Despite the library of books written about this most misunderstood of financial crises, surprisingly little has been written about the role of the City’s Old Lady, the Bank of England. Dan Conaghan substantially fills this gap with The Bank – an immaculately researched, pleasingly gossipy history which charts the creation of a modern Bank shaped by the character of what the author calls her ‘Last Governor’, Sir Mervyn King.
Conaghan draws King in turns as both a shrewd Prince at the centre of a scheming court, and as a rather lost, superannuated Captain Mainwaring incapable of understanding why the world stubbornly refuses to fit his mathematical models.
Sitting at the heart of the book is a serious criticism, that the Bank became a creature of monetary policy at the expense of everything else. The catastrophic decision by the last government to remove financial regulation from the Bank, coupled with King’s high-minded uninterest in the grubby context in which monetary policy operates, has in retrospect proved disastrous as low interest rates drove financial risk-taking. Conaghan invites the reader to conclude that by the time Northern Rock imploded the Bank and its governor were simply incapable of understanding either the nature or the scale of the crisis.
He reserves equal ire for a little-remarked aspect of Gordon Brown’s time in the Treasury: the decision to measure inflation – and therefore the target of King’s beloved monetary policy – using an index which excluded the rising cost of housing, meaning that King would have been unable to respond to the property bubble even if the Bank was inclined, or indeed skilled, to do so.
When the book reaches the financial crisis we are shown a bank in denial, actively restricting the labours of Alistair Darling and the Financial Services Authority. This is perhaps the weakest section of the book. Conaghan narrates the complexities of the crash well, but there is little new research to add to the existing literature.
Instead Conaghan’s contribution is in the earlier chapters where he offers a rare insight into a wilfully opaque institution, and raises a fundamental failure of the outgoing regulatory system: operating monetary policy without an understanding of its impact on escalating financial risk. Here this engaging history has a valuable lesson to teach King’s eventual successor.
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Allen Simpson is a former Labour party researcher and former political adviser to the London Stock Exchange
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The Bank: Inside the Bank of England
Dan Conaghan
Biteback Publishing | 256pp | £18.99