Dancing on the edge of disaster
Bank of England deputy governor John Gieve hit out at Britain's tripartite system of economic management
The ‘footwork’ of ministers and financial authorities in tackling the credit crunch ‘owed more to John Sergeant than Fred Astaire’, the deputy governor of the Bank of England said last night.
In an unprecedented and devastating attack, Sir John Gieve hit out at the ‘tripartite’ system set up by Gordon Brown in 1997 to manage the economy.
He said the combined efforts of the Treasury, the Bank of England and the Financial Services Authority after the events of August 2007 – when credit markets froze – had failed to stem the crisis at Northern Rock and within the banking sector.
Their moves ‘may have owed more’ to the bumbling efforts of John Sergeant on Strictly Come Dancing than to suave American film star Fred Astaire.
It was the first acknowledgement by any senior official involved in the Northern Rock debacle that Mr Brown’s three-way arrangements failed miserably at the start of what is now being seen as the worst financial crisis to hit Britain for a century.
‘I don’t think that anyone now believes that the business [Northern Rock] could have been saved’, Sir John said in a speech at the London School of Economics.
Having stepped in, the authorities had been ‘hamstrung by the inadequacy of the legal powers to resolve it’.
In 1997, Gordon Brown passed the Treasury’s power to set interest rates to the Bank of England and its regulation of the banking sector to the FSA.
More from Alex Brummer for the Daily Mail...
- ALEX BRUMMER: If you think Trump's been bold so far, you ain't seen nothing yet! 17/01/17
- ALEX BRUMMER: A dark day for Rolls-Royce as it stumps up £671m to settle bribery and corruption charges 16/01/17
- ALEX BRUMMER: Trump rally is driven by proposals to cut corporation tax, deliver tax relief to middle-income Americans and a splurge on infrastructure 13/01/17
- ALEX BRUMMER: St Michael’s cup overflows as M&S celebrates a record increase in same-store clothing sales 12/01/17
- ALEX BRUMMER: Trump's risky loose lips spell a roller-coaster ride for financial markets 11/01/17
- ALEX BRUMMER: Downing Street need to get on with cleaning up Britain's grubby boardrooms 10/01/17
- ALEX BRUMMER: Don't let the Aussie vampire kangaroo suck £2.7bn out of our Green Investment Bank 09/01/17
- ALEX BRUMMER: Tough calls on the media will likely rest with the Prime Minister 06/01/17
- The truth is that Britain is on a roll after Brexit and has emerged as the most robust economy in the industrialised world, writes ALEX BRUMMER 05/01/17
- VIEW FULL ARCHIVE
In answer to questions, Sir John also delivered a shock verdict on the prospects of the British economy. He said there was a ‘serious risk’ that Britain could be heading for a decade of deflation like the one suffered by Japan in the 1990s after the explosion of a property and share price bubble.
Sir John said: ‘There is a risk and that’s why rates have been reduced here and across the world. There is a serious risk.’
Sir John, who is stepping down after three years as deputy governor, also turned his guns on the Government’s use of the Consumer Prices Index – which does not include housing costs – to target inflation.
‘There are powerful arguments for including the cost of home ownership in the target measure of consumer prices,’ he argued.
As Chancellor, Gordon Brown replaced the traditional Retail Prices Index – which includes housing and mortgage costs – with the controversial CPI in 2003.
He claimed the change was being made to conform with EU practice. As a result, the Bank of England was unable to react fully to the bubble in property prices by raising interest rates, because housing was excluded from the target measure of inflation.
Sir John’s comments are certain to be seen as a direct attack on the regime established by Mr Brown, which allowed the uncontrolled surge in house prices.
But Sir John, 58, has also come in for criticism for his own role in tackling the crisis.
The former Treasury mandarin was parachuted into the Bank as deputy governor after a stormy period at the Home Office under David Blunkett.
He was seen there as one of the principal architects of what has become known as the ‘surveillance state’. Sir John was later accused by the National Audit Office of having left the financial systems at the Home Office in a shambles and of financial mismanagement.
He received a battering from the Treasury Select Committee at the time of the Northern Rock debacle for not being at his post as head of the Bank’s financial stability wing when the lender ran into trouble in August 2007.
Sir John said the 'footwork' of ministers and financial authorities owed more to John Sergeant, left, than Fred Astaire, right
It later emerged that Governor Mervyn King had given him permission to attend the funeral of a close relative.
In his farewell speech yesterday, Sir John outlined his plans for cleaning up the financial system in the wake of the crisis. He blamed the commercial banks for failing to recognise ‘the froth in the financial markets’ and said the systems they had in place to limit risk were preparing them for ‘a shower not a hurricane’.
He said Britain needs ‘more effective crisis management’ and made the case for the transfer back to the Bank of England of the supervision of the banks which was passed to the FSA in 1997.
Sir John argued that simply improving the tripartite arrangements will not be enough to prevent further crises. International action is also needed.
He argued that the American decision to allow Lehman Brothers to fail in September 2008 was ‘a fully fledged disaster for the world economy’.
Sir John believes that in an age of global banks there may be a need for a ‘supranational’ authority – but this is seen as unacceptable to the U.S. and China which are unwilling ‘to hand over regulation’.
The deputy governor also delivered stinging criticism of the economics profession, which failed miserably to predict the crisis despite modern sophisticated models.
‘We badly need thinking to make the models better,’ he said. Sir John sees the roots of the current crisis in the events post 9/11 when the Americans cut interest rates to the bone and other central banks – including the Bank of England – slavishly followed.
He said: ‘The large and coordinated cut in interest rates at the start of this decade almost certainly contributed to the build-up of an ever-larger bubble.