Darling’s antics expose myth of Bank of England independence

29 September 2007

Until last week, the world had almost forgotten that Alistair Darling even existed.

Consider the precedent this has set. If the government underwrites every penny invested in Northern Rock, this means it cannot deny the same to every other failed bank. Darling has in effect committed British taxpayers to subsidising the future misadventures of the nation’s banking industry. Northern Rock had not used a penny of the emergency facility it had arranged with the Bank of England. So why would Darling perform such a U-turn?

The answer is nakedly political. Gordon Brown could not stand another day of news reports featuring queues outside Northern Rock. The images were toxic to his reputation for economic prowess. So Darling was instructed to agree this deal with Mervyn King – or, we should say, instruct the governor of the Bank of England to agree to the U-turn.

The implications of this decision will remain with us for years to come. One of Brown’s achievements was to give the Bank of England its “independence” but even this has evaporated on its first real contact with reality. And if Northern Rock’s business is to be underwritten by the taxpayer, what of the pensioners being refused compensation for the collapse of schemes vouchsafed by the government? Can any private company force a rescue package from the government if it lays on a sufficiently dramatic show?

The real political risk now facing Brown is that King could resign. Just last Thursday, the governor was chastising the rest of the world’s central banks for boosting liquidity at a non-emergency rate. This was a “moral hazard”, he said, inviting worse misbehaviour. He has been forced to eat those words by Darling. His credibility is his lifeline: it has been damaged. The City will wonder whether he may be overruled by a nervous government.

But Darling’s reputation has taken the biggest hit. He will now be regarded as a cipher, simply acting out instructions from the first lord of the Treasury (one of the prime minister’s titles). His two main set-piece speeches, the Spending Review and the Pre-Budget Report, are due to be delivered on the same day, minimising his exposure. There is little doubt that almost all of the much-delayed Spending Review was already written when he arrived at the Treasury.