A Crisis of Faith in Britain’s Central Banker
A central banker need not be loved, but at the least he should command respect — and in Britain these days Mervyn King cannot count on either.
Mr. King, the donnish governor of the Bank of England, has been accused of presiding over the worst stagflation — a dreaded combination of stagnant economic activity and rising inflation — happening in any major developed economy.
He has been condemned for flouting the bank’s independence by publicly supporting the British government’s deficit-cutting strategy.
As for the issue on which he may have most closely staked his reputation — that Britain’s large banks must increase capital levels well beyond international standards — he so far has been ignored.
Doubts over Mr. King’s inflation strategy come as European leaders are working to devise a unified strategy for dealing with sovereign debt woes in the region.
Germany and France are pressing for concrete steps to harmonize fiscal spending by focusing on tax and pension issues, while weaker nations are struggling to bring down their deficits.
But with inflationary pressure picking up everywhere, the main topic of debate is expected to be how much longer the European Central Bank, like its counterpart in Britain, can resist the pressure to raise interest rates.
Not long ago, central bankers in the United States, the European Union and fast-growing emerging countries like Turkey and Brazil were being hailed. They were seen as having salvaged their economies by flooding their banking systems with enough money to help prevent a depression.
But now many of them are confronting the prospect that their powers are on the wane, as inflation begins to creep up and as growth in advanced industrial countries is hampered by high levels of government debt.
For a group accustomed to being influential — the Federal Reserve’s Ben S. Bernanke and Jean-Claude Trichet of the European Central Bank are facing challenges similar to Mr. King’s, if less acute — such diminution can come as a rude awakening.
In a speech last month, Mr. King acknowledged his limited ability to combat the high levels of unemployment and increased inflation bedeviling Britain.
With food and energy prices increasing and the weakness of the British pound making imports more expensive, he said, monetary policy could not “alter the fact that, one way or another, the squeeze in living standards is the inevitable price to pay for the financial crisis and the subsequent rebalancing of the world and U.K. economies.”
It sounded a bit like the last cry of the “incredible shrinking central banker.”
“It was a defensive speech, and there is a degree of frustration in the forces that are beyond his control,” said DeAnne S. Julius, the chairman of Chatham House, a research and analysis organization in London, and a former member of the Bank of England’s monetary policy committee.
Ms. Julius is a critic and argues not only that Mr. King is underestimating the inflationary winds but also that he is too extreme in urging that British banks take on more capital.
“The pressure is on — both in terms of banking reform and inflation,” she said. “I do not think he has an easy life.”
And then there is the issue of fiscal policy.
The British public could be in for an even rougher ride this year when the government’s £80 billion austerity program really starts to bite. That prospect looms even larger after recent indications that the economy, instead of continuing to grow, shrank by 0.5 percent in the last quarter.
Consumer prices rose at a 3.7 percent annual rate in December, reaching the highest level in two years and, for a 13th consecutive month, missing the Bank of England’s target of 2 percent.
Mr. King declined to be interviewed.
But people who have worked with him paint a picture of an innovative thinker who has an agreeable charm but can also be pugnacious and confrontational when challenged intellectually.
“Mervyn is not blessed with any doubts about his abilities,” said Michael Foot, chairman of the Promontory Financial Group consulting company in London and a former Bank of England executive.
But the accumulation of pressures seems to be having its effect.
His January speech, while carrying all the quirky earmarks of a King address — he began and ended with quotes from “Anna Karenina” — came across to many analysts as unusually prickly rather than as a measured analysis of the British economy.
“There is a misapprehension in some quarters that the monetary policy committee could have prevented the squeeze in living standards by raising interest rates over the past year to bring inflation below its present level,” Mr. King said in the speech.
“That view is a misunderstanding of how monetary policy works.”
Two members of the bank’s policy making committee recently expressed public disagreement with Mr. King’s insistence that Britain’s current inflation rate had been driven by outside shock factors and that interest rates should not be increased.
He has also been accused by another board member, Adam Posen, of jeopardizing the bank’s independence by talking up the Conservative-led government’s deficit-cutting strategy.
Since the Bank of England was made independent from the Treasury in 1997, its governors have been appointed by the government but have been viewed as apolitical, with a focus on ensuring price stability — and with no business sharing their views on fiscal policy.
Mr. King, whose second and final term will end in 2013, appeared to have moved beyond that understanding when he endorsed the coalition government’s plan to cut the deficit faster than the opposition Labour Party had suggested when it was still in power.
The fear, some economists said, is that his endorsement creates expectations that he would be willing to neglect inflation for a while in order to let the government’s spending cuts work.
To Mr. King’s defenders, however, those who raise such fears do not know the heavy burden of running the Bank of England from its palace-like base on Threadneedle Street at the heart of the City, as London’s financial district is known.
Indeed, Mr. King has plenty of fans who praise him for the power of his convictions — unpopular as they may be.
On the subject of being too close to the Tories on cutting the deficit, his defenders point to leaked cables in which Mr. King raised doubts about the experience of the Conservative leader, David Cameron, and his chief economic adviser, George Osborne.
“He is a king, a monarch in the classic sense, and he is fulfilling his duty to advise, consider and warn,” said Michael Fallon, a Conservative member of Parliament who has questioned Mr. King numerous times as a member of the Treasury select committee.
“Our public finances were in a deeper mess than others, and he has helped shape that debate.”
Mr. King has also attracted a strong following — largely outside British banking circles — for his aggressive campaign to reduce the leverage of Britain’s banks.
He laid out his case in a hard-hitting address late last year in New York. As Mr. King pointed out in that speech, Britain’s banks pose unusual risks because they have assets 4.5 times the size of the British economy.
How to scale that back is the subject of a much anticipated independent inquiry here, led by John Vickers, a former Bank of England chief economist and head of the Office of Fair Trading.
Mr. King has been careful to not prejudge the result. He has made clear, though, that his view is that radical changes must come, saying in his speech that of the systems one might use to organize banks, “the worst is the one we have today.”