Has Merv swerved the blame game?

3rd May 2012

His exact words were: "Whether in this country, the United States, or Europe, there was no unsustainable boom like that seen in the 1980s; this was a bust without a boom".

Robert Peston commented in his blog: "The moment he said it, he raised a few hackles. His former colleague from the BoE's Monetary Policy Committee, Andrew Sentance, tweeted: "disagree with Mervyn King that fin crisis was bust without a boom…it was just very long boom!"

RedHairedGirl said bluntly: "Not true. King is in denial about his own culpability. The boom was everywhere – a credit bubble the largest for 100 years. The growth was the illusion since it was based on ever larger debts – state, personal & corporate. King is famous for stating it is not the job of the Bank of England to control assets prices when warned about the housing bubble."

For many, King's mistake was not raising interest rates sooner when emerging markets were importing deflation through cheaper manufactured goods. Inflation numbers may have looked controlled, but domestic inflation was higher. When this situation reversed and emerging markets imported inflation, through higher commodities prices, inflation figures leapt up.

Certainly Peston believes that there has been a boom over the last 10 years: "1) The massive increase in bank lending, from about 100% of GDP to 600% of GDP over 20 years or so; 2) The trebling in house prices in the 10 years before the 2007; 3) Consumer spending growing faster than the economy, fuelled by borrowing, in the 15 years before the crash; 4) The UK importing more than it exports every year since 1983, not earning its way in the world."

King did go some way to admitting a degree of responsibility for the crisis: "With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called 'light-touch' regulation hadn't prevented any of this," King said.

However, he added that the decision by Gordon Brown to strip the Bank of England of its power to regulate banks in 1997 tied his hands: "Our power was limited to that of publishing reports and preaching sermons. And we did preach sermons about the risks." With hindsight, King does not appear truly to believe that he was at fault.

King was marginally more bullish on the UK economy than he has been in the past, forecasting a steady, slow recovery. However, he urged speedy banking reforms.

However, the real question is whether King's credibility remains in tact. dragonfly101 on the Telegraph site sums up the views of many when he says: "It seems to me all his predictions have been proven consistently wrong. If I were a betting man – and I am – I'd bet against any of his future predictions. In fact his consistency in being wrong might be useful."


More on Mindful Money

Mervyn King has failed; it's time for change at the BoE

The economics of the Olympics

Europe: Where might investors profit?

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21 thoughts on “Has Merv swerved the blame game?”

  1. Drf says:

    Hi Shaun;

    “To work this would require a belief that the extra public spending would
    be reversed in the future. As over our economic history we have proved
    capable of reducing the growth of public spending at best this is not
    entirely reassuring!” I think you perhaps may mean here “…we have proved incapable of reducing…”? Then again it is not that “we” have proved incapable, but it is the politicians who are incapable!

    1. Anonymous says:

      Hi Drf
      Apologies for that sentence which is not entirely clear. I have added the word rate to it which I hope clears it up.

    2. Andy Zarse says:

      Politicians are about as capable of doing this as the FSA are of regulating financial products…
      Oh, wait!!
      Here’s a couple of questions Lord Turner never answers.
      Where was the FSA when the banks were selling PPI for a ten year period? And why don’t any lenders now sell it; surely the protection it affords (paying off debt when illhealth or redundancy strikes) would be good for at least some consumers if it was properly priced? Why have the FSA totally over-regulated its sale – meaning it is now impossible to obtain?
      Why are there now fewer employees in workplace pension schemes since records began? And why do you consider this a successful outcome from your time as head of UK regulation?

      1. Anonymous says:

        In fairness it was Gordon Brown who skimmed a new tax out of the pension pots. Gordon Brown also favoured means tested benefits which was another disincentive to save.

        Yes the FSA could have tried to promote more accountability in public companies – directors rewarding themselves for failure is dishonest and economically damaging. Likewise the bankers were too busy taking big bonuses to be bothered doing share value promoting shareholder activism. The FSA could and should have capped mortgages at 95% LTV – allowing 120% LTV is grossly irresponsible.

        The FSA have done little to justify their salaries, but I think the pension enrolment drop was caused by Gordon.

        1. Patrick, London says:

          Agree with all of what you say apart from the 95%. If you need a 95% mortgage, you’re not ready, and most likely, not capable of paying a mortgage on which you were only able to raise a 5% deposit. All it does is facilitate overpriced housing.
          Probably, sensible sized deposits/LTVs wouldn’t have stopped the asset rich from continuing their gorging on BTL, but perhaps the market would’ve been cooler, and therefore less attractive. (And the self cert 100% and above legions would’ve been shown the door).

          Has there ever been a debate on taxation on ‘boom’ price increases being separate from standard capital gains. Maybe you could finally eradicate boom and bust in the property market, if you knew that price rises that happened as a result of inflation or speculation were taxed at 80%, as opposed to rises based on ‘gentrification’ of an area, or improvements in the home which were tax free. Obviously a bugger to police, and I haven’t really thought it through, but it seemed an interesting idea a few minutes ago… 🙂

          1. Anonymous says:

            Yes the LTV upper limit could be lower than 95% – that is a discussion the FSA & BOE should be having. With a 95% mortgage, you need a lot more than the 5% downpayment – lawyers fees, various search fees, stamp duty etc. Possibly money for furniture, basic appliances (Fridge etc) and so on.

            The BTL is driven by a lack of other good investments – see comments about poor deals for minority shareholders, pension funds being retrospectively taxed and pathetic returns for savers. Add to this a residential property shortage and you will get very high prices.

            In hindsight, higher interest rates from 1996 would have kept house prices lower, especially if the BTL generation found returns on savings more profitable than BTL.

          2. Anonymous says:

            Hi Patrick
            As you say the problem would be defining it or policing it.
            If you head in that direction the only way of doing it would be to remove/reduce the Capital Gains Tax exemption that a first home has.
            Perhaps you could do it for future gains to try to limit such issues in the future but again that is not easy to define/police.

      2. Anonymous says:

        Hi Andy
        As to bank regulation there was also the issue of produtcs similar to PPI for business loans which were as bad if not worse. I was involved for a while in the small business sector area and they were definitely pressurised to take out such products with loans.
        You would think that such products involved sales commission which allowed staff to hit targets which if they did not hit they would be sacked over aka enormous moral/financial pressure which the FSA “missed”.

  2. Andy Zarse says:

    Hi Shaun, having read your last three blogs on the ESM, negative interest rates, and now the amazing postulations of Red Adair, I sat staring at the computer screen this morning wondering if I hadn’t accidentally logged into the meeting minutes for The Magic Circle! There really is some crazy stuff going on out there, so can I take this opportunity, maybe for the last time on MM, to say thank you for trying to make sense of it to those of us who are mere mortals. Incidentally, is it possible to comment on the notayesman blog?

    1. Anonymous says:

      Yes it is.

  3. pavlaki says:

    There is an argument that cutting interest rates as low as they have has harmed savers and the ‘grey pound’. These people are quick to reign in their spending which hits the service economy in particular and also delays capital purchases such as new furniture, cars etc. The spending power of ‘savers’ is considerable and they will not feel comfortable until they see their income (through higher rates) rise at which point they will resume spending and help the economy. Cutting rates further may be killing the golden goose.

  4. anteos says:

    Hi Shaun

    where exactly do we stand with the QE money. Is it officially recognised as a debt? Or not as its only ‘temporary’ and will be reversed at some point 😉


    1. Anonymous says:

      Hi anteos
      Depends what you mean by debt. If I answer that in terms of the UK public-sector then the national debt numbers as of now are unaffected by it because it is expected to be reversed. That has been the route taken by the Office for National Statistics.
      Should it be “cancelled” then our national debt would shrink by that amount.

  5. Anonymous says:

    Shaun – a fascinating insight. If he was indeed “setting out his stall” then he has succeeded in what the Australians call “dog-whistle politics” where whoever reads or hears the words can take from it exactly what they want, thus appealing to more people. As a strategy, fine, but if this is what he REALLY believes, we are in for more tough, unpalatable medicine!

  6. jan says:

    What about “moral hazard” or does this only apply to us mere mortals? We would all spend like crazy if we didn’t have to pay our debts.
    On another topic, what happened to the Tobin Tax which Lord Turner was in favour of? I believe it has been adopted by some of the EU member states why not us as well?

    1. Anonymous says:

      Hi Jan
      As of mid-week 11 EU states voted to push the financial transactions tax or Tobin Tax forwards. The problem for us is that we have such a big financial sector and so it would be a drag on that. The issue to my mind is that it is indiscriminate rather than weeding out the bad bits.

  7. Anonymous says:


    Thoughts of negative interest rates when energy prices currently increasing at 8 -9% shows how broken the financial linkages are and how out of touch is the BoE and MPC!
    As discussed before energy inflation certainly has a multiplier effect on the UK inflation rates.

  8. james says:

    Great article as ever. Id say that Lord Turner has the nomination sewn up:
    1. He has magically found a way of reducing government debt
    2. It does not involve cuts or extra tax
    3. It will be done in a way which no-one will understand
    4. Its effects will be indirect and poorly understood by the media
    5. It could be repeated whenever we run out of cash.
    I nearly wept when Robert Peston called all this “accounting” on the radio this morning. We seem to get further and further from the idea that government expenditure should bear some relationship to the tax base. There seems to be no link at all between the real world and that of high finance, whether City or government.
    Today we have seen striking examples of the difference between reality and the crazy world inhabited by people in high office:
    1. Nick Clegg cannot face more welfare cuts, but has not one suggestion as to how to mend the finances of the country (mansion taxes are not going to do it, Nick)
    2. The EU gets the Nobel peace prize. I guess that this is the arch example of one unelected quango giving an abstract entity a prize. Did they take into account the utter failure of the EU to deal with the USSR in the Cold War, the inability to deal with ex-Yugoslavia, Palestine etc etc? There has been no war in Europe because the USA stood up to the USSR, because the USA funded the Marshall plan, because the USA gave the Germans a very constrictive constitution etc. Does the EU have an army in the USA to help keep peace? I thought not. Does the USA still have an army in Germany? I think so.
    3. Lord Turner is being considered for a job when the mistakes he previoulsy made should make him instantly a non candidate. Mind you, Hector Sants was being considered for the Bank of England Court as well, which defies all belief.

  9. Robert S says:


    Are you able to explain to a non-economist like me, why the £365 billion QE money isn’t creating higher inflation now (I’m assuming the QE money is in the banks hands as I’m guessing the BoE bought the gilts from them), and why it will create inflation when the recovery really kicks off?

    Thank you.

    Robert S

    1. Patrick, London says:

      Call me a cynic, but… because the figures for inflation are being mis-reported all the time…?

    2. Anonymous says:

      Hi Robert
      In essence it is down to human behaviour.
      People change in the two arenas. Right now there will be saving and reductions in borrowing. In a boom/recovery we tend to spend (often too much).
      So just as the economy is doing well we will see that the extra cash is then much more likely to be spent…
      It is in many ways irrational but human beings often are irrational.

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