Mervyn King was appointed Deputy Governor of the Bank of England in 1997 and became an ex-officio member of the Bank’s interest-rate setting Monetary Policy Committee when the Bank was cut loose from Treasury control that year. In June 2003, he succeeded Sir Edward George as Governor.
King has always been an anti-inflation hawk. Before becoming Governor, he regularly voted for tighter monetary policy than any of his colleagues. That pattern continued through his Governorship. Most notably, he opposed the interest cut by the MPC in August 2005 and was in the MPC minority voting in favour of higher rates in June 2007. This willingness to place himself in a minority on interest rate policy is exceptional among central bankers. In both cases, King was on the side of the angels.
Mervyn King’s wisdom has surfaced most spectacularly since the financial crisis began to impact the British economy. He is best known for (correctly) refusing Bank of England funding to Northern Rock when it ran into financial difficulties, and for refusing similar funding to other retail banks. He cannot be held responsible for the bank nationalisations that followed under the intemperate and unwise governance of Gordon Brown’s doomed Labour government. But his upholding of the doctrine of lender of last resort against extreme political pressure will go down in central banking history as a position of wisdom and high integrity.
Fully aware of the economic lunacy of excessive deficit financing as a tool for countering economic contraction, Mervyn King risked his career on March 24, 2009 by explicitly and publicly warning the British government against a second fiscal stimulus. More recently, he has warned publicly against excessive complacency about economic recovery, noting that it is likely to be plagued by stagflation as a direct consequence of past fiscal imprudence.
He has asked repeatedly, and justifiably, for the complete segmentation of British banks into separate retail and investment corporate entities as a means of avoiding the “too-big to fail” syndrome. Last month he criticised the British retail banks for their policies both of excessively remunerating their employees, and of paying out excessive dividends to their stockholders, all at the expense of refusing to extend justifiable wealth-creating loans to cash-starved small enterprises.
A number of years ago, at an annual meeting of the American Economic Association, I attended a lunchtime address by Mervyn King when he was Deputy Governor of the Bank. King chanced to mention that a central bank had an obligation to protect high levels of employment as well as price stability. Just a week earlier, Alan Greenspan had spoken about the absolute priority that should be given to price stability by the Federal Reserve. Smart Alec, that I may have been, I challenged Mervyn King on this discrepancy, asking whether this implied that the value of sterling predictably would decline against the US dollar as a consequence of this difference in central bank philosophies. King nervously checked out the room to determine that the press was absent. He then deferred in his reply to Alan Greenspan, stating that he could not compare himself with the Maestro on such matters.
Well, both Mervyn King and I were wrong on that occasion. Alan Greenspan turned out to be a Wizard of Oz, not a Maestro, whereas Mervyn King was much more of an anti-inflation hawk than I believed. So I am more than happy to extend my apology to Mervyn King for this grievous error of judgment.
I only wish that the Federal Reserve might have been blessed with a Chairman with the wisdom and integrity of Governor Mervyn King over the period 2003-2010. The world-wide financial crisis and economic contraction of 2008-2010 surely would have been far less pronounced than has been the case.
Visit Charles Rowley’s blog to read an earlier version of this article.