Tonight:
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To advise, to encourage, and to warn. That's been the function of our monarchy down the centuries.
But King of the Bank of England is no longer content to keep his counsel private. This week, in front of the Commons Treasury Committee, he blew the whistle on the government's handling of both our public and our private finances.
First, he dismissed the private Treasury briefing that the Bank of England had been too slow to print the money the economy needed.
Unnamed officials had briefed that day's papers that the Bank was still consulting on its programme of quantitative easing and that Treasury ministers were “irritated and perplexed” over the Bank's sluggish response.
On the contrary, Governor Mervyn King told us that in just three months the Bank had already purchased £95 billion of the £125 billion allocated.
More important, the real test of the programme wasn't the quantity of money printed but the scale of private issuance in response.
That was monetary policy. Then came his attack on the fiscal position.
Last week, he called for a change in policy on the public finances. This week, he spelt it out.
He pointed out what Gordon Brown and his Chancellor Alistair Darling have long denied, that the hole in our public finances was there well before the recession started — before the banks were bailed out.
He called for “a clear plan” to reduce borrowing and wants the Government's numbers reworked to show how the deficit will be tackled and debt reduced “within the next Parliament”.
No longer can either party duck that challenge. Finally, King let rip on financial regulation.
He stunned the committee by admitting that he hadn't even been consulted on next week's White Paper, the biggest regulatory shake-up since 1997.
Nor had the much-vaunted Tripartite — the Bank, Financial Services Authority (FSA) and Treasury — even met to discuss the Government's proposals.
Nobody in the City can remember when the Governor of the Bank of England was so directly at odds with the Chancellor — on monetary policy, on public spending and on banking supervision.
So it is worth recapping. Twelve years ago, the Bank was given independence to set interest rates.
In practice, the new monetary policy committee wasn't entirely free. Brown appointed four of its nine members, and then stuck in two former Treasury civil servants as Deputy Governors.
He reset its inflation target every year, and then, against the Bank's advice, changed it in 2003 to a different index that completely ignored rising asset prices.
And his acolytes, such as Ed Balls, didn't hold back from trying to tell the Bank when to cut rates.
But the Bank can't operate monetary policy in a vacuum from fiscal policy.
Despite the boom years, the Government hasn't balanced its budget since 2002.
The so-called fiscal rules have been stretched until they snapped: Brown himself simply defined his own economic cycle to fit his spending
numbers.
Throughout all this, the Governor warned: in speech after speech, King urged tighter fiscal discipline and told the Chancellor to stick to his rules.
He saw the danger that the markets, especially overseas investors, were losing confidence that the deficit would ever be reduced.
In fact, Brown kept on missing his targets. In March 2003, he promised to balance the budget again by 2006; by 2006 that became 2009, then 2014.
Now it's 2017-18. That's simply no longer a credible target, and the Governor is right to say so.
After the election, either party will have to reduce the deficit throughout the next Parliament, and they need to come clean about that now.
Then there's regulation. The Bank of England used to supervise the banks; since Brown transferred that job to his new FSA, five of the big ten have had to be bailed out.
While the FSA's 2,500 bureaucrats were checking everybody's gas bill and obsessed with “treating customers fairly”, just three of them were looking after Northern Rock.
Worse still, the Tripartite failed to get a grip. For two years now, nobody has really been in charge.
The Government drifted into bank nationalisation but refused to give the Governor the powers he requested to tackle future bank failures.
The FSA still says “leave it to us”. The Chancellor seems to think better boards of directors are enough.
Only the Governor has thought through the bigger questions: banks have got too big; the cost to us all of bailing them out is too large; we need new banks untarnished by toxic loan books.
Consider just one set of numbers: bank debt as a percentage of GDP in 2008 was 16 per cent in Canada, 21pc in the USA, 72 pc in Germany, 87pc in France — and a staggering 224pc in the UK.
Only Iceland's was higher. Yet the authorities here are still bickering over who regulates what.
It matters that the Chancellor and the Governor have fallen out. As in any marriage break-up, the real casualties are the children.
Across the City, there is bewilderment at the bickering and serious worry over the lack of authority at the very time when real leadership is required. The markets are losing faith in ministers.
We now need to cut through the rows and the counter-briefings. Leave the FSA — now subservient anyway to Brussels — to tinker with its regulation.
But put the Bank back where it belongs — at the heart of our financial system.
Let the Governor, not some frightened rabbit of a politician, rule on systemic risk, and decide when and how to close down a major bank or any other large financial institution in trouble.
And the Chancellor? When your own finances are in so deep a mess, there's one classic rule that any debt adviser will tell you for nothing: don't ignore the calls from your bank manager.
Michael Fallon is Conservative MP for Sevenoaks and deputy chairman of the Treasury Select Committee.
Reader views (2)
We should start a Governor King the Economist fan club to make sure he doesn't get the stiff arm from the two Scottish lawyers - Darling & Brown.
- John Problem, Hackney UK, 29/06/2009 16:37
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Delusions of Grandeur! The more Very Important People that Pa Broone, Alistair Darling and Pals fall out with, the sooner we might get the early general election we have all being demanding!!
So, Mr Darling, keep rearranging the deck chairs on the 'Titanic'.
- Uncle Vanya, East Anglia Area UK, 29/06/2009 13:04
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