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Home Publications Blogs Beat the Press Mervyn King Led the UK Economy to Its Worst Downturn Ever

Mervyn King Led the UK Economy to Its Worst Downturn Ever

Friday, 26 April 2013 05:30

David Ignatius used his Washington Post column yesterday to give a glowing tribute to Mervyn King, the outgoing governor of the Bank Of England. The whole piece is a paean to King's wisdom that concludes by telling readers that King is:

"the only person I’ve ever seen who could intellectually intimidate former Treasury secretary Larry Summers. King couldn’t fix the British economy, but he did understand it."

While silencing Larry Summers is certainly commendable, the claim that King understands the economy is highly questionable. It was not just his job to fix the British economy, it was his job to prevent it from breaking in the first place.

King was running the Bank of England as the housing bubble grew to ever more dangerous levels. It should have been clear to King that this asset bubble would burst at some point and that it would have severe consequences for the UK economy. However he took no measures to rein it in, apparently oblivious to the dangers. As a result, the UK is now experiencing a downturn that is more severe than the Great Depression. That fact probably deserves some mention in a balanced assessment of King's record.

 [Typos corrected from an earlier version.]

Comments (10)Add Comment
written by JSeydl, April 26, 2013 6:05
However he took measures to rein it in, apparently oblivious to the dangers.

Should be "took *no* measures..."
King the radical.
written by Ralph Musgrave, April 26, 2013 9:16
I like King in that he is an inquisitive intellectual: he knows all about the more way out and radical ideas on banking.
So offensive on so many levels
written by Jennifer, April 26, 2013 9:26
First he emphasizes the "influence" of King-he had a dinner at the British Embassy full of important people! Then he make the "remarkable admission" that "purely monetary stimulus will be not enough . . . " This is remarkable? Does any central banker think monetary stimulus is enough-I think Bernanke states this is not the case almost every time he comments on policy. The rest of the article seems to compare him to Keyes-maybe King has charm that doesn't come across in public (from what I've read Keyes was quite a personality) but I cannot follow this. I am pretty sure the austerity measures that the UK has pursued are quite the opposite to what Keyes would have advocated for if he was here.
written by NWsteve, April 26, 2013 9:55
is it a given that King has raw intellect, or is this belief held solely by his former acolyte Ignatius?
in any event, without a strong dose of active common sense, it is often quite difficult to convert such a talent into any useful pursuit...
the UK, upon a recent first-pass-summary, has just now barely avoided a triple dip recession in its economy...
and for this: King is to be anointed to, well, a King?
wonder of wonders...
Damaged Goods
written by Nancy Cadet, April 26, 2013 10:26
Yes,the R&R Op-Ed is shameful. It's obvious that their work was used to justify austerity policies, and that they never corrected the record--even though they have publicly made many statements , given Congressional testimony and published editorials that support the points they now are trying to distance themselves from.

As an academic in a completely unrelated field, I 'm familiar with this behavior; it's egregious. The tactic they are using is to pretend to be huffy and insulted that some people disagree and then to try , often viciously, to defeat or silence critics with ad hominem attacks while rationalizing their behavior/writing/theories.

One big difference between possible damage in my field and
R&R 's is that their flawed work affected millions of lives, but in general disgruntled academics do not have such a big public forum or powerful backers like Pete Peterson and his $$$. Academics can just hurt a handful of opponents/critics/non disciples by denying grants, sabotaging job interviews , graduate fellowships, recommendations, tenure or publishing opportunities. But it's the same abusive, dishonest game!
written by skeptonomist, April 26, 2013 1:58
People tend to act in certain ways in certain situations - it's just human nature. It's predictable that if finance is allowed to run wild, there will be a crash eventually. When prices reach certain levels with respect to fundamentals it's predictable that there will be a crash eventually. It's also predictable that those in authority will tend to think the same way as everyone else, and ignore the signs of an impending crash. Until we have robots smart enough to do jobs such as central-bank chairmen, it is futile to count on those human beings to detect bubbles and act constructively to end them without harm. It does no good to rail about how the last monetary leader fell down on the job - it's predictable that the next person will very likely do the same thing, even if the last one is thrown in jail (which will never happen). Actually there is little evidence that once a bubble reaches a dangerous level it is even possible to deflate it harmlessly.

There is no way to stop asset bubbles, and central bankers actually do not have authority to do so. But really dangerous bubbles usually involve excess leverage - this is typically what makes them grow so fast and makes it look like it's so easy to get rich quick. Leverage can and must be limited by regulation. Greenspan was a very good friend to leverage and he acted wherever possible to expand it, and he was also a declared enemy to regulation from his first days in office. But who was keeping an eye on Greenspan? Many economists who think of themselves as liberals fell in with the legend of Greenspan as Maestro and thought that he had things under control. Should those economists be punished?
Of the Big Three Central Bankers, King Was the Most Dismissive
written by Hugh Sansom, April 26, 2013 4:22
Of the Big Three central bankers — Bernanke, Trichet, and King — it was King who was most hostile to suggestions that there was a problem on horizon. It was in 2005 that Raghuram Rajan presented his paper at the Jackson Hole cluster-fest: "Has Financial Development Made the World Riskier?" (Of course, Bernanke wasn't Fed head then; he was Chairman of Bush's Council of Economic Advisers.)

None of the economic whizzes took heed of warning signs. Bernanke famously dismissed suggestions that housing prices might see sharp declines. But King was actually hostile to the point of vindictiveness. British economist and Dartmouth professor David Blanchflower left the Bank of England after disagreeing strongly with King. King was impressively arrogant and unkind to those who disagreed with him.
Mervyn & Larry's genius is so advanced they can only be considered "human" in a technical sense
written by Buck Turgidson, April 27, 2013 4:55
Reading the Washington punditry the last decade or so you'd get the idea that Larry Summers intellect is so powerful that Richard Feynman would appear Chimp-like if they were in the same room. I don't care if he can warp space and time with his mind, he missed/ignored/facilitated possibly the largest financial crisis in history. THAT IS THE ONLY THING HE GETS GRADED ON. Period. If he could beat 1972 Bobby Fischer in Reykjavík 13-0 that's just super-duper but he only gets graded on the economy. Mervyn King has at least had the decency to appear contrite. It's not genius but it's more than Larry Summers has delivered.
written by skeptonomist, April 27, 2013 9:12
A lot of people bear responsibility for the debacle of 2008-9. Dean rightly beats up on the others too, including Clinton and his advisors who had several basic economic ideas wrong, not just deregulation. Correcting things will be extremely difficult and will probably await the next crash after which a massive public reaction could cause reform. But leaving everything up to Maestros to blow a magic whistle when a bubble develops is not going to do it. Not only is there no magic whistle but history tells us through many, many repetitions of bubbles and crashes that authorities would not blow it. People don't attain and keep these positions by being real contrarians, they are usually organization people who go along with the conventional wisdom.
I wonder...
written by Tracy, April 27, 2013 9:17
As a college educated secretary who makes $10/hour, I'd like to think that if I ignored my duties and made the company vulnerable to lost profits, I'd be able to keep my job and be treated to plaudits from the Post.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.