Sep 20 2007
Questions for the Governor of the Bank and for the Chancellor
Readers of this site may remember that there was plenty of warning that money market conditions were too tight before the Northern Rock queues of depositors. On August 29 when I wrote "Markets fall again" it was clear money was very tight. On September 5th the blog highlilghted the different approach of the ECB/Fed who were supplying liquidity to markets to that of the Bank of England who were not. On September 7th in "Benign or malign neglect?" I urged the UK authorities to ease conditions in money markets. On September 10th I reported "City doubts" about the Bank of England strategy and on September 13th when the Chancellor gave his stern interview ruling out help to banks I was critical of his interview and asked when he would intervene to ease the obvious difficulties.
We now know the answer to that question. Shortly after he gave the interview he decided to approve intervention to lend to the Northern Rock, and after a disastrous weekend decided to offer a guarantee on all deposits. Recently the Bank has announced that it is making money available to the banking sector after all.
Today the Treasury Committee has its chance to ask the Governor some questions. I hope this will be followed quickly by an interview of the Chancellor. We will certainly need a Statement in Parliament from the Chancellor as soon as the party conferences are over and Parliament is allowed to meet again.
The obverse side of the coin of "independence" is "accountability". Those who believe the Governor does run an independent Bank will hold him responsible for the events of the last few weeks. Given that the Chancellor was clearly heavily involved in the crucial decisions to lend money to Northern Rock and guarantee deposits isn’t the Chancellor ultimately responsible? He after all, is the senior member of the tripartite arrangement for banking supervision Gordon Brown established ten years ago.
Questions that should be asked of the Governor include:
1. Why did he not intervene to ease monetary conditions in late August and early September when other Central Banks were doing so?
2. What was his view of short term interest rates in the money markets climbing well above Bank Rate? Did he think this mattered?
3. What has changed this week that warrants supplying liquidity now when the Bank did not favour intervention before the Northern Rock problem?
4. Will he confirm there are no major UK banks (with assets of more than say ??100 billion) that have entered into the kind of irresponsible lending he and the Chancellor have condemned on a scale which causes him worries?
5. Assuming there are no such banks why then did he worry about the so called moral hazard of easing conditions in money markets when conditions were obviously too tight? Does he really think any major bank is now going to behave irresponsibly because he has eased money markets?
6.When is he expecting a clearer view to emerge of the extent of any UK banking losses from valuing their various assets at current market prices? Wouldn’t profit updates be helpful (if needed) at this moment so people can be reassured that any losses can be easily handled?
7. What is his current view of the collateral that is acceptable for banks to offer the Bank of England in return for borrowing? Has his view of this changed in recent weeks?
Quesitons for the Chancellor are many, but include
1. Why did he make his statement on September 13th warning banks about irresponsible lending?
2. Does he seriously believe major British banks might enter into irresponsible lending if conditions are now eased?
3. Why did he intervene to sanction lending to Northern Rock when he did? Why did he not take market action sooner to avert the problems that Northern Rock subsequently encountered?
4. As he believes Northern Rock was always solvent, how does he explain how it got into difficulty? Weren’t short term money markets too tight?
5. Was the Bank of England right to resist easing conditions in late August and early September?
6. Was the Bank right to ease conditions this week? Why was it necessary this week but not before the Northern Rock problem?
7. Under the tripartite agreement, when does he think he has to provide a lead on banking and monetary supervision?
8. Does he accept that the ultimate responsbility for banking is his, as the most senior member of the tripartite arrangement?
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John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
[...] Check out the rest at his blog post here: http://www.johnredwoodsdiary.com/2007/09/20/questions-for-the-governor-of-the-bank-and-for-the-chanc... [...]
The Treasury committee was an object lesson in how not to govern anything. split responsibility into 3 or 4 different groups. allow everyone to say they did their jobs with nobody in charge. the hectoring labour members on the committee were illinformed and ludicrously politicial.
add to this the conflicting legislation imposed by, you guessed it, the EU and you see why nobody cares about voting anymore. Nobody will take responsibility, everyone hides behind the EU legislation that “has been imposed from brussels” and we all move on.
pathetic. Mervyn king was calm and articulate and should be commended for dealing with a crisis when clearly the government were pulling the strings to suit their own agenda.
Why no questions for the FSA? I am not a financier but they seem to be very remiss here; NR was entirely based on borrow short lend long and a recipe for trouble. Mervyn King was not happy with the tri-partite arrangement and the Chancellor needs to be held to account for the BoE/FSA split.
Reply: I think the main questions must be for the Chancellor, as the most senior of the three in the tripartite arrangement. It was Gordon Brown who set up this three man pantomime horse, so his successor should have the pleasure of explaining how it is performing. Both the FSA and the Bank can rightly say that they did not individually have all the powers to sort out the problem. That leaves the Chancellor, who finally did take control. What took him so long?
A few days ago I asked what you think Cameron could do to inflict lasting reputational damage on Brown as a result of the banking fiasco. I also expressed my severe doubts that he would be able to lay a glove on Brown and would - as usual - make himself look like a charlatan.
God I hate being right sometimes!
Cameron’s big, huge, massive failing right now is that he is up against a player who has made a virtue of being boring but serious. This requires the establishment of an image with gravitas. What does Cameron do? He puts Swampy and the teenagers in charge of policy papers. He goes stirring it up during a crisis rather than being statesmanlike and then knifing Brown after the fact. To be a credible PM in waiting surely requires a different approach.
Remind me again why not to vote for UKIP at the next time of asking.
Reply: Voting UKIP rather than Conservative is Gordon Brown’s dream result.
[...] unknown wrote an interesting post today onHere’s a quick excerptOn September 5th the blog highlilghted the different approach of the ECB/Fed who were supplying liquidity to markets to that of the Bank of England who were not. On September 7th in Benign or malign neglect?
John,
Indeed voting UKIP is a wasted vote. My final comment was a bit tongue in cheek. There’s zero chance of someone like me voting for Labour but a real chance that I’ll look at the Conservative offering and simply stay at home on election day, wondering when I’ll ever get a meaningful choice at the polls.