The Alchemists: Three Central Bankers and a World on Fire (33 page)

The committee, following the procedure King had helped create as chief economist more than a decade earlier, first assembled on the Friday morning before the meeting itself, in this case on July 31. This session, which includes dozens of economists and other staffers from across the bank, as well as “bank agents” with business contacts around the United Kingdom, is an opportunity to get a broad interpretation of what is happening with the British and world economies.

The following Wednesday, the afternoon before a decision is to be made, the nine members gather for a much smaller meeting in a Pemberley-worthy room with a huge crystal chandelier and a grand Palladian window overlooking a courtyard. They talk for three hours or so, then reconvene on Thursday to discuss what policy action the bank should take. The final meeting starts at 9 a.m., with a decision due to be announced to the world promptly at noon.

The Bank of England’s monthly meetings to set monetary policy are intimate affairs, at least compared to the Fed’s, in which seventy or so people are in the room and nineteen people make up the committee itself, or the ECB’s, in which there are twenty-three members of the committee. The sheer size of the Fed and ECB policy meetings means they must rely on protocol, with clear dictates of who speaks when and for how long.

The grandeur of the interior aside, MPC meetings aren’t dissimilar from the get-togethers of any corporate board in the world, in the sense that they involve a very small group of people debating in a rather informal fashion in order to reach a consensus. For all of Mervyn King’s dominance of the Bank of England, this less structured format left him with less power to control the actual decision than his counterparts at the other major central banks. He couldn’t, for example, use Trichet’s technique of limiting potential dissenters to only five minutes’ say. British political culture is one in which people feel free to state views vigorously and disagree openly. Never was that more evident among the members the MPC than on the morning of August 6, 2009.

The session the afternoon before was, as is often the case, relatively freewheeling, with jokes and interjections. On Thursday, the meeting always began with the governor speaking for five or ten minutes, summing up the discussion of the economy from the previous day and setting a framework for the decision. Then Charles Bean, the deputy governor for monetary policy, would speak for another ten minutes to propose policy options—although a careful listener might have already discerned which one King favored.

The Bank of England’s models, Bean explained that day in August, suggested that it would have to make about £50 billion in further bond purchases to keep inflation near its 2 percent target. King then invited the other seven members of the committee to share their views, one at a time. Next, he made explicit his own view: that the risk of deflation taking hold was high enough to warrant even more aggressive easing than the bank’s models suggested. He had in mind £75 billion.

This is the kind of thing that committees exist to hash out. According to the bank staff’s analysis, the British economy wouldn’t have been radically different a year later either way. Whether to authorize £50 or £75 billion was a close call—equivalent to choosing to cut Bank Rate by either 0.5 percentage points or 0.75. The meeting should have been routine.

But for reasons that still mystify some of the participants, it wasn’t. Everyone was in a tetchy mood, perhaps burnt out from the long year of crisis fighting and eager to get on with an August vacation. The committee members’ irritability might also have been in part a passive-aggressive response to King’s high-handed, top-down mode of leadership. King seemed to expect the kind of deference to his views that he received during the worst days of the crisis, when MPC disunity could have rattled markets, even as many of the other committee members wanted to reassert their role as independent shapers of policy.

When King finally went around the table to count the votes, only two committee members, Tim Besley and David Miles, sided with the governor on buying £75 billion in bonds. The other six—among them King’s seniormost deputies, Bean and Paul Tucker, who was in charge of financial stability, as well as the bank’s chief economist, Spencer Dale, and its markets chief, Paul Fisher—all voted for £50 billion. It was only the third time King had been outvoted in more than seventy meetings of the committee.

Two weeks later, when the minutes of the meeting were released publicly, they contained only the subtlest of references to the verbal warfare at Threadneedle: “There was a range of views amongst the Committee over the precise balance of risks to the outlook for inflation and how much significance to ascribe to the various arguments about the appropriate policy response to that outlook.”

But the document clearly disclosed the outcome of the vote, and the world knew that King had faced a small act of rebellion by his committee.

•   •   •

I
n the final months of 2009 and the first few of 2010, the evidence that Britain needed to reckon with its fiscal deficit sooner rather than later was, at least to King, mounting. Debt crises in Greece in October and the Arab city-state of Dubai in November meant that global investors were no longer cavalier about the risks of government bonds. At the G7 meeting in Iqaluit, Canada, in February, King, when he wasn’t dogsledding, was joining with other high officials in calling for a move away from high government deficits. If you squinted, you could even see signs that the bond markets were becoming less fond of UK debt: The ten-year gilt yielded 4.02 percent at the end of 2009, up from 3.4 percent in early October. (Never mind that a six-tenths of a percent increase doesn’t necessarily signal an imminent debt crisis, or that those rates were quite a bit lower than they had been during the Lehman crisis in late 2008.)

King never made the argument that Trichet did with regard to Greece, that cutting deficits would increase business confidence enough to fully counteract the negative impacts of lower government spending and higher taxes. But the Bank of England chief did suggest that fiscal austerity would result in at least some boost to confidence, easing the UK’s pain more than conventional economic models might suggest. Asked in a February 2010 press conference whether he agreed with Trichet’s view that cutting budget deficits is stimulative, King said it “depends on the circumstances.” “
I just think it’s more complicated
than just saying, you know, you must always close the deficit immediately. But what is very important, and why I totally agree with Jean-Claude Trichet, is that at all times governments need to have a clear and credible plan for reducing a structural deficit.”

King was essentially splitting the difference between Trichet and Bernanke, the latter taking a more traditional Keynesian view that slashing budgets causes economic suffering with few offsetting benefits in the immediate future. Fundamentally, King wasn’t an adherent to Trichet’s theory of “expansionary austerity,” as some of his critics argued. Rather, he was making an argument for risk management: If a fiscal crisis arose, it would both damage the nation’s economy and limit the Bank of England’s options for dealing with it. Helping his case was the fact that the bank could ease monetary policy and reduce the value of the pound, helping to some degree to counteract near-term budget cutting.

But no matter how nuanced or substantive King’s calls for government debt reduction were, they didn’t exactly endear him to the ruling party. “
If there were any mobile phones
, staplers or printers still intact in 10 Downing Street on Tuesday, it’s a good bet they found themselves being hurled towards the nearest cowering staffer that afternoon,” wrote
Daily Telegraph
economics editor Edmund Conway in January 2010, “for it was then that Gordon Brown learned of the contents of a speech that the Governor of the Bank of England was about to read out that evening. Despite private remonstrations with the Bank, despite Mr. Brown having thought he had secured Mervyn King’s agreement to refrain from barbed economic comments until the election was over, the turbulent Governor had gone and done it again.”

Conservatives, meanwhile, took King’s comments as independent verification that the Labour government had been feckless in its stewardship of the nation’s finances. “
This is a decisive moment
in the economic debate in Britain,” Shadow Chancellor of the Exchequer George Osborne said in February, “a moment when Gordon Brown’s argument on the deficit has collapsed and a new consensus for more decisive action emerges.”

His relationship with Darling and the Labour government increasingly strained, King sidled ever closer to the men who would soon rule Britain.
Five times in the winter and spring of 2010
King met at his office on Threadneedle Street with Osborne and future Conservative prime minister David Cameron. Despite efforts to keep the existence of the meetings secret, they only increased the sense that King was advising the Tories. Said Kate Barker, who served on the Monetary Policy Committee from 2001 to 2010, “The cynical view would be that this was Mervyn’s effort to get the Bank into a good working relationship with the next regime. The uncynical view is that he was worried markets could lose confidence, which is certainly plausible, so you can argue Mervyn was right to say, ‘This can’t go on.’ But the way he expressed his views on fiscal policy meant they could be interpreted in a political way.”

Whatever King’s true motivations for becoming so vocal an advocate of fiscal austerity, he seems to have been unimpressed with Osborne and Cameron themselves. On February 16, 2010, King met with Louis Susman, who had recently been installed as U.S. ambassador to the Court of St. James’s, assigned with nurturing the “special relationship” between the United States and its former colonial master from the fortress of the U.S. embassy building overlooking Grosvenor Square. Susman reported back to Washington what he had heard from the Bank of England governor. “
King expressed great concern
about Conservative leaders’ lack of experience and opined that Party leader David Cameron and Shadow Chancellor George Osborne have not fully grasped the pressures they will face from different groups when attempting to cut spending.”

King indicated that in his meetings with Cameron and Osborne he “received only generalities” when he asked how they would reduce the debt. And he seems to have viewed the two relative youngsters—Cameron was forty-three at the time and Osborne thirty-eight—as lightweights. “King also expressed concern about the Tory party’s lack of depth. Cameron and Osborne have only a few advisers, and seemed resistant to reaching out beyond their small inner circle. The Cameron/Osborne partnership was not unlike the Tony Blair/Gordon Brown team of New Labour’s early years, when both worked well together when part of the opposition party, but fissures developed . . . once Labour was in power.”

These were harsh judgments to share with a foreign power about the men who would soon rule Britain, even if King meant them to remain in confidence.

Britons went to the polls on May 6, 2010, the same day ECB officials gathered in Lisbon and discussed how to rescue the eurozone late into the evening, and the same day the U.S. stock market experienced its Flash Crash. Between the perpetually gloomy Gordon Brown and the dismal economy, things weren’t looking good for Labour. All the polls pointed to the party being swept from office. Indeed, the Conservatives picked up ninety-seven additional seats in the 650-seat House of Commons, with Labour losing nearly as many. It wasn’t quite the decisive result that Cameron and company had wanted, however. They fell short of a majority and would need to form a coalition with the Liberal Democrat Party, which held fifty-seven seats, to take control of the government.

For once, the third party of British politics had some real negotiating power, as both the Conservatives and Labour competed for the affections of the Lib Dems as coalition partners. King wasn’t directly involved in the negotiations, of course—yet he wasn’t entirely absent from them either. The deficit, wrote David Laws, a Liberal negotiator, “
was the spectre which loomed over our talks
. This was the reason that the Governor of the Bank of England stood ready to brief us on his perspective on the risks to the UK.” The Tories cited King’s support for spending cuts as a lever through which to push the Liberals toward more austerity, faster. Sunday, May 9 (the day Trichet and most of the other central bankers were in Basel hammering out what would be the ECB’s controversial bond purchase program), civil service chief Gus O’Donnell is said to have offered to arrange a briefing by King so negotiators could “understand the seriousness of the economic situation.”

King was in a curious position, both at the center of momentous events taking place in Basel and London and physically apart from them. He was on a long conference call with the finance ministers and central bankers of the world’s leading powers, which stretched over the entire evening of May 9 and into the early morning hours of May 10. (One American official dialed into the international number from home and ended up with an $800 phone bill.) There was a long stretch of silence, as the European finance ministers in Brussels put their phone on mute in order to hammer out some differences among themselves. King, showing his impish humor, entertained the other leaders on the phone by reading off that day’s soccer scores, the joke being that this was his only way of staying awake.

When British politicians finally did reach agreement to form a coalition and on immediate austerity, King gave them a sort of reward. “The most important thing now is for the new government to deal with the challenge of the fiscal deficit,” he said in a press conference May 13. “It is the single most pressing problem facing the United Kingdom. . . . And I have been told what is in the agreement between the Conservatives and the Liberal Democrats this morning, and I am very pleased that there is a very clear and binding commitment to accelerate the reduction in the deficit.” As a government came together, so did the forces that would buffet the British economy under Prime Minister Cameron. Prices for food, energy, and other commodities had soared on global markets in the first part of the year, even as the value of the pound had fallen due to the Bank of England’s quantitative easing policies, hiking the cost of imports. Additionally, a stimulus measure that had cut the value-added tax expired, meaning the purchase price of a wide variety of goods increased further still. That added up to 3.4 percent inflation in March, well above the 2 percent the Bank of England aimed for. King and most of his colleagues on the MPC viewed this as a one-time price jump, not the kind of ongoing inflation that might warrant raising interest rates. “In the medium term we expect inflation to come down below the target, given the extent of spare capacity in the economy,” King said in a May 12 press conference, while acknowledging “enormous uncertainties around this.”