"It's only when the tide goes out that you learn who's been swimming naked." You heard that Warren Buffett folksiness a lot in 2008, as reckless banks and investors went to the wall. You can expect to hear it all over again in the next few months. This time, however, it will be said of governments, who have failed to prepare for the coming turbulence.
You don't have to be an insider or a banker to spot an ugly financial storm on the horizon; you just need to follow the news. In Greece, the rightwing New Democracy party is scraping together a coalition whose primary objective will be to sustain an unsustainable austerity programme. In Spain, the cash-strapped government is now being charged 7% interest on 10-year loans; in other words, one of the richest sovereign nations on the planet is getting a worse deal than you or I could score on the internet.
Many more days of this and Madrid will need a second bailout from the rest of Europe, only it's not clear that the single-currency club has the cash to provide one. At twice the size of Ireland, Portugal and Greece put together, Spain may be too big to bail. If so, this is the point at which a regional catastrophe becomes something far larger and far more frightening. This is the climax that the euro crisis has been threatening to build towards for the past two years. This is the nightmare that all those war games and ministerial summits and that trillion-dollar firewall were meant to stave off – and it appears to be materialising.
Just because Britain is not in the euro doesn't mean it will get off lightly. Far from it. The UK relies on the eurozone as far and away its biggest export market, and our outsize banking sector will also be badly buffeted by the ensuing chaos. Mervyn King, for one, is so alarmed about the possible fallout that last week he warned of a "large black cloud" hanging over Britain. Coming from the head of the Bank of England, who prefers to paint the economy with gentlemanly cricketing metaphors, this was frightening stuff.
So let's apply the Buffett test to Britain: how well covered are we, if the tide goes out for the second time in five years? The evidence is frankly worrying.
Take the dinner at which King was speaking, at the Mansion House. For most of the past two decades, it has been the event at which the governor and the chancellor have addressed the City's top bankers and either engaged in mutual back-slapping (I'm thinking of some of Gordon Brown's most cringeworthy moments) or, more recently, tried to console each other. What George Osborne did last week was completely different and utterly extraordinary: he announced two major new state lending programmes to get Britain out of recession and protect banks from volatility. Not only that, but one scheme, the funding-for-lending plan intended to get more cash from banks to the rest of us, had only been dreamed up a couple of weeks ago and is yet to have key details filled in. Among the basics yet to be nailed down is how much the plan is actually worth: £80bn or £100bn?
This must be what the posh-boy version of panic looks like. Osborne spent last year sticking to a plan for bank lending that was the original suggestion of the banks themselves. Having come up with the idea and agreed to the targets, the banks then flunked the most important one, on lending to small businesses.
The other problem has to do with King himself. Over the past few years, he has become more powerful than any British central banker in living memory. Indeed, given that the government is pursuing a policy of tight budgets and loose monetary policy, the head of the Bank of England is probably the man most responsible for getting Britain out of recession.
No wonder that King is the subject of public deference from Cameron and Osborne; he is in charge of the £325bn quantitative-easing scheme; and in a few months the Bank will essentially replace the Financial Services Authority as the UK's top financial watchdog.
Yet this is the official whose interest in banking regulation was so limited before the crash that, according to the FT, he would doze off in meetings on the subject. King was in charge of the Bank when the wheels came off the economy, and yet his institution's role in the crisis has still to be thoroughly investigated. Coming up to date, the Bank's economic forecasts, predicated on recovery being just around the corner, are regularly wide of the mark.
Any official has his or her flaws, but King's have inadvertently become more exposed by a government so austerity-minded that it has outsourced the job of macro-economic management to him. Britain is not alone in doing this. In the cuts-crazy eurozone, the European Central Bank's Mario Draghi often looks like the only adult around. In America too, Obama relies more and more on the Federal Reserve's Ben Bernanke.
Yet the tools that the Bank has are too limited and too crude to do much of what is being asked of it. Just how limited, how crude, we may find out this summer.
Comments
18 June 2012 8:09PM
What is the thesis?
Or is this just a tour d'horizon, without any discernible point?
18 June 2012 8:14PM
quelle surprise then we're up sh1tcreek sans paddle. why is he still in post?
x
18 June 2012 8:15PM
I bet hes got a brilliant plan that will save the economy and will make everybody as rich as Croesus. Or maybe hes just a chancer who's out of his depth and is making it up as he goes along
18 June 2012 8:18PM
Can Mervyn King save the British economy?
Is this some new Guardian game?
Rearrange the following headline to make it correct?
Can the British economy be saved from Mervyn King?.
....Is the correct answer.
Merv. In case you hadn't already realised...
History will deliver a very harsh verdict.
18 June 2012 8:19PM
I will be interested to see how watertight the "funding for lending" aspects of this latest subsidy will be.
"Not very much" would be my best guess.
18 June 2012 8:20PM
Or maybe "out of his depth" is not quite accurate.
Maybe its just that his goals are different to those of the general population.
18 June 2012 8:22PM
This kiddy presided over the biggest issuing of funny money in the UK
Unsubstantiated credit was doled out with such happy abandon
Credit was issued to people who could not realistically afford to pay it back in two or three lifetimes
All done to bolster a hyper-inflated housing market
Asking a question like can "Can Mervyn King save the British economy?"
Can a baby make baby food?
18 June 2012 8:22PM
One day we'll look back at all this and have a jolly good laugh....well, Dave, George and Mervyn will.
18 June 2012 8:22PM
No.
He will toady up to Cameron just like he toadied up to Brown until it's time to get out with his mega pension.
He's a time server.
18 June 2012 8:22PM
Mervyn King is a mechanic. The problem - that the basic engineering of the system is flawed - can't be solved by him.
18 June 2012 8:22PM
Even though his term in office has been an unmitigated disaster, he still got given an honour in the 2011 birthday honours list: the Knight Grand Cross. Still, rewards for failure is very big in banking these days.
18 June 2012 8:26PM
Must be still serving pheasant and port at the Bank of England restaurant. "Never mind time for a quick doze...those 'City Wiz Kids' are very clever...they know what they are doing!"
18 June 2012 8:27PM
No. The only things we're any good at are financial services and public sector diversity consulting. We ship our cleaners in from Lahore, our tradesmen in from Poland and our doctors from Bangalore. We can't actually do anything ourselves! Hoe can you save an economy built on make-believe industries?
18 June 2012 8:28PM
Merv is making it a lot worse by parating in QE
See the link below , UK total debt to GDP is 1000% that is 2.5 times Greece. The only reason we are not in crisis is tht we can print money through QE to buy our goverment Bonds 'Guilts' .
Problem is the more QE the more inflation as our curency is de-based. Take into acccount the QE amounts will have to keep increasing as monetized debt matures and the interst on it will reuqire more QE payments.
The Dollar, Euro GDP are all fiat currencies and the fact is ' Every singel fiat currency in history has ended up worthless, and the GDP is not exception and on that path. Its just a matter of time until it is completely devalued to pay off the debt through hyper inflation. Make sure you have tangible assets and the only money you should keep in the bank is money you are happy to lose.
http://www.google.co.uk/imgres?q=UK+debt+to+gdp+chart&um=1&hl=en&sa=N&rls=com.microsoft:en-gb:IE-SearchBox&biw=1280&bih=622&tbm=isch&tbnid=U4iQkuYCc8BX2M:&imgrefurl=http://www.zerohedge.com/news/psssst-france-here-why-you-may-want-cool-it-britain-bashing-uks-950-debt-gdp&docid=j2q0kHgmyn6IoM&imgurl=http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011/12/World%252520debt%252520to%252520GDP.jpg&w=1047&h=783&ei=xH_fT57KI8S_8gO5_vS9Cw&zoom=1
18 June 2012 8:28PM
I bet MK has a cunning plan.... a plan so cunning he could put a tail on it and call it a weasel.
18 June 2012 8:29PM
As Mervyn King's scheduled to retire next year does he have any real interest in doing anything other than just make X's off his calendar and go through the motions?
18 June 2012 8:33PM
I much prefer the Daily Mash's take on the situation - it has Mr. King digging his old guitar out & going round his local pubs doing Tom Petty covers.
Sleep well in the (So, basically, the choice is that we either redistribute some of the frankly obscene wealth we have funneled upwards or the whole system goes boom & the great unwashed rise up & kill us in our beds. Hmm, that's a tough one. Have to go away & think about it) fire.
18 June 2012 8:39PM
Given the Governor of the Bank of England resembles the character 'Orinoco' from the Wombles, who was renowned for his capability to shirk work and fall asleep at the slightest opportunity, if pressed I would hazard a guess at NO!
18 June 2012 8:40PM
One more thing , as all the banks are so highly leveraged from there reckless derivative gambling the national intereret rate has to be kept extremely low so that all the banks can maintain the margin requirements on the leveraged bets.
Because of this wages will not rise , savers will be thrown under the bus , infaltion will surge and cause negative real interest rates,(as fiat money is flooded into the economy) as a result it causes a negative feedback loop of dimishing demand, QE bailout, Austerity, dimishing demand ETC ETC.
Mervyn King could end it all by raising interst rates killing the reckless banks and rewarding savers and Labour which is the back bone of capitalism.
Instead he is keeping rates low rewarding speculators in the city and throwing the country under the bus.
Mervs legacy will not be one to remember as he bows down and serves the corrupt fradulent financial system and institutions.
18 June 2012 8:41PM
He won't be able to get us out of recession because he's only in charge of monetary things, like interest rates (which there isn't scope to cut further) and QEing money into banks (where it sits, in part to bolster their reserves, and in part because there's a lack of demand for borrowing due to the lack of demand in general in the economy right now.)
We need fiscal action now - stimulus - not austerity - to get get growth back.
18 June 2012 8:41PM
His record ain't so bad. We have a (very) stable currency and relatively low inflation, despite a turbulent environment. central banks need to be let alone to do what they do (manage the money supply). Recent weeks have seen the central banks of Turkey, China, Russia and a number of CEE countries move to react to the situation, as best they can. We need (and have) an adaptive, flexible central bank -- one that is not afraid of making decisions. This is good.
If Spain needs a bailout, Spain will get a bailout , Aditya (hint: EU funding will be matched by IMF funding if necessary [effectively doubling the size of the war chest] -- although I'm sure you already knew that).
18 June 2012 8:42PM
There's this great delusion that somewhere out there there's a plan which will rescue us all.
You can't solve a multivariable problem with a simple scheme - or even a complicated one.
18 June 2012 8:43PM
Rubbish. How would higher interest rates stimulate employment and growth?
18 June 2012 8:45PM
Jeeesus, what nonsense is this?. You do understand the concept of an independent central bank...right? That the BoE is independent (and often disagrees with Gideon?)
18 June 2012 8:47PM
Glad to see you finally recognizing that deficit-fetishism is a nonsense. It took a while but you got there in the end.
18 June 2012 8:59PM
You can't solve a multivariable problem with a simple scheme - or even a complicated one.
Mervyn's clearly not a whizz at multivariate analysis...
There are plenty of mathematicians in the city who could sort it out......You know those guys and galls who
derived all those derivatives....which unleashed the poison.
What we need is a re-incarnated JMK or perhaps a Krugman!
18 June 2012 9:00PM
Oh GOOD, no 'silly season' this year then?
18 June 2012 9:01PM
It is a shame that the self-satisfied old stoat did not awaken from his slumbers to ask for "greater clarity" about the extent to which the bankers were indirectly exposing us to further disaster;by insuring crap loans to the weakest Eurozone countries
http://news.sky.com/home/business/article/16018023
How much longer can they go on printing money, monetising the public debt?
How long before it turns into a complete clusterfuck?
Not too long apparently
Amazon Reviews
18 June 2012 9:02PM
No
18 June 2012 9:06PM
I'm sure Mervyn King has found it much more congenial to stuff envelopes with QE cash for his Bankster chums than stay awake in meetings thinking up constraints to stop these same chums wrecking the British economy!
18 June 2012 9:07PM
You probably believe the Independent Police Complaints Commission and the Press Complaints Commission, are independent, too. .... don't you?
18 June 2012 9:09PM
."the head of the Bank of England is probably the man most responsible for getting Britain out of recession."
Did I miss something ?
18 June 2012 9:13PM
The Bank of England governor is probably the man most responsible for getting Britain out of recession. So can he do it?
If evidence to date is anything to go by then no.
18 June 2012 9:14PM
Merve the Swerve is responsible for the bank of england just about doing its job and eventually making sure the banking system didnt collapse. Dont overdo the credit though. The bank of england can create ulimited bank reserves. Saving the banks involved fulfilling its mandate of financial stability. Its a shame he didnt do it before he announced that Northern Rock was bust but there you go.
18 June 2012 9:15PM
I did just that and what I got was: He in shit creek not 'aving very many combs
(Go ahead and check)
18 June 2012 9:15PM
But as to Merve getting the country out of recession. Please !
18 June 2012 9:16PM
Wrong again, my dear chap. Being forced to borrow even more money at a time like this is bonkers.
18 June 2012 9:17PM
One of the points about multivariant problems is that usually there is no mathematical solution.
18 June 2012 9:18PM
<like interest rates (which there isn't scope to cut further)>
who knows they might come up with like borrow 20000 and we give extra 2500 free.
Problem with the situation is that Politicians are not that educated in economics and they rely on bankers for advice. We know bankers are idiots they could not see which way they were going with bank's money.
To sort it out one needs to be strong personality who does not care for his banking career and kick the butts of buggers who brought all these troubles
18 June 2012 9:19PM
Mervyn King wants to collect his gold watch at retirement next year.
His economics is about as useful to the world today as an Apple 1 is useful at processing the transactions of a supermarket. Not a lot.
Who does Britain owe money to?
What does Britain buy from overseas?
18 June 2012 9:21PM
Can Mervyn King save the British economy?
what economy, he has delibrately given those with some of the biggest debts a lifeline with low interest rates, people with mortgages, while those of us who saved get nothing.
King with the backing of our rich political elite are the problem.
1 billion to develop new nuclear engines, here's hoping the Iranians go to the UN to block that idea and save us a few bob.
18 June 2012 9:24PM
By getting rid of the Zombie Banks and forcing a debt write down.
We are wasting all our money on serviciing the interest on the debt that we took on from the private banks gambling habits and the debt they worked up through the dispicable fractional reserve banking system,
These interest payments will only act as a ball weight around the leg of the UK economy until they are written off.
For a prime example of this see Japan's lost decades.
The only way out of this is either to write of the debt through a debt jubilee, or hyper inflate the currency to pay off the debt, we cannot generate the growth needed to pay off the debt by producing more debt, and besides, as all debt is money if we pay off our debt the economy will collapse through severe deflation as there wouyld be no money in circulation.
Unfortuanetly either a debt Jubilee or hyper inflation will be devastating as all debt is money. So either way it will wipe out savers and people with pensions or any wealth denominated in the fiat currency of the GBP.
That is why i cannot emphasise the importance for everyone in the UK to get there wealth into tangible assets with no counterparty risk to the financial system through the paper fiat currency which is going to be eventually hyper infalted or written down.
Its happening all around right now, and were about to see it happen i nEurope where they will need to print trillions to pay off the interest on the debt as the debt matures.
There is no way out of this, and the politicans and bankers are just kicking the can and will eventually make it 100 X worse.
I would rather end the sytem now before the problems get even bigger.
All the yare doing right now is the equivalent of trying to payt off a mortage with a credit card. You cannot solve a debt problems by creating more debt, that is basically what it comes down too.
18 June 2012 9:27PM
Oh, but I heard somewhere - where was it? - that you 'can't solve a multivariable problem with a simple scheme'. I mean that would be like an indebted man refusing to borrow the money for a ladder to do a windowcleaning round in the evening to earn extra cash and instead deciding to save his bus fare by giving up his day job. Now that really would be bonkers 'my dear chap'.
18 June 2012 9:28PM
Mervyn King reminds me of the Dormouse at the Mad Hatters tea party [he kept falling asleep and had his face pushed into his bowl to wake him up], the Mad Hatter being a composite of Osborne and Cameron. Heaven help us all with this unholy trinity at the helm of our economy.
18 June 2012 9:32PM
mervyn king has printed 300 billion nicker in funny money
for the banks to buy Dogshit Bonds in order to bolster the market in the sales of Dogshit which no one wants to buy apart from the banks
yeah, right
18 June 2012 9:37PM
Very true. Which doesn't mean to say you have to persist in the patently absurd.
I refer your window cleaner to Mr Micawber.
18 June 2012 9:39PM
Strange people Guardian Readers.
Mervyn King is like a fireman called to a block of rundown council facts which are burning trapping most of the occupants. While he is desperately trying to beat back the flames with his hose, and prevent the residents burning to death,
Guardian readers are like Chavs who throw bricks at him
18 June 2012 9:47PM
The biggest fallacy out there right now is that the UK can print enough money to generate enough growth to pay down the debt.
Its Just not possible, with Gov debt ( which is banker debt) where it is 80% of GDP and contagion from our government purchases of European Soverign bonds which will never get paid back, banker debt our government took on is just going to keep on growing as the interest and principle on the debt matures and requres even more debt being produced just to keep the interst rate payments going in what is the biggest fiat currency ponzi scheme in human history.
The worlds fincnial system mathmatically has 100% chance of crashing as world debt not including derivatives and CDS is already estiamted at 200 trillion which is 300% of world GDP!!!
As real wealth is only created through Labour and resources , the only way we are goign to pay this off is if a race of aliens 20 Billion strong come to Earth and we enslave them and force them to work 24 hours a day!
18 June 2012 9:48PM
wot?
is 'e tryin' to wee-wee on the problem?
18 June 2012 9:49PM
Mervyn King will be judged very harshly.
Under his watch, UK nominal GDP had the largest fall and the worst recovery since the great depression. The BoE's reaction in September 2008 was far too slow and they allowed inflation expectations to collapse.
In 2010 King encouraged the coalition to inflict spending cuts and tax rises on an economy still to recover from the recession, with interest rates still stuck at the zero lower bound.
One consequence of these tax rises was an increase in consumer prices. CPI rose above the inflation target. Hence it has been extremely difficult for the Bank of England to offset Osborne's contractionary fiscal policies.
During the ongoing issues in the Eurozone, King has consistently failed to credibly articulate what the Bank of England will do to maintain UK aggregate demand. Why has it taken since last autumn for the Bank to take steps to reassure investors in the UK about the BoE's ability to maintain demand in the face of events in Europe? He consistently emphasizes uncertainty around the world and provides little certainty about what the Bank of England will do to reduce this uncertainty.
Conventional inflation targeting, as conducted by the Bank of England, has proven to be deeply problematic at very low real interest and inflation rates.
The Bank of England has two choices for alternative monetary policy regimes, nominal GDP targeting (advocated by Brittan or Sumner) or raising the inflation target (advocated by Rogoff and Krugman).
In a recent speech Vince Cable advocated nominal GDP targeting.
Would be good to hear more about it in the Guardian.
Either way, economic historians have pinned considerable blame for the Great Depression and the stagflation in the 1970s on mistakes in monetary policy. No doubt history will judge King similarly.