Dear Mervyn King,
Congratulations on standing up for yourself in the Treasury Committee witch hunt yesterday. Quite alarmingly, most politicians with an interest in financial matters have been looking for someone to blame at the BoE and it looks like you are the poor soul who has borne the brunt of it - which in my opinion is horribly misguided.
Today’s article on your committtee appearance in the Independent stated that there were two main concerns expressed by MPs - the “lack of action to stop Northern Rock taking on too much risk, and the Bank’s failure to help it before emergency funding was required”. What I don’t understand is why the BoE should intervene with any of this. My previous post on the topic made it perfectly clear that neither of these two ‘concerns’ required any action whatsoever on your part. If Northern Rock, as an independent business in a tough financial market, chooses to take on too much risk, why should you get involved? Taking on risk is a key feature of any market in a mixed economy such as ours and if a risky decision causes a bank to come crashing down and their savers to lose money, so be it. To suggest that the BoE or anyone else should be forced to offer emergency funding is ridiculous, as no emergency funding was required. Once Northern Rock’s share price hit rock bottom they would have been bought out by a rival and their share price would have immediately started to rise again. A government guaranteeing deposits flies in the face of the risks taken in financial markets and it is certainly not a matter on which you should be judged. In short, the BoE and the government should have steered clear of this whole situation and there was never any justification for them getting involved.
With sympathy,
A.Tory
2 responses so far ↓
James // September 21, 2007 at 8:19 pm
I do agree that the Bank of England did little wrong, but I do feel that at the end of the day the government and the bank had to step in as the system was not working. Northern Rock was not insolvent, the problem was that public confidence had been lost, creating a bank run which also seemed to be causing problems outside of Northern Rock as shares from other banks where being hit. It’s a fine balance between the moral hazard issue and intervention but in the end I feel the BofE and the government did what it had to do.
On another note, this is the first time I have come across to this blog and it looks really interesting and the letter angle is a refreshing and unique idea. Expect to hear from me again in the future.
Letters From A Tory // September 22, 2007 at 8:57 am
Thanks for the comments, James.
I know that suggesting the BoE should have sat there and done nothing seems odd, but business die every day across the UK and I don’t see why a bank should be any different. Obviously Labour were desperate for consumer confidence to stay high because if it drops, the ripple effect will be catastrophic (house prices, high street spending etc) so I can’t help but feel that the BoE were leant on irrespective of the way that this whole situation has damaged the very notion of a free economic market.
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