Ah, the thankless task of endeavoring to uphold sensible principles when events conspire against you. Mervyn King, the governor of the Bank of England, had to eat quite of a bit of crow in the Northern Rock bailout, when a mere two days after a submission to Parliament in which he criticized other central bankers for being too liberal with liquidity, since it had the effect of rescuing investors who had made bad decisions, the Bank of England (in concert with the FSA and the Treasury) took extreme measures to salvage a second-tier bank (admittedly one experiencing a painfully visible bank run). However, Martin Wolf of the Financial Times observed that commercial banks had managed to gain the upper hand in any game of chicken with central bankers.
Nevertheless, King is soldiering on, arguing for probity and against de facto subsidies for the foolhardy. And while we welcome someone, anyone in authority arguing that private market participant ought to be subject to the downside as well as the upside of their actions, it is all too likely that King’s objectives will again be trumped by circumstance and political necessity.
From Bloomberg:
Bank of England Governor Mervyn King suggested he’s reluctant to cut interest rates to shield lenders from higher corporate borrowing costs and predicted more “turmoil” in financial markets.
“The current turmoil in financial markets is not over,” King said in a speech in Northern Ireland yesterday. The benchmark interest rate “will not be set now to insulate the banking system from the re-pricing of risk. But you can be sure that we will do whatever is necessary to keep inflation close to the 2 percent target.”
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That’s today mature, developed economies for you. It’s all capitalism, free markets and Adam Smith on the way up. It’s all socialism, planned markets and somebody, anybody hand us a life jacket on the way down.