Ben Bernanke, the Federal Reserve chief during the 2007 crash, published his memoir entitled “The Courage to Act” in October – which Peter Schiff said should rather be called “A Coward’s Way Out” – and now it is former Bank of England governor Mervyn King’s turn to chime in with his version of events in a new book called “The End of Alchemy: Money, Banking and the Future of the Global Economy”. This is not a review, as we have not read his book, but it has been widely reviewed and The Telegraph ran excerpts from it last week. The title of the book is encouraging, and King (now known as Lord Mervyn) valiantly argues that you can’t blame individuals for the crisis (as has become very popular), but that there was general disequilibrium in the world economy, with unsustainable levels of spending in most Western countries, trade imbalances, distorted real exchange rates and inefficient allocation of capital. So far, so good.
King is surprisingly candid when he states that one of the main reasons for this disequilibrium is that “real interest rates were distorted well below the likely expected return on capital investment” in an effort to inspire growth, and that today “central banks are trapped into a policy of low interest rates because of the continuing belief that the solution to weak demand is further monetary stimulus”. Of course this is surprising because King himself was in charge of the Bank of England through most of the period in question! The Base Rate was 3.75% when he took over in July 2003 and it was immediately lowered by 25bps, though he then entered a tightening cycle which took the rate to 5.75% in July 2007. Every major western country raised rates though this period, so he can hardly lay claim to any special insight, but of course his thesis is that it is the system which takes people along and not the other way around. King then slashed the rate to its current level of 0.5% in 2009 and presided over that rate for four years until he left to be replaced by Mark Carney. Again, Lord Mervyn was merely following consensus, and it if a fair assumption that rates would be exactly the same if he was still at the helm of the BoE.
King believes that the Keynesian response to the crisis, with its massive fiscal and monetary stimulus, was appropriate, but at the same time he points out that the low interest rate regime we are in is perpetuating the disequilibrium, and says that raising rates would make “a smooth and gradual return to a stable path for the economy” difficult. So he goes on to discuss which bubble will pop next. He has some radical ideas on how to change the system, at the centre of which is a different, but no less powerful, role for central banks. None of it, however, is a recognition that it was meddling with free markets which was the root cause of the crisis. So while King laudably doesn’t set out, like Bernanke, to argue how he saved the world, he is hardly contrite either. What is clear is that even central bankers can see that something is very wrong with the way the system works and how they had rigged the world economy in the lead-up to the crisis. It is also clear that they didn’t have the courage to do anything about it. Peter Schiff was right about the title of Bernanke’s book.