new governor by June of 2013, to think beyond the leading internal candidates, including deputy governor Paul Tucker, and look towards a commercial banker.

Barclays departing chief executive John Varley is among those who have been seen in this potential role and recently has spearheaded an effort to end a period when bankers have been regarded as social outcasts. But Varley brings with him his own baggage of allowing investment bankers at BarCap to fill their boots before, during and since the crisis.

That is why government, of whatever colour, needs to place integrity and independence of thought above all else when it comes to filling King's shoes.