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Passing the pound

3 May 2012 By Peter Thal Larsen

“Don’t blame me, blame the banks.” That, in a nutshell, is Mervyn King’s assessment of Britain’s most severe recession for seventy years. The Bank of England governor admitted in his radio lecture to not shouting loudly enough about financial risks. Yet his retrospective largely ignored the many criticisms of central bank policy, after as well as before the crisis. That’s a missed opportunity.

Anyone who tuned in expecting new insights about the financial crisis will have been disappointed. King offered a conventional – and partial – explanation of what went wrong: banks became risky, interconnected and too big to fail. When the financial system wobbled, taxpayers and central banks were able to avert a total collapse, but not a severe recession. Even King’s mea culpa came with an excuse: because the central bank was stripped of responsibility for regulating banks in 1997, it could not intervene directly.

King’s praise of pre-crisis monetary policy was especially baffling. The governor insisted that the central bank had got it about right, because there was “a bust without a boom”. That totally ignores the giant debt-fuelled property bubble that helped bring about Britain’s subsequent economic woes. And if the Bank of England was broadly correct before, why has it set up a Financial Policy Committee, chaired by the governor, which is seeking far-reaching powers to prevent future bubbles?

King may have felt that a radio broadcast, the first such peacetime address since 1939, was not the best forum in which to explore such contradictions. Besides, Federal Reserve Chairman Ben Bernanke and former European Central Bank President Jean-Claude Trichet have hardly been more apologetic. And lack of contrition has so far proved a successful strategy. The Bank of England has emerged from the crisis more powerful than ever, while the Financial Services Authority, which has completed several painful self-examinations, has been dismembered.

Such stubbornness may yet backfire. The Bank of England is under intense pressure for its expanded responsibilities to be combined with greater transparency and accountability. King’s self-congratulatory revisionism will only embolden his growing band of critics. The governor’s successor, who is due to take over in July 2013, may face greater restraints.


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