Mervyn King being martyred for Northern Rock

Brian Turner | | 0 Comments

There is a lot you can criticise the Bank of England for. Slow action over 2004-2005 that helped create an ugly housing boom, the instability of which already threatens us, is possibly their greatest failing.

But the current fiasco over Northern Rock, and The Bank of England – particularly the governor, Mervyn King – is nothing more than a hunt for a scapegoat.

If we can make one fact plain, it is that the current credit turmoil in the world’s financial markets was created by lenders, exaggerated by lenders, and left unchecked by the lenders.

In fact, a certain lender called Northern Rock was aggressively chasing the mortgage markets at a time when subprime woes had already forced many lenders into cautious mode.

Northern Rock made a policy gamble – the nature of business is risk – but this risk blew up in their face.

Yet now various voices within the UK banking industry have been raised to criticise Mervyn King in particular for not doing enough to help prevent the Northern Rock fiasco – one created by the banking sector itself. A sector that refused to offer credit to Northern Rock themselves, yet demanded the Bank of England take on those dubious CDO’s as security.

While it is certainly the job of the Bank of England to try and ensure financial stability in the UK, it’s also a position of responsibility that leaves them certain not to rush in where angels fear to tread. Rarely can the Bank of England be said to make fast and rash decisions.

For those who really would like to crow for Mervyn King’s head on a plate, denouncing the Bank of England as having acted too slowly, it may be worth considering what was happening in the world before last weekend.

More importantly, it is worth considering the massive losses world stock markets enduring during August, and the expectation after that things could only get worse. According to reports, Mervyn King was personally made aware of the situation regarding Northern Rock on August 18th.

That was the day after a billion dollars in stock options were made, predicting an even bigger crash to major equities than had already occurred. The mood on world equities markets was jittery for certain, with continued fear over the existence of worthless subprime credit.

And it was certainly not the time for the Bank of England to suddenly declare issuing emergency funds to the UK’s fifth largest mortgage lender – one that didn’t even hold subprime debt directly but instead pushed it off to Lehman Brothers.

Did the Bank of England act too slow? That is certainly a topic that only academics will be able to try and reach any resolution with, as they look back at these days with a more objective historical perspective.

But there is one thing they would probably agree on – if the Bank of England had acted too fast, events would almost certainly have turned out even worse.