In my Money Week column this week, I've been wondering why Mervyn King doesn't get the same kind of grilling that Alan Greenspan gets in the US. Here's a taster....
There are few sights quite so grimly fascinating as watching a once stellar reputation come hurtling back down to earth. By the time he finally stepped down as chairman of the Federal Reserve Alan Greenspan was hailed as an economic mastermind. He was paid millions for a book, even more for speaking engagements. The markets continued to hand on the every word uttered by ‘the maestro’.
And yet last week, he was beaten up in Congress, castigated for his role in creating what now looks like one of the greatest bubbles of all time. Far from being a genius, Greenspan is rapidly being re-cast as the man who allowed a slow-motion train crash to play out on his watch, and did nothing to prevent it.
From a British perspective, however, it is interesting not just how the Greenspan story is being re-written, but how lightly his equivalents on this side of the Atlantic have so far escaped.
Shouldn’t Mervyn King, and indeed the Bank of England itself, come under the same kind for forensic examination? They certainly should. Plenty of different parties were to blame for the catastrophic build-up of British debts during the noughties, and the financial collapse that followed inevitably from it. But it is wrong that the Bank should evade accountability. After all, if we aren’t willing to learn from the mistakes of the past decade then we are condemned to repeat them.
Over in the US, there has been a lot more soul-searching over the central bank’s role in the build-up to the crash. Greenspan is still clinging on to his mantra that he was largely blameless. You can’t spot bubbles in advance, he still gamely insists. Even if you could, there wouldn’t be very much you could do about them. And, anyway, as he pointed out to Congress at last week’s hearing, there was a lot of pressure from politicians and others to expand lending, not curtail it. It’s not fair to blame him.
Maybe he’ll get away with that line. When the history books come to be written on the Great Crash of 2008, no doubt many different culprits will be fingered. But it is unlikely that Greenspan, with his policy of ultra-low interest rates, and of pumping up the economy during every minor downturn, will escape a hefty share of the blame.
But what about the Bank of England? Shouldn’t we be putting it under the microscope in the same way? So far, in this country we have pointed the finger everywhere other than the Bank’s Threadneedle Street headquarters. We have blamed the Americans, the bankers, the Financial Services Authority, and, of course, Gordon Brown. The Bank itself has skilfully managed to sidestep any real criticism.
That’s pretty odd. After all, the UK has suffered as badly as any country from the credit crunch. Our banking system collapsed as completely as any outside of Ireland. The bail-outs have been massive, saddling a whole generation with huge debts. Our economy has slumped into a longer recession than any other major economy.
It didn’t have to be like that. The other Anglo-Saxon economies didn’t suffer anything like so much. Australia is still booming – so much so that the central bank is steadily raising interest rates again. Canada didn’t see any significant banking crisis. In truth, the UK suffered so badly because of specific, home-grown policy mistakes.
It’s certainly fair to blame Gordon Brown. He over-regulated the economy, over-taxed it, and ran up too much debt. The FSA made a terrible mess of regulation: it concentrated on micro-managing who could open an account, whilst failing to notice that whole banks were going bust. And Britain was caught up in a worldwide financial storm as much as any other country.
And yet the Bank, surely, is guilty on two counts. It ran a loose monetary policy, allowing, if not actively encouraging, a runaway housing boom. And it did nothing to prevent the runaway build up of personal, corporate and government debt.
House prices have rocketed since the Bank was made independent in 1997. According to Nationwide data, in the thirteen years since then, the price of an average house in the UK has risen by 173%. True, the Bank’s Governor Mervyn King was one of the very few senior officials willing to warn publicly that the housing market was looking overheated. The Bank fretted about the housing bubble, and the impact it might be having on the economy. But it stopped well short of raising interest rates to choke it off.
Likewise, the UK built up extraordinary debts. According to McKinsey research, when you add together government, corporate and personal debt, the UK is now by far the most indebted of all the developed economies. Total debts are a staggering 450% of GDP. Most of that was built up in the last decade: total debt as a percentage of GDP roughly doubled since the Bank won its independence in 1997. Again, there are other culprits for that. The government borrowed a lot more than it should have done. Tax policy favoured debt over equity, stoking the boom in leveraged buy-outs. But you can’t exclude monetary policy. The interest rate is the price of debt. If people were taking out too much of the stuff – and in retrospect it is clear that they were – then surely it was priced too cheaply?
Both the housing boom and the debt bubble were fuelled by monetary policy that was too easy for too long. In the City, an independent Bank of England is viewed as a ‘good thing’, without any real debate. The fact remains that it has presided over a catastrophic collapse in the financial system.
In the US, they have started to rumble that the central bank might have had something to do with that. Here in Britain, we should at least be questioning whether ours did as well.