Review: Bank of England exposed, but not decoded
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
At some point in the next few months, the UK government is expected to publish an advertisement inviting applications for the position of Governor of the Bank of England. Though the job will not become vacant until the incumbent, Mervyn King, steps down in June 2013, his successor is expected to be named before the end of this year.
The successful applicant will take the reins of an institution that is probably as powerful as at any time in its 318-year history. Yet expanded powers at the Bank – as it is universally known in the City of London – are so far unmatched by increased accountability. Despite the dramatic and unconventional policies it has pursued since the financial crisis kicked off in the autumn of 2007, it has so far stubbornly resisted any formal examination of its performance.
Dan Conaghan’s “The Bank” is an attempt to fill that vacuum. It is an accessible and entertaining account of the Bank’s recent history, offering a tantalising glimpse of life behind its Threadneedle Street facade, and deftly sketching the personalities and foibles of its main characters – particularly its cerebral, domineering Governor.
Conaghan, a fund manager and former journalist for the Daily Telegraph, has done his homework. He trawled through countless reports, speeches and transcripts of appearances by Bank executives before the parliamentary Treasury Select Committee. He also interviewed numerous sources, some of whom apparently still work at the Bank. Yet this is far from an authorised account. The Bank has questioned the accuracy of Conaghan’s anecdotes. Indeed, Bank executives were discouraged from attending the book’s launch party for fear that their presence would imply an endorsement of its contents.
The restricted access is most evident in the chapters dealing with the financial crisis. Readers hoping for a definitive fly-on-the-wall account of the collapse of Northern Rock, or the bank rescues of 2008, will be disappointed. Conaghan’s account is also let down by the occasional factual slip: for example, he states that the UK government would use Permanent Interest-Bearing Shares to inject capital into banks, whereas it actually took ordinary equity.
A bigger complaint, however, is that the book skims over the intellectual framework that informed the Bank’s decisions, and how this was upended by the crisis. A highly accomplished academic economist, King appears to have largely accepted the prevailing pre-crisis orthodoxy that financial markets were mostly efficient and self-correcting. Even when cracks appeared in the summer of 2007, he initially resisted offering extra liquidity to banks on the grounds that the Bank’s main responsibility was to protect against moral hazard.
Within a week of the run on Northern Rock, King changed his mind. Yet the book offers little insight into how his thinking has evolved or the reasoning behind his subsequent decisions.
Aside from the odd reference to complex econometric models, the book largely glosses over the detailed economic analysis that accounts for much of the Bank’s work. This may reflect a desire to keep the narrative accessible to a non-specialised audience. However, the book does not always shy away from complex subjects: the chapter on Quantitative Easing – a subject that many commentators have struggled to explain – is admirably clear.
The book is well timed. In the past few years the Bank has seen its balance sheet inflated by 287 billion pounds of gilts acquired as part of its efforts to avert an economic slump. It will soon regain formal responsibility for regulating banks – powers it lost when it was granted its independence in 1997. And it hosts the embryonic Financial Policy Committee, whose mandate for preventing future financial crises could extend the Bank’s reach deep into the realms of social policy.
With the race to replace King set to start in earnest, the book will appeal to readers whose interest has been primed by almost five years of financial and economic crisis. “The Bank” is by no means the final word on the matter. But until the Bank consents to a more detailed examination of its recent actions, it will be the best on offer.