Till Time's Last Sand

by David Kynaston

  The Bank is, and always will be, deeply involved in the City and those who work here. We operate in markets daily; we stand at the centre of – indeed underpin – the payments system; we have a close interest in settlement systems. But our involvement is from the perspective of the public interest, not the defence of particular private interests …

  If those remarks suggested a new degree of objectivity in relation to the City, that objectivity was taken to a higher level by the crisis. The crucial pronouncement was in October 2009, when the governor told businessmen in Edinburgh not only that ‘never in the field of financial endeavour has so much money been owed by so few to so many’ (that is, following the bail-outs), but that if banks were ‘too big to fail’, then there was no alternative but to split them up – remarks that found greater favour with the Tory opposition than with the Labour government, though without a commitment from the former that the UK would strike a unilateral path for narrow banking. King’s greatest unpopularity, persisting for the rest of his governorship, was with the bankers themselves. In October 2010 he declared that ‘of all the many ways of organising banking, the worst is the one we have today’; the following spring, in a frank interview with Charles Moore, he accused the banks of in effect continuing to be bonus-driven, behaving in risky ways in the knowledge that the state would bail them out – the ultimate one-way bet; in July 2012, something not wholly unadjacent to a raising of the governor’s eyebrows played a role in the dramatic departure of Bob Diamond from Barclays; and in June 2013, only days before stepping down, he had strong words to the Treasury Committee for banks which deployed their formidable lobbying powers to put ‘tremendous pressure’ on politicians to interfere with decisions made by the Bank’s newly empowered supervisors.39 All this, to reiterate, amounted to almost entirely unusual behaviour on the part of a governor.

  The crisis, followed soon afterwards by the prospect of the return of banking supervision arguably making the Bank more powerful than at any time in its history, inevitably raised serious questions of governance and accountability. The main focus was on two key areas: the role of the governor; and the role of the Court.

  Both areas naturally formed part of the Treasury Committee’s November 2011 report on Accountability of the Bank of England. As far as the governorship was concerned, it made a trio of recommendations: that instead of a maximum of two five-year terms, future governors be appointed for a single eight-year term, based on the argument that the existing renewal process was vulnerable to ‘at least the perception of political interference in the Bank’; that, ‘in order to safeguard his or her independence’, the Treasury Committee be given ‘a statutory power of veto’ over the governor’s appointment and dismissal; and that, in a crisis situation, the ultimate statutory responsibility for managing that crisis should rest with the chancellor, ‘after the formal notification by the Bank of a material risk to public funds’. In due course, the new Financial Services Act, eventually coming into force in April 2013, did incorporate the first and third of the Treasury Committee’s recommendations, but – perhaps unsurprisingly – not the second.

  Fundamental questions, however, remained open. ‘The danger of the proposed expansion of the governor’s responsibilities,’ reflected Samuel Brittan in April 2012 as speculation grew about the identity of King’s successor, ‘is that we will end up with a bureaucratic chairman figure, dependent on advice from below that will reflect the conventional wisdom of the moment. The alternative of a dictatorial figure, who claims to know it all, might be even worse.’ Some believed that King himself was such a dictatorial figure; and when the Financial Times’s Chris Giles sought in May 2012 to examine that issue, involving interviews with almost two dozen current and former Bank officials, he concluded that while King was certainly not ‘a tyrant, shouting and banging his fist’, nevertheless the reality was ‘a Bank honed to deliver to the governor what he wants’, accordingly rather different from ‘an open organisation with open discussion’. In any case, what was crystal clear was that under the new dispensation the governor of the day would hold formidable powers – chairing the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority board. He would also be the chief executive; though at a time when the size of the Bank’s staff had quite suddenly almost doubled (up to some 3,500, compared to just under 2,000 at the start of 2012), few quibbled in June 2013 about the appointment of Charlotte Hogg as the Bank’s first chief operating officer, assuming from July day-to-day responsibility for matters like divisional performance and organisational structure, leaving the governor in his chief executive role free to focus on strategy. What about the deputy governors, of whom by spring 2013 there were three? James Barty’s searching report the previous year for Policy Exchange had called on the next governor ‘to become more of a chairman, overseeing the coordination between monetary policy, financial stability and prudential regulation’, while the deputy governors became ‘the CEO’s of the respective parts of the Bank’, running them on a day-to-day basis and ‘enabling the Governor to take an overview of everything the Bank does’.40 Only time would tell if that became the new reality at the top.

  As for the role of the Court – responsible for ‘the affairs of the Bank’, as the 1946 Act nicely put it – it had of course become increasingly marginal during the second half of the previous century. ‘We only used to meet for about an hour,’ recalled Sir David Lees about his time as a non-executive director during the 1990s. ‘There were presentations by the executive and then we, lambs to the slaughter, were offered five or ten minutes to talk about that part of industry we represented. I spoke for the motor industry in those days. How much they listened, I don’t know. Lunch was good.’ From 1998 the Court’s main forum for oversight (including of the MPC) was the newly created NedCo, with its own chairman (appointed by the chancellor) and drawing on increased representation from the regions; in 2009, post-crisis, new legislation – in effect initiated by King – saw a non-executive director (Lees) replacing the governor as chairman of the Court; but the external impression remained that the Court still had some way to go on its journey from a lunch club to a properly functioning, properly scrutinising Plc-style board.

  In November 2011 the Treasury Committee’s report ‘strongly’ recommended that the term ‘Court’ be abolished and suggested that it be renamed the ‘Supervisory Board of the Bank of England’ – a board that in essence would be leaner, more expert, better staffed and in general fully empowered to hold the Bank’s executive to account. King’s response in early 2012 was to meet the Treasury Committee halfway: the Court to set up an oversight committee to review the way the executive made its decisions, but not to become a supervisory board as such. ‘I don’t think it makes any sense to have another group of unelected officials to say “actually, we want to second-guess the decisions taken by the first group,”’ he told the Treasury Committee. ‘If you really believe they are better, you should put them in the first group to start with.’ As the new legislation took shape during 2012, the governor largely got his way. The Court’s name was not abolished; it remained a unitary body, in other words a mixture of executives (the governor and deputy governors) and non-executives (the majority, but no more than nine, with one of them still as chair); and NedCo was replaced by the Oversight Committee, to be chaired by the chair of Court and accorded statutory responsibility for keeping under review the performance of the Bank in relation to its objectives and strategy. ‘The chairman of the Court is not first fiddle, he’s second fiddle,’ Lees would observe in 2014 shortly before stepping down from his three-days-a-week position. ‘The Governor, because of all the policy issues, is first fiddle. The next chairman of the Court has to accept that. It’s lower down the pecking order than you would be used to in the corporate sector.’41

  In 2011–12 neither King nor the Treasury Committee’s chairman, the redoubtable and zealous Andrew Tyrie, underestimated what was at stake. ‘The Bank of England will play an even m
ore vital role in preventing future crises, yet aspects of its governance appear antiquated,’ Tyrie remarked at the time of his report. ‘Scrutiny of the Bank should reflect the needs of 21st-century democracy. That means clear lines of accountability and more information made available to Parliament.’ Of course, the Bank had become significantly more accountable to Parliament since independence in 1997, including with the Treasury Committee holding confirmation hearings (though not with the power of veto) for MPC and subsequently FPC appointments; but what Tyrie now wanted – and what King more or less successfully resisted – was in effect, as Alex Brummer noted after the report, to turn the Court from ‘an extension of the Bank’ into ‘a conduit to Parliament’, including through undertaking and publishing reviews of policy. Inevitably, quite apart from the imminent prospect of the Bank’s significantly enhanced powers, there was also a specific political context: in this case, the familiar issue of what degree of authority the governor enjoyed to venture – or, some would say, trespass – on to fiscal domain.

  A controversial year and a half or so began in June 2009 with King’s Mansion House speech. Before he came to his ecclesiastical analogy in relation to the Bank’s financial-stability powers, he included a passage that also made headlines. ‘As we emerge from recession, fiscal policy will have to change,’ declared the governor. ‘Five years from now national debt, as a proportion of national income, is expected to be more than double its level before the crisis. So it is necessary to produce a clear plan to show how prospective deficits will be reduced during the next Parliament …’ The Daily Telegraph’s take was predictable – ‘Put your books in order, and soon, King warns Darling’ – while the following week King himself, appearing before the Treasury Committee, had more to say: ‘We are confronted with a situation where the scale of deficits is truly extraordinary. This reflects the scale of the global downturn, but it also reflects the fact that we came into this crisis with fiscal policy on a path that wasn’t sustainable and a correction was needed.’ And: ‘Although we are finding it easy now to finance those deficits by issuing gilts, there could be problems down the road. We need a credible statement of what will guide the deficit reduction.’ Given that the Labour government was planning to fight the following year’s election on the terrain of investment in public services versus ‘Tory cuts’, it was hardly surprising that the shadow chancellor, Osborne, seized on King’s words to claim that they had ‘demolished for good any claim that this discredited government ever had to a credible plan for the recovery’.42

  The election itself in May 2010 saw the Tories becoming the largest party but without an overall majority. It would later be claimed that, during the ensuing days of talks and negotiations that eventually led to the coalition with the Liberal Democrats, and as markets faltered in the additional context of the Greek sovereign-debt crisis, the governor had played an active role in encouraging that political outcome; but such claims lack any evidence. What was undoubtedly true, though, was that in the immediate wake of the coalition being formed his was a particularly prominent voice for deficit reduction, aka austerity. King’s Mansion House speech on 16 June could hardly have been more explicit:

  Monetary policy must be set in the light of the fiscal tightening over the coming years, the continuing fragility in financial markets and the state of the banking system. I know there are those who worry that too rapid a fiscal consolidation will endanger recovery. But the steady reduction in the very large structural deficit over a period of a Parliament cannot credibly be postponed indefinitely. If prospects for growth were to weaken, the outlook for inflation would probably be lower and monetary policy could then respond. I do, therefore, Chancellor, welcome your commitment to put the UK’s public finances on a sound footing. It is important that, in the medium term, national debt as a proportion of GDP returns to a declining path.

  The following week, Osborne turned his ‘commitment’ into action, with a budget – described by the Financial Times’s George Parker as ‘audacious’ – setting out how he intended to fill the hole in Britain’s finances in one Parliament; and according to Parker, it was the governor who ‘played a decisive role in persuading the chancellor that the Budget’s priority had to be the elimination of the $155bn deficit’: ‘The chancellor’s team say Mr Osborne’s most agonising Budget decision was over the risks to the economy from cutting too deeply and too soon. Mr King insisted it was vital to take questions of Britain’s creditworthiness off the table for good.’ Certainly, irrespective of the question of his direct influence, King continued through 2010 to bang the drum hard and insistently. Public borrowing, he told the TUC in September, was ‘clearly unsustainable’, and any government had to have a ‘clear and credible’ deficit-reduction plan; and he added that he would be ‘shirking’ his responsibilities if he did not warn his somewhat sceptical audience of the risks – including ‘a damaging rise in long-term interest rates’ – of failing to tackle the deficit.

  The storm came in November. ‘Concern as King blurs line on policy’ was the Financial Times’s main headline on the 10th, with the paper reporting that ‘some senior staff at the Bank of England are uncomfortable with Mervyn King’s endorsement of the government’s public spending cuts, suggesting he has over-stepped the line separating monetary and fiscal policy’. Six days later, appearing before the House of Lords Select Committee on Economic Affairs, the governor sought to brush aside the story:

  I would be concerned if people felt that I or the Bank was behaving politically. I don’t believe we are. We are facing the largest fiscal deficit in our peacetime history. I think the surprising thing would be if the central bank had no view that this was a matter of concern. We do believe it is a matter of concern. Of course, in terms of the Bank, I am sure everyone has their own view about the right path. They do on monetary policy; it would be surprising if they didn’t on fiscal policy … I have never commented on anything beyond the overall level of the deficit. I did not endorse the spending review, I did not comment on the balance between spending and taxes as the best way to deal with a fiscal deficit, let alone comment on the individual measures. I have never commented on any other aspect of fiscal policy, other than the concern about the size of the deficit and the need, for monetary policy purposes, to have in place a truly credible, medium-term path – not inflexible, but credible – for reducing the deficit over a horizon which is credible to markets, that is a horizon over which an elected Government can claim to have sway, namely, the length of the Parliament.

  Just over a fortnight later, the MPC’s Adam Posen, well known as its leading dove, spoke to the Treasury Committee of how back in May, during the preparation of the Inflation Report, a minority on the MPC had felt concern about the paragraph ‘talking about the particular speed with which to deal with fiscal policy’. ‘We were concerned,’ explained Posen, ‘that the statement could be seen as excessively political in the context of the election. That language was too political, too much of a statement.’ Next day, the Financial Times quoted a former MPC member, Sushil Wadhwani. ‘I think that, rightly or wrongly, Mervyn has come to be seen as being much closer to the Conservative Party than the Labour Party,’ he observed. ‘No central bank governor should allow this to occur. In the years ahead, we are likely to need a Bank that is seen to be independent. It is a great pity that the perception of independence has been put at risk.’ The criticism continued into 2011. ‘The last thing you ever want is for the Bank of England to be drawn into the political arena,’ the shadow chancellor, Ed Balls, told the Financial Times in February, and soon afterwards the prominent American economist Paul Krugman accused King of acting as a ‘cheerleader’ for the coalition’s policies: ‘He’s wrong on the economics – front-loaded spending cuts are the wrong policy for a still depressed economy – but that’s not the key point; rather, the point is that if you’re going to have an independent central bank, the people running that bank have to be careful to stay above the political fray.’

  The row di
ed down, but the inherent fundamentals of the situation did not magically disappear. ‘When fiscal and monetary policy start to merge into one,’ Rod Price observed in a May 2012 letter to the Financial Times about central banks generally, ‘governors are no longer apolitical.’ King himself was intensely aware – perhaps no one more – of the preciousness of the 1997 independence prize and the prime importance of not having it tarnished or threatened. His 2016 book, The End of Alchemy, included what was clearly a heartfelt anecdote relating to 2007: ‘At 12 noon on Thursday 10 May, Tony Blair announced his resignation as Prime Minister after ten years at Number Ten. At exactly the same moment the Bank of England announced an increase in interest rates of 0.25 percentage points. Nothing could symbolise more vividly the change in the monetary regime in Britain than that conjunction.’ For, as he explained with his well-developed sense of history, ‘before the Bank of England became independent it would have been inconceivable that interest rates would have risen on a day when there was an important government announcement’.43

  Who would succeed King? Paddy Power offered in April 2012 some odds: Paul Tucker and the FSA’s chairman, Lord (Adair) Turner, as joint 5/2 favourites; Lord (Stephen) Green, former HSBC chairman and now trade minister, closely behind at 11/4; Lord (Gus) O’Donnell, former Cabinet secretary, at 5/1; and Mark Carney, governor of the Bank of Canada, at 10/1; while out-and-out long shots included Gordon Brown (200/1) and Fred Goodwin (300/1). In June the Evening Standard’s James Ashton saw it as ‘a straight fight’ between Turner and Tucker; by July, O’Donnell had shortened to 9/4 and Green lengthened to 6/1; in August the Spectator called on Osborne to ‘scour the globe’; in September the position was, for the first time ever, formally advertised; by October the Treasury had denied reports that Carney had been sounded out, while O’Donnell had dropped out; in its issue dated 24 November, the Economist recommended Tucker, given Carney’s apparent unavailability; and on Monday the 26th, Osborne made his announcement.