Did we enjoy watching Mervyn King, governor of the Bank of England, squirm last week? Oh yes we did. Were we thrilled by Sir John Gieve, the deputy governor, writhing as he was told by MPs that he was “asleep on the job”? We were indeed, recalling that Gieve got this plum after leaving the Home Office in the worst shambles in its history.
Did we not object to MPs, so often negligent, grandstanding their rage before the cameras? Not really. We elected them and they spoke, for once, for a baffled and no less enraged nation.
The governor of the Bank of England used to be second only to the Archbishop of Canterbury in Establishment sanctity. While ordinary mortals went about their business, they assumed that their business was ultimately safe in the hands of chaps like these, with lofty titles and salaries and a knowledge of Libor rates and “three-month maturities”. A bit of oil here, a squeeze on the arm there and the government machine would purr smoothly onwards.
Now we have had the first run on a British bank since the Overend Gurney crash of 1866. Charlotte de Rothschild knew something awful was happening when “dear Papa, the Uncles and Natty” were all at the office on a Saturday. The Times reported that “the throngs were heaving and the tumult became a rout”.
This time orderly queues lined the nation’s high streets and were given free Starbucks. But when told by the gilded ones not to panic, they pondered on the advice and panicked. When the chancellor of the exchequer and the prime minister were prised from their shells and promised that the deposits were safe, they were simply disbelieved. Nobody trusts political liars when his money is at stake. Lurking in Northern Rock’s offices appeared to be weapons of mass financial destruction. When Alistair Darling and Gordon Brown denied it, the depositors said pull the other one.
On Thursday, after no sign of mea culpa from anyone in charge, the House of Commons at last did its job. It held the executive to account, albeit making do with King and Gieve, the organ-grinder’s monkeys. They appeared mildly if briefly discomfited, secure in their jobs and pensions but forced at least to explain themselves. Gieve, a member not just of the Bank but also of the official regulator, the Financial Services Authority (FSA), showed little awareness of what this liaison implied. He seemed to think it was just to observe, thus embodying British amateurism at work.
King’s line was that none of this was his fault. True, crisis management is the chief task of a central bank. But the failure of Northern Rock – or at least the nationalisation of its deposits – was a result of decisions taken by the present prime minister when at the Treasury. One was the sacking of the Bank as Britain’s financial regulator, moving the job to the FSA. The other, two years ago, was enforcing the European Union’s “market abuses directive”. Its inter-bank disclosure rules made any covert rescue bid impossible (a claim since denied by Brussels).
This accusation threatened an open split within the nation’s financial establishment. On this at least the powers-that-be were swiftfooted. It took Darling a matter of hours to assert his full confidence in King. He was thus able to imply that the fiasco was nothing to do with the government and that King had de facto apologised, to Downing Street’s satisfaction (and relief). If King were to fall, his memoirs might tear aside the fig leaves that have long covered Brown’s vitals as chancellor. As far as ministers were concerned, posturing MPs might have their day but all would be quiet tomorrow.
King appears to have some justice on his side. (The FSA is a different matter.) Even Milton Friedman, the guru of economic laissez faire, accepted that the one task required of government is to put in place a structure to prop up market confidence in the banking system in time of panic. Where confidence is unjustified (as in such failures as BCCI or Barings), the damage should at least be isolated.
In the days of the joint-stock cartel, the Bank of England’s governor would have heard rumours of trouble at Northern Rock and would have convened a secret meeting of the other banks. Given that Northern’s asset base, mostly house mortgages, was reportedly sound, a short-term loan would have been assembled and injected to restore confidence. There would have been no run on deposits.
Since 1997 Brown’s Treasury reforms have rendered any such covert operation near impossible, with a plethora of banks and a separate official regulator. It must have irked King, as it did Sir Eddie George, his predecessor, to hear Brown constantly blowing his trumpet over his reform of the Bank of England. Now it has fallen at the first hurdle. As The Economist commented last week, the crisis has wrecked the City’s reputation for “the depth and sophistication of its markets and the sure touch with which they have been regulated”. Nor is it just the City at risk. Financial services are now a fifth of the British national product.
Capitalist economics are based on credit, a willingness of those with money to postpone spending it and allow others to use it more productively. This relies on small savers parting with their money, praying to a mix of information and blind faith on which, as Eliot said, “assurance rests like a silk hat on a Bradford millionaire”. In explaining his apparent failure on Thursday, King appealed to such mystique.
This might seem no more than a squabble at a plutocratic garden party if it did not raise the spectre of our old friend, trust. Where loss of trust in a public authority can be met by more openness, the answer is simple, more openness. But in banking regulation, as in matters of national security, openness is not necessarily the answer. Public consent to a regime must rely on the credibility of those in charge. It was against that credibility that last week’s high street queues were a damning demonstration. “Trust them?” said one irate depositor. “You must be joking.”
The affair has shown just how difficult Tony Blair and Brown have made it for people to believe what leaders say. Both men have bombarded the public with vague pledges and targets whose purpose is little more than political wallpaper. Ministers promise smaller classes, more literacy, less poverty, more police, less traffic, with targets they have no means of achieving and with no intention of resigning or otherwise accepting responsibility if they fail. When the press holds them to account it is accused of “feral cynicism”, Blair’s euphemism for democracy.
Brown has taken over where Blair left off. He demands trust in claiming that British troops are “doing a worthwhile job”, getting killed in Iraq and Afghanistan simply to hold together the coalition with America. He demands trust in claiming that national security requires 90 days’ detention without charge. He demands trust that the proposed European treaty is “merely a tidying up” and is not the old constitution renamed (as he knows it is).
He expects us to believe his talk of listening, delegating and localising while his decisions go the opposite way. This is the same leader who expected people to believe him when he said Northern Rock was safe without state backing.
In her 2002 Reith lectures, Onora O’Neill remarked that openness and transparency were not absolute goods in government. “We should not be surprised,” she said, “that the technologies that spread information so easily are just as good at spreading misinformation.” Consent in a democracy also depended on accepting a role for confidences, secrets and professional respect. That trust is desperately vulnerable to erosion, which can be carried over from one sphere of government to another, from defence to personal morality to public finance.
The Northern Rock crisis appears to be over, thanks to the injection not of trust but of £28 billion of taxpayer guarantees. But the roasting of a few Establishment bottoms will not undo the damage. Brown would be wise to make a self-denying ordinance. He should say only what he means and mean only what he intends to do – and then he should do it. When what he does is proved wrong, as with the Treasury reform of the Bank of England, he should admit it and correct it at once.
Otherwise he and his ilk will never be entitled to what any democratic leader needs: the public’s belief in his integrity.
