This article was originally published on February 9, 2012 in Societe Generale’s Global Strategy Weekly.
In the wake of the 2008/09 economic collapse, central bankers have been working very hard. Working hard, that is, to deflect blame away from themselves. Long before they credit bubble burst we had identified the former and current head of the US Federal Reserve as primarily responsible for the inevitable debacle. The UK’s Bank of Englad was similarly responsible for presiding over a copy-cat catastrophe. If knighthoods are being removed for those held primarily responsible for the debacle, shouldn’t Sir Alan Greenspan and Sir Mervyn King, like the ex-CEO of RBS Fred Goodwin, be stripped of their honours too?
° To the majority of readers on my mailing list, based as they are outside the UK, the removal of former RBS chief Fred Goodwin’s knighthood must seem pretty irrelevant. It is not. I believe that the post-bubble discourse has been hijacked by those in positions of power with a vested interest in shifting the blame. I am known in the markets for strong views. Let me make absolutely clear that these views are my own. Readers may disagree with my view but at least they know they get a straight opinion.
° Politicians and central bankers have been working very hard to deflect blame away from themselves. I repeat my previous statement that “The pygmies that populate the political and monetary elites prefer to genuflect to the court of public opinion in a pathetic attempt to deflect blame from their own gross and unforgivable incompetence” And, to be fair, the pygmies have been remarkably successful in their endeavours. But if blame for the crisis is deliberately mis-attributed then we all risk that the wrong lessons will be learnt and the wrong remedies mis-applied.
° My trenchant criticism of Fed Chairmen Greenspan and Bernake’s tenures at the Fed has been as lengthy as it has been voluble. The UK Bank of Englad governor Sir Mervyn King has presided over similarly ruinous policies to those in the US. Their bankrupt-(ing) policies can be summed up in one paragraph written in a Global Strategy Weekly back in December 2002 – “The nature of the Fed’s role as guardian of the punchbowl has altered. It is 2am. The party has wound down. The guests are sloshed and want to get home. Yet in one of those Nightmare on Elm Street moments, Big Al has bolted the door and is now dunking the struggling guests’ heads into the punchbowl”. It has consistently been my view that it was excessively loose monetary policy, both in the US and the UK that was primarily responsible for the ‘Great Recession’, not the over-exuberant actions of lenders and borrowers.
° Terry Smith, CEO of Tullett Prebon, is a well known financial market commentator here in the UK. He wrote to the FT recently saying that if the mood is to strip knighthoods for those responsible for the credit crisis surely attention should now focus on the honorary knighthood bestowed upon Alan Greenspan in 2002, bestowed for his “contribution to global economic stability(!!!)“ – link. But if this means we are now in the business of looking for scapegoats for our own home grown Great Recession, I believe Sir Mervyn King’s knighthood should be removed too.
The removal of the knighthood of Fred Goodwin, former CEO of RBS, has been extremely controversial in the UK as it was unprecedented. The BBC reported that in the past, only convicted criminals or people struck off by professional bodies have had knighthoods taken away. Goodwin satisfied neither of these criteria–link.
After this unprecedented action, a Cabinent Office spokesperson said by the way of explanation: “The scale and severity of the impact of his actions as CEO of RBS made this an exceptional case.” He added: “The failure of RBS played an important role in the financial crisis of 2008/9 which, together with other macroeconomic factors, triggered the worst recession in the UK since the Second World War and imposed significant direct costs on British taxpayers and business. Fred Goodwin was the dominant decision-maker at RBS at the time. In reaching this decision, it was recognised that widespread concern about Fred Goodwin’s decisions meant that the retention of a knighthood for ‘services to banking’ could not be sustained.”
But as Terry Smith pointed out in his letter to the FT, Fred Goodwin was CEO of a board that made collective decisions supported by RBS shareholders. Many in the UK believe, as I do, that he is a scapegoat. For in an environment of excessively loose monetary policy, both lenders and borrowers inevitably make ridiculous borrowing and lending decisions they come to regret later. That is how it always is and that is how it will always be. It is the Central Bank’s job to remove the punchbowl and be unpopular. Hence I believe it is the monetary authorities in both the US and the UK who are almost wholly responsbile for allowing this lax monetary environment and the boom and bust in their respective economies. I find it simply incredible that they have been so successful at shifting the blame elsewhere. The Bank of Englad and Sir Mervyn King have been far more successful at evading criticism than the Fed, Sir Alan Greenspan and his successor Mr Ben Bernanke.
I remember after the 2001 Nasdaq collapse, Fed board members openly stating that they were deliberately targeting rising house prices to keep the US consumer spending. I said in December 2005, “As far as Alan Greenspan’s tenure at the Fed is concerned, we have spared few words of derision. We have made plain our views that the supposed US prosperity that has accompanied his tenure has been based on a grotesque mountain of debt. We have likened the economy to a Ponzi scheme which ultimately will collapse. He has allowed the funding of strong economic activity by mortgaging the US’s future against one bubble (equity) and then another (housing), which is now beginning to implode”.
The UK was no different to the US. We wrote in January 2008 that the UK economy now resembled a ‘banana republic’. “While most of the markets’ focus of economic attention has been on the sudden realisation of the dreadful macro quagmire the US finds itself in, the UK economy’s recent difficulties have paled into insignificance — attributed mainly to chilly winds blowing in from the other side of the Atlantic. The UK’s problems though, are clearly home grown. In many respects the conjuncture is as big a mess as the US situation and might easily end the same way — deep recession…… Years of UK macro-mismanagement, mirroring closely the Noddynomics we saw in Asia a decade ago, may have dragged the UK economy to the edge of a deep precipice. We have long warned the US macro-Ponzi scheme would collapse. But the UK situation looks just as bad.”
I have quoted extensively not to appear smug in retrospect. There were many other commentators who saw this debacle coming and identified exactly who was responsible before the bust. Yet amid the boom almost no-one was willing to listen to the few commentators who had the temerity to suggest that it will all end in tears. Plus ca change.
Both Sir Alan Greenspan and Sir Mervyn King resolutely mount stern defences, claiming that they were impotent in the face of global events — including both saying, wholly disingenuously in my view, that their respective credit bubbles were the consequence of excess Asian savings which they could do nothing about!
Dylan Grice, in his latest Popular Delusions, calls these central bankers “dishonest fools” for taking too narrow a definition of inflation and tolerating rampant credit growth as long as the CPI remains well behaved – link (honest fools would be fine).
I agree with Dylan. In September last year, I wrote that policymakers, “including Mervyn King, are being dishonest with the general public in projecting the appearance of knowledge and control. The UK Central Bank Governor Mervyn King extolled the necessity of fiscal cuts before the Trade Unions Congress last week. Mr King said that the bank could offset any renewed economic weakness by pumping more money into the economy. Yet despite his confidence, he has no idea whether further QE will actually work. Both King and Bernanke are dangerous. Many commentators who correctly foresaw the crisis, unlike Mr King, believe that in a balance sheet recession, monetary policy has limited effectiveness and fiscal policy should stay loose.” Wind forward a year and, lo and behold, despite Mervyn King’s promises, QE has not offset fiscal retracement and the UK finds itself back in recession. And as a direct consequence there has been minimal improvement in the fiscal situation.
Sir Mervyn King’s knighthood last year was controversial at the time. It was not just that he was at the helm of the Bank of England throughout the UK’s very own boom and bus cycle which wreaked havoc in the UK banking sector – one could charitably argue in his defence that RBS was laid low primarily by US housing-related instruments acquired from ABN-AMRO and that had nothing to do with UK monetary policy, but what about the ‘bankruptcies’ of HBOS, Northern Rock and Bradford & Bingley, which were all home grown disasters, all directly attributed to the UK’s own boom/bust economic cycle.
The knighthood of Mervyn King in June 2011 was additionally controversial as the governor was heavily criticised in the run-up to the May 2010 general election for advocating fiscal policies that many claimed were too close to the Conservatives – link. The FT reported that many, both within and outside the bank, thought that King had overstepped the mark and should not be making such overt statements on fiscal policy – link and link.
If Fred Goodwin as CEO is held responsible for what happened to RBS, it goes without saying that Sir Alan Greenspan and Sir Mervyn King should also be held responsible. Alan Greenspan’s responsibility as chairman of the Fed requires little discussion in my view. My views on Mervyn King may be more controversial, but he has been in senior positions at the bank since 1991 as Chief Economist, then Deputy Governor, and Governor since 2003. He has been at the helm and should, in my view, bear primary responsibility for the UKs economic collapse. On the Cabinet Office’s own criteria “The scale and severity of the impact of his actions as
CEO of RBS [Chair of the Bank of Englad MPC] made this an exceptional case.”
The strong words of Senator Bunning (R-KY) to Ben Bernanke at his re-confirmation hearing in December 2009 might equally apply to Sir Mervyn King in my view. He said “Your time as Fed Chairman has been a failure. You stated time and again during the housing bubble that there was no bubble. After the bubble burst, you repeatedly claimed the fallout would be small. And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for. Where i come from we punish failure, not reward it.” – link. Arise, Mr Mervyn King.