Charles Rowley's Blog

Mervyn Allister King was born in March 1948. He studied economics at King’s College, Cambridge, where he earned a First Class Honours Degree in Economics, and at Harvard University, as a Kennedy Scholar.  So one might well expect that he would have emerged in full-blown hydraulic Keynesian economic cloth.  Such may possibly have been the case during his early career teaching at Cambridge and Birmingham universities, as well as during his spells as visiting professor at both Harvard University and MIT (where he shared an office with a young  Ben Bernanke). 

By October 1984, however, when he joined the London School of Economics as a full professor, Mervyn King  surely had become much more market conscious, indeed founding the Financial Markets Group.  Recognizing that money matters to a much greater degree  than any hydraulic Keynesian would ever allow, King became a non-executive director of the Bank of England in 1990, and joined the Bank as chief economist and executive director one year later. 

 He was appointed Deputy Governor in 1997 and became an ex-officio member of the Bank’s interest-rate setting Monetary Policy Committee from the latter’s inception in June 1997, when the Bank was cut loose from Treasury control.  In June 2003, King succeeded Sir Edward George as Governor of the Bank of England.

Mervyn King has always been an anti-inflation hawk. Before becoming Governor, he regularly voted for tighter monetary policy than any of his colleagues.  That pattern continued through his Governorship.  Most notably, he opposed the interest cut by the MPC in August 2005 and was in the MPC minority  voting  in favor of higher rates in June 2007. This willingness to place himself in a minority on interest rate policy is exceptional among central bankers.  In both cases, Mervyn King was on the side of the Angels.

Morever, King is more than willing to put his money where his mouth is. As an anti-inflation hawk, committed to holding  inflation in Britain low and stable at the target rate of 2 percent, in 2008 he declined a pay increase of 125,000 pounds sterling, that would have elevated his salary to 400,000 pounds sterling per annum.

Mervyn King’s wisdom has surfaced most spectacularly since the financial crisis began to impact the British economy.  He is best known for (correctly) refusing Bank of England  funding to the Northern Rock  Bank when it ran into financial difficulties, and for refusing similar funding to other retail banks that misbehaved with their depositors monies. He cannot be held responsible for the bank nationalisations that followed under the intemperate and unwise governance of Prime Minister Gordon Brown’s doomed Labour Government.  But his upholding of the doctrine of lender of last resort against extreme political pressure will go down in central banking history as a position of wisdom and high integrity.

Fully aware of the economic lunacy of excessive deficit financing as a tool for countering economic contraction, Mervyn King risked his career on March 24, 2009 by explicitly and publicly warning the British government against a second fiscal stimulus. More recently, he has warned publicly against excessive complacency about  economic recovery, noting that it  is likely to be plagued by stagflation as a direct consequence of past fiscal imprudence.

He has asked repeatedly, and justifiably,  for the complete segmentation of British banks into separate retail and investment corporate entities as a means of avoiding the ‘too-big to fail’ syndrome.  Just this week, he has castigated the British retail banks for their policies both  of  excessively remunerating their employees, and of paying out excessive dividends to their stockholders, all  at the expense of refusing to extend justifiable wealth-creating loans to cash-starved small enterprises.

A number of years ago, at an annual meeting of  the American Economic Association, I attended a lunchtime address by Mervyn King when he was Deputy Governor of the Bank.  King chanced to mention that a central bank had an obligation to protect high levels of employment as well as price stability. Just a week earlier, Alan Greenspan had spoken about the absolute priority thst should be given to price stability by the Federal Reserve.  Smart Alec, that I may have been, I  challenged Mervyn King on this discrepancy, asking whether this implied that the value of sterling predictably would decline against the U.S. dollar as a consequence of this difference in central bank philosophies.  King nervously checked out the room to determine that the Press was absent.  He then deferred in his reply to Alan Greenspan, stating that he could not compare himself with the Maestro on such matters.

Well, both Mervyn King and I were wrong on that occasion. Alan Greenspan turned out to be a Wizard of Oz, not a Maestro,  whereas Mervyn King was much more of an anti-inflation hawk than either he or I believed. So I am more than happy to extend my apology to Mervyn King for this grievous error of judgment.

I only wish that the Federal Reserve might have been  blessed with a Chairman with the wisdom and integrity of  Governor Mervyn King  over the period 2003-2010. The world-wide  financial crisis and economic contraction of 2008-2010 surely would have been far less pronounced than has been the case.