You could call it a moment to savour for Mervyn King. This week the governor of the Bank of England starts his second five-year term. By popular account he has lately seen off both the prime minister and the chancellor. Politicians come and go. The governor has a higher calling.
Granted, Mr King has had to explain why inflation has broken through the top of the official target range and will likely stay there for many months. No one blames him, though, for soaring energy and food prices. That is all Gordon Brown’s fault. As for the global credit crisis and the failure of Northern Rock, the culprit quite obviously is Alistair Darling, the chancellor.
Unsurprisingly, then, Mr King seems to have won the tussles with his political masters. He has got the new deputy he wanted and has thwarted efforts by the Treasury to check the Bank’s authority. His views have prevailed in the debates about the regulatory regime that will replace the system buckled by Northern Rock.
The new architecture sees the Bank given statutory authority to safeguard the stability of the financial system. A committee of experts will broaden oversight but will be firmly under Mr King’s control. The committee, the governor insists, will not be allowed to take “operational” decisions.
The choice of Charles Bean, the Bank’s chief economist, to replace the departing Rachel Lomax as a deputy governor was trumpeted likewise as a victory for Mr King over Mr Darling. All in all, it looks like game, set and match to the governor.
Such has been the favoured narrative: the sober judgment of Threadneedle Street has triumphed over the opportunism of Whitehall. I am less sanguine. Recent events have left both a nasty taste and a nagging suspicion that the design of the new framework owes much to pride and ego as well as to objective purpose.
First the nasty taste. Sir John Gieve, the deputy governor responsible for financial stability, will leave the Bank next spring. Sir John was given the choice of stepping down or re-applying for his post when its responsibilities are expanded within the new regime.
News of his departure leaked on the evening of the annual Mansion House dinner, the grand occasion at which chancellor and governor address City luminaries. The timing caused Sir John maximum embarrassment. It also confirmed that he has been designated official scapegoat for mistakes made last summer and autumn.
The Bank blames a tit-for-tat reprisal by Mr Darling. Mr King insisted Ms Lomax’s post of deputy in charge of monetary policy be filled by an economist. Mr Darling was equally determined one of the two deputies had a track record in the markets. So Sir John, a former civil servant, had to go. The expectation is that his post will be filled by Paul Tucker, a senior Bank official with the requisite expertise.
Whatever the precise machinations, Sir John has been done a severe injustice. It began when he was traduced by MPs for failing to break into his holiday after credit markets seized up in August.
The story made for good headlines. It was also untrue. Sir John was away because of a family bereavement. It was Mr King who insisted he should not hurry back. The governor, incidentally, gave the same message to Ms Lomax when she volunteered to interrupt her holiday. Mr King had everything under control.
Once back, Sir John was far from relaxed. Colleagues say that he spoke loudest for aggressive action to pump liquidity in to credit markets. Mr King was reluctant to “reward” the banks for reckless dealings in subprime mortgage markets. Sir John thought the systemic risk outweighed the moral hazard. Mr King prevailed.
At the time I thought the governor was right. In fact, he badly underestimated the impact on the banks of the unfolding crisis. It was soon clear that refusing them liquidity risked systemic collapse.
Here I return to my unease. Mr King is a man of great certainty as well as formidable intellect. For all his qualities, even his closest friends would not claim that he is good at devolving authority or accepting contrary advice. His style as governor is that of a benign autocrat.
In the choreography of monetary policy, this does little harm. Each of the members of the monetary policy committee has a vote of equal worth. Financial stability is another matter. Mr King, an academic economist, lacks the intuitive market feel of his predecessor, Eddie George. He is said to have found it hard to read the bankers’ pleas for emergency liquidity. Were they squealing simply to protect their profits or were the banks really in serious trouble? Initially, he made the wrong call.
The changes in structure and personnel will further concentrate power in the governor’s hands. But the regulatory system requires a more co-operative approach. Mr King must be more open to advice from within the Bank and to closer co-ordination with the Financial Services Authority and the Treasury. Winning turf wars is the wrong yardstick for effective governance. Britain benefits from a strong and independent central bank governor; it does not need an overmighty one.
More columns at www.ft.com/stephens