Northern Rock Drags Bank Of England Into The Lifeboat
Sydney Morning Herald
Tuesday September 18, 2007
MERVYN KING, governor of the Bank of England, has spent the past month trying to stay above the fray as the US subprime-mortgage collapse hit credit markets. Now he's getting dragged in, whether he likes it or not.
Two days after Mr King, 59, told lawmakers on September 12 that central banks should avoid giving the impression they would help lenders that made bad decisions, the Bank of England provided emergency funds to Northern Rock in the biggest rescue of a British bank in three decades. "It's a crisis of confidence and the Bank is confused," said Patrick Minford, an economics professor at Cardiff University who advised former Prime Minister Margaret Thatcher. "They want to be hands-off but in this situation they can't be."Mr King's credibility is in question for his refusal to emulate other central banks and take early action to help cash-strapped lenders. With Northern Rock's failure, he is finding himself subject to the same charge of excessive caution being levelled at US Federal Reserve chairman Ben Bernanke, whose office adjoined Mr King's at the Massachusetts Institute of Technology in the 1980s. "There's no doubt that had the Bank of England acted early, Northern Rock would not have had the same problems," said Stephen Bell, chief economist at hedge fund GLC Ltd in London. "The idea they can't do anything about it is clearly wrong." Mr King, a former London School of Economics professor whose five-year term ends next June 30, initially underestimated the threat posed by rising defaults on mortgages to US borrowers with poor credit histories. It was "not an international financial crisis," he said on August 8; the next day, credit markets seized up as concern about exposure to subprime losses made banks reluctant to lend to each other.The European Central Bank has lent cash to banks in seven special auctions since then, and the Fed responded to criticism its response was too slow by cutting the rate at which it lends directly to banks on August 17. Economists predict the Fed will reduce its benchmark rate tomorrow by at least a quarter point.Mr King held back until markets forced his hand. Last week he said that too much help "encourages excessive risk-taking and sows the seeds of a future financial crisis". With three-month money-market rates close to a nine-year high, the bank on September 13 made its first additional cash loan to banks. The next day, it rescued the Newcastle-based Northern Rock after rising credit costs left the UK's third-largest mortgage provider unable to make new loans."Is this the right environment to be so sanctimonious and to take such a hard line?" asked James Knightley, an economist at ING Financial Markets in London. "If you play this moral high ground, it could backfire." The criticism of Mr King could hardly come at a worse moment if he wants to be reappointed. The only member of the Bank of England's Monetary Policy Committee to vote on each rate decision since 1997, Mr King has been overruled by his colleagues twice in the past two years and in March was forced to write a letter to then Chancellor of the Exchequer Gordon Brown after inflation accelerated to a decade-high of 3.1 per cent. It has since receded: consumer prices rose just 1.9 per cent in July. Bloomberg
© 2007 Sydney Morning Herald
