Adam Posen is wrong to suggest the BoE has been cosying up to the Banks

In a recent interview with Reuters, Adam Posen hit out at the Bank for having cosied up to the Banks, implicating the post-crisis Mervyn King leadership in that, and therefore urging on Carney's efforts to bring about cultural transformation.

I thought his comments gave quite a misleading view of what has been going on at the Bank, and missed the big picture.  Readers of this blog will know that I am always up for some BoE kicking with my tired, long-serving boots, but only when it's deserved.  But on this occasion I feel obliged to push back on Posen's comments.

In a twitter exchange with him Adam said [sic] that King's rhetoric was sincere, it had not translated into concrete policy action.

Well, here are some examples, most of which I tweeted already, but written up here for completeness.

First, I'd cite Mervyn King's moral hazard lecture in the Summer of 2007.  This wagged a disapproving finger at banks who had adopted aggressive funding and lending strategies, arguing that it would be a betrayal of those that hadn't for the BoE to extend its hand of support.  In fact Mervyn was widely criticised for this lecture, for it seemed not to foresee the systemic nature of the problem, and even aggravate it.  That's contestable.  But it certainly was not cosy, and it translated into a concrete policy of not offering help that wasn't deserved (in Mervyn's opinion).

Second, you could cite the surge in interbank rates in September 2007, which the Bank allowed to happen, when it could, had it chosen, relaxed its Sterling Monetary Framework.  That had the effect of being decidedly uncosy.  Although it's arguable that that happened because of neglect and lack of foresight than any conscious policy to be harsh to banks who were short.

Third, what about the operation of the Bank's Special Resolution Unit?  How uncosy can you get?

Fourth, I'd cite the extremely conservative nature of Quantitative Easing.  Mervyn King and the other Executive Team members were dead set against large scale private asset purchases, which could have involved relieving Banks of troubled assets, or purchases of Bank bonds, or bonds of firms that banks were exposed to.  Instead, while operating a piddlingly small corporate paper purchasing scheme, the Bank bought only gilts.  That's not cosying up to banks.

Fifth, one must presume that the analysis and rhetoric of Mervyn King and Andrew Haldane, enumerating the vast implied public subsidy in historic funding rates for the banks on account of too big to fail, and arguing for very conservative capital regulations, and making the case for narrowing the allowable scope of bank investments, had some influence on the Banking Commission report led by John Vickers.

Sixth, would you describe Mervyn King's involvement in the deposing of Bob Diamond as cosy?

Seventh, I would list the determination of Mervyn and Andrew Bailey to instigate a new supervision model that involved less box-ticking by junior staff, and more big picture judgements on the overall health and competence of a bank, by more senior staff.  That's not cosiness either.  That was an analysis of how the FSA failed to turn the screw on the banks, and how they were going to put it right.  You can argue about whether it was the right diagnosis, but there was one, and the objective was very clear.

Eighth, Adam forgets the war that broke out between Vince Cable and the PRA/FPC over the latter's demands that banks improve their capital positions quickly.  Vince was more concerned that the Banks should be allowed to extend themselves and lend regardless.  Leave aside who was right, but those under the auspices of the BoE were not cosying up to the Banks.

Ninth, one could think about the very long lag between the onset of the crisis and the beginning of Funding for Lending as being indicative of a reluctance to be cosy to the Banks.  Emphasised too by the careful design of the scheme to stop banks gaming it.

Tenth, note the determination of the BoE to wind up the Special Liquidity Scheme, despite warnings that Banks would face a possible 'funding cliff'.  That was seen through.  No cosiness.

Eleventh, I'd cite the clean bill of health given in the external report by Ian Plenderleith on the Bank's Emergency Loan Assistance during the crisis.  You might scoff that Ian was a former BoE employee.  But his legacy would have been in tatters if he had let the Bank off the hook, so his incentives were very clear.

Adam's remarks aren't without provocation, most recently the yet to be determined nature of BoE involvement in foreign exchange fixing, if that's what it was.  But we have to put this unresolved issue in perspective.  The Executive Team's messaging was frequently hostile to Banks, articulating the tragedy they had inflicted on the economy, and what had to be done to rein them in, and that culture transmitted itself around the institution.