David Blackburn

A good war

A good war
Text settings

As Allister Heath notes in City AM this morning, Mervyn King has had a good war. Well, not so much a good war as a profitable peace. King contributed to the domestic crisis by sustaining very low interest rates whilst ignoring asset prices. Brown may have forced the Governor’s hand, but King was groggily supine until a sovereign debt crisis threatened.

George Osborne is dismantling Gordon Brown’s regulatory imperium. King is the major beneficiary as the FSA is subsumed by the Bank of England. How will exercise that power? Obviously, time will tell; but monetary tightening will moderate excess (and spruce up banks' balance sheets) in the short-term. Heath reports:

‘In his own speech last night, King suggests that his new system of macro-prudential regulation within this regulatory infrastructure would have seen a “progressive tightening in capital standards that would have reined in the near-tripling of UK bank balance sheets between 2002-2007.” Perhaps; but of course many economists warned that there was a bubble last time yet the authorities either didn’t agree or never really tried to puncture it. More relevant to the markets in the very short-term, King implied that monetary tightening in the UK, when it eventually starts, will take place via higher interest rates, not quantitative tightening (the selling-off of previously purchased gilts).’