Jobsworth Bank of England Governor gets it wrong (again) on Northern Rock

It is gratifying that UK Chancellor of the Exchequer Alastair Darling places so much store by the advice of Bank of England Governor Mervyn King.

The trouble is that King seems to be something of a stickler for the purist principles underlying the role of the Bank, and two opportunities to avert disaster, in relation to the Northern Rock crisis, have been missed. King had previously declined to support Northern Rock when it started to get into trouble (because in a free market banks survive or fall based on their lending policy, never mind the panic this will cause to UK savers), and now (from BBC News):

He [Mervyn King] also revealed that it was Chancellor Alistair Darling who decided not to support a Northern Rock takeover bid.

Mr King told the BBC he had advised the chancellor that governments should not provide financial help to one company so that it could take over another. Lloyds TSB had asked for a £30bn Bank of England loan to finance the deal.

Speaking to BBC Radio’s File on 4, Mr King said Lloyds TSB had wanted a two-year loan at competitive rates.

“I said to the chancellor: ‘This is not something which a central bank can do.’

“‘They don’t normally finance takeovers by one company for another, let along to the tune of £30bn, which is rather a large amount of money’.”

So not only did King advise Darling not to support the rescue plan, he blamed him for taking the final decision. Of course it is not part of the normal role of the Bank to “provide financial help to one company so that it could take over another”, but then the circumstances are hardly normal and Northern Rock looks set to be a millstone round the necks of the British taxpayer for years anyway, with no easy way of regularising the situation.

The Lloyds takeover would have been far preferable and would have seen the taxpayer off the hook in two years. If the Governor just trots out the purist position in all circumstances what do we need him for? Let’s just read the rule book and follow it slavishly. Is there no room for judgement, for looking squarely at the bigger picture and analysing the longer term repercussions of failure to intervene?

To satisfy the purist Lloyds should have tried to raise the finance in the open market, but the reality is that given the amount and the circumstances that just wasn’t going to happen. The Bank breaking with its normal policy and helping Lloyds would have got everyone out of this jam, but Jobsworth King knows better. Of course, it wasn’t his fault - he just gave the advice. Darling didn’t have to listen, did he?