Daily Mail 'Monday Column' – Mervyn King must be re-elected

by Dr. Ros Altmann

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Last week's Monday View raised the possibility of Mervyn King not being reappointed as Governor of the Bank of England.  The suggestion that this man of intellect and integrity could be replaced by a 'best-in-show poodle' cannot go unchallenged. 

To risk the independence of the Bank of England, at a time when financial and economic dangers are looming large, should be unthinkable.  Recent events powerfully highlight why Mervyn King must remain in charge. 

Let us not forget that Northern Rock's problems stemmed from its flawed business model and were of vastly different magnitude from other banks.  Indeed, one wonders, in the absence of a possibly imminent general election which had not yet been called off, whether Northern Rock would have been rescued at all.  Certainly, if the Government had heeded Mervyn King's exhortations to provide an adequate system of deposit protection, the whole fiasco might have been avoided. 

Over the last couple of years, Mervyn King warned about the dangers inherent in imprudent lending, soaring asset prices based on over-borrowing and the need to ensure risk is priced correctly – to reflect liquidity as well as solvency.  He also rightly made clear that he wanted to provide incentives for prudent behaviour, rather than rescuing bank shareholders from the consequences of flawed lending policies.

Sacking Mervyn King – which is what failing to reappoint him would amount to – would be a classic case of shooting the messenger, rather than dealing with the message.

The Prime Minister should take careful note.  He needs an independent Governor who says what he thinks, rather than what politicians or bankers want to hear.  Mervyn King has been trying to ensure a long-term framework for financial stability.  Prudent economic management sometimes means accepting painful short-term decisions.  There needs to be a penalty for overly risky business practices, which put the savings of ordinary citizens at risk.   

Politicians may be tempted to favour short-term expediency, regulators may bow to the will of powerful financial companies.  Somebody must remain impartial and look beyond the short-term political cycle or the coming quarterly banking results.  After years of strong profits, most banks can afford to absorb some losses.  Northern Rock had an insufficiently diversified business base to cope with the liquidity risks it was assuming, it should have failed.  However, the rest of our banking system is basically sound. 

Mervyn King has acted with far-sighted thinking and honesty.  These qualities are not in abundant supply.  The Governor must be independent of bankers and independent of politicians.  Ordinary citizens need a strong voice in the financial system, someone who will stand up for us against the power of big institutions. 

It was the Prime Minister who established our tri-partite system of regulation, handing banking supervision to the FSA.  Despite having all the information from Northern Rock, the FSA either did not understand the implications or was asleep on the job.  But that is in the past.  We need now to move forward.

There has been some damage to the international prestige of the City of London.  None of the tri-partite organisations can entirely escape any blame, but, unlike the FSA or the Government, at least Mervyn King has been man enough to admit some mistakes and shown willingness to learn better ways to protect the public in future. 

Of course it is good for the UK to have a profitable and healthy financial sector, but the short-term profitability of banks must not be put ahead of the longer-term interests of ordinary citizens.  Irresponsible lending can appear hugely profitable.  Bankers, politicians and shareholders love it while it lasts, but taxpayers are shouldering the costs of failure when the music stops.

If all our regulators were too close to the industry they were supposed to be regulating who will make the necessary independent, impartial judgements about what is really in the best long term interests of the country?
Mervyn King has proved that he thinks deeply and longer-term and also cares about protection for ordinary bank depositors.  To sack him for this would be a risk to us all. Mervyn, your country needs you!

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