Mervyn King’s stint on the Today programme yesterday was curious. It was much anticipated in some quarters. The reality then proved to be less revelatory than some might have hoped. I’m not sure what people were expecting – after years of buttoned-up discretion it was unlikely he was suddenly going to let all hang out. But some of the interpretation of King’s comments has been intriguingly partisan.
We are now only too familiar with the Coalition’s inclination to pin the blame for the financial crisis of 2007-08 on the last Labour government. But asked directly yesterday whether he thought Labour were to blame he stated:
I am not going to talk about individual parties’ culpability because I think the real problem was a shared intellectual view right across the entire political spectrum and shared across the financial markets that things were going pretty well.
There were imbalances – we knew things were unsustainable – but it was not entirely obvious where it would come unstuck – and I think that is something everyone shared, and the right thing is to make it better for the future.
This has been interpreted in some quarters – notable by the Guardian – as King shifting his position and exonerating Labour.
King is someone whose public utterances, while at the BoE, were closely interrogated to try to fathom where the emphasis was being placed in particular statement or whether an incautiously raised eyebrow signified anything important. So of course a reformulation of his position is likely to be weighed in the balance.
But I’m not sure that these statements can be taken as letting Labour off the hook. A fairer interpretation is that Labour were wrong. But so was everyone else. And for the same reason. Everyone – or at least everyone who mattered when it came to shaping policy – was in thrall to the same view that a freewheeling financialised economy was the best of all possible worlds. Indeed, as has been pointed out many times, by just about everyone except the Tories, in the run up to the 2007 crisis the Tories were haranguing Labour for over-regulating the financial system.
When King says “the right thing is to make it better for the future” we would probably all say amen to that. But what needs to be done to make it better? Here, I think, critics of the excesses of the 2000s would come away from King’s comments rather disappointed.
He considered that while the leverage of banks was “absurdly high” it came as “an enormous surprise to everyone that banks were not creditworthy”. Statements like that never cease to be alarming, even if they are no longer surprising. They just (re)confirm that oversight of the system was woefully inadequate. But King does not thing the problems the system encountered in 2007-08 are a product of weak regulation but of “a change in psychology and fear in the financial markets”.
At one level that strikes me as an odd statement for an economist to make. It places all the explanatory power on the sort of subjective, ephemeral – dare I say it “sociological” – factors that economists are not all that keen on invoking, unless they are a certain type of Keynesian. It also dissociates the motivations and beliefs of market actors from the institutional structures within which they are embedded, which is clearly a nonsense. Whether we fear the creditworthiness or otherwise of those we trade with depends what they can get away with, and therefore on the systems of regulation and enforcement within which they have to operate.
If the focus is genuinely on market psychology then it is perhaps not surprising that King considers policymakers haven’t yet “got to the heart of what went wrong”. Behavioural factors are undoubtedly relevant, but make that the exclusive focus draws the scope of the analysis too narrowly. And if we conclude that financial crises are down to nothing more than caprice then it gives policymakers limited room for manoeuvre. It implies there is little that policymakers can do by way of structural reform to make the system safer.
This is one of those areas in which it is hard to tell whether policy reflects political economy or intellectual orthodoxy, or indeed both. We now have a financial system that is even more dominated by big players exercising political power to ensure regulatory regimes are as benign as possible. But the old intellectual orthodoxy, which gives no firm mandate for stronger regulatory intervention, pushes policy in the same direction.
It is only those who are thinking about the issues from a wholly different perspective – for example, those who are thinking about markets as non-linear systems with dynamics fundamentally shaped by institutional structures – who have the basis for making different types of arguments about the wisdom – indeed, necessity – of more fundamental reform. Such arguments are yet to penetrate policymaking circles sufficiently to sway elite thinking or overpower the forces of conservatism.
I tend towards the view that we’ve not yet had a crisis big enough to upset the status quo. The financial establishment was able to weather the storm of 2007-08 and emerge with its political influence intact. It will take a bigger calamity to undercut its position and generate effective popular pressure for more substantial reform. The question is whether such a calamity will occur. Or, perhaps more realistically, the question is when it will occur – sooner or later?
Image: IMF via flickr.com under Creative Commons.