Yes, the Bank did know

Wasn\’t this, well, a bit of a worry? I asked (in the Bank of England understatement is the modus operandi – or at least it was then). The faces that stared back looked drawn, fearful and rather weary. They pointed me towards another set of figures, even more worrying. They implied that if there was an unexpected shock that made it difficult to fill that gap by borrowing short term from other investors, home and abroad, the consequences would be disastrous: we were talking about a year\’s worth of profits – £40 billion – being wiped out; about house prices falling by a quarter and the economy shrinking by 1.5 per cent.

The boom went on for another year and a bit, and the eventual slump looks like being even worse, but the fact remains: there was a distinct bat-squeak of worry in the Bank of England in 2006 – and it was more or less ignored. Granted, the Bank had not identified all of the details, nor precisely how this crisis would become the worst since the Great Depression, but it did enough; it identified the root cause of the credit crunch.

So what went wrong?

One candidate for what went wrong. The Bank was no longer in charge. Supervision of the banking system lay with the FSA, not the Bank as had been the case before 1997.

In earlier days this sort of worry would have had the chief execs called into hte back room by the Governor, given a stern talking to and told to sort things out. Under the new, more legalistic and rule based system, no one actually had the power to do that.

Thanks Gordon.

5 comments on “Yes, the Bank did know

  1. I think this belief in the power of all-knowing State officials to sort out private-sector problems with a ‘stern talking to’ and waggy finger is the stuff of fairy tales.

  2. Matthew, you might be right to think that moral suasion from State Officials is not an effective means of regulation. That is not to say that it did not happen. There are many examples of previous Governors exerting great control over the policies of various financial institutions – check the biography of Montague Norman for example.

  3. Oh sure it happened, but governments used to run a lot of things more effectively than we now believe they could.

    Am I the only commenter left whose economic liberalism extends to not believing that State officials know more than the market?

  4. One of the problems is surely that financial institutions are now so big, diversified and multi-national that no single government can control them. When their functions were split between brokers, jobbers, acceptance houses, clearing banks, discount houses and their activities were focused on one country, control was much easier than it is now when one institution can effectively do all these functions in many jurisdictions.

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