Mervyn King, the Governor of the Bank of England, tells Charles Moore why he shares the public’s disquiet over the need to bail out failing banks.
Before the war,” says Mervyn King, “my father worked on the railways. In the war, he was in the Royal Engineers and helped with the planning of D-Day. After it, he trained on a demobbed soldiers’ programme to become a teacher. He was also a Methodist local preacher. He died only a few weeks ago. At his funeral, I said that he was always a preacher and a teacher – some might say it runs in the family – I am proud of that.” A hint of deep emotion is visible behind the famous thick spectacles.
The Governor of the Bank of England is sitting in his large and elegant office, leaning forward in an austere upright chair that he says is better for his back. All around him are the trappings of his venerable institution. A butler in the Bank’s famous pink coat comes in with a silver coffee pot. But the small, round, soft-spoken man in the chair is not a City grandee, but a teacher, a preacher, an intellectual.
It is 20 years this week since Mr King walked into the Bank, hired as its chief economist. His previous experience had been wholly academic. But “I wanted to see policy-making from the inside”. The year after he arrived, Britain fell out of the Exchange Rate Mechanism, and Mr King’s ideas about inflation-targeting came to the fore. In 1997, on a Bank Holiday, Eddie George the then governor, called him into the office in which we are now sitting to tell him that Gordon Brown would announce Bank independence the following day. “So you can’t leave now, can you?” said Mr George. He couldn’t.
The next year, Mr King became deputy governor. In 2003, he succeeded George. He has seen more “policy-making from the inside” than he could ever have dreamed – “a period of immense historical significance”.
The young Mervyn “really wanted to read cosmology” but could not find the right undergraduate course, so he went up to King’s College, Cambridge, in 1966, as a mathematician, but switched immediately to economics.
He loved Cambridge, but economics was too much “harking back” to Keynes. It was in postgraduate work at Harvard that he “learnt that economics could be a serious discipline”. Being a bright young man, he gave “excessive weight” to economic models. “You feel, 'My models will make a big difference.’ As I get older, I give more weight to history. Alfred Marshall [the founder of Cambridge economics] was absolutely right that you should do the mathematics but then burn the paper and write it down in words.” Maths and models should be “aids to thinking, not substitutes for it”. He thinks people should have remembered that during the financial crisis. Tell me, I say, what a layman should read to understand that great disaster in which we are still embroiled. There are two books, he says. One is Walter Bagehot’s 19th-century classic, Lombard Street, with its “wonderful description of the people who made the money markets work – they’re exactly the same now – and his popularisation of the idea of the lender of last resort”. The other, about the credit crunch itself, is The Big Short by Michael Lewis. It explains, says Mr King, why a few people did not believe that the lending in the US subprime market was going to work but “how difficult it was for them to make the bet they wanted to make and how the great banking machine was all geared to do the opposite”.
Now, the Governor is off on why all this has a moral dimension: “The more I’ve thought about how labour markets work, the more I’ve realised that there are hardly any jobs whose tasks you can describe exactly. Nowadays, most jobs have the property that employees can choose to do them well or badly, so employers need to think about the long-term welfare of the staff not just pay today.” It follows that moral attitude is vital. Industry often understands this well. Nissan in Sunderland asks all its workers for ideas to raise productivity, and, says Mr King, it benefits.
The Governor makes a point of visiting manufacturing and service industries all over the country. Such firms pay far lower rewards than financial services but have “an incredibly successful record. They care deeply about their workforce, about their customers and, above all, are proud of their products”. With the banks, it’s different: “There isn’t that sense of longer-term relationships [hence the demise of the local bank manager]. There’s a different attitude towards customers. Small and medium firms really notice this: they miss the people they know.”
He also thinks that there is “too much weight put on the importance and value of takeovers”. They make short-run profits but “it doesn’t make sense to destroy a company with a reputation”. Since the Big Bang in the late 1980s, Mr King goes on, too many in financial services have thought “if it’s possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable”. Good businesses “keep a clear vision of who their customers are, and are run by people who don’t think they should simply maximise profits next week”. But in the past 25 years, banks have increasingly “taken bets with other people’s money”.
That is bad enough, but it gets much worse “if the rules of the game are that they get bailed out if it all goes wrong”. In this weird atmosphere, banks eventually stopped trusting one another. “Financial services don’t like the word 'casino’, but instruments were created and traded only within the financial community. It was a zero sum game. No one knew which ones were winners when the crisis hit. Everyone became a suspect. Hence, no one would provide liquidity to any of those institutions.”
Continue reading - Mervyn King interview: We prevented a Great Depression... but people have the right to be angry
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