Did Merve Swerve?

In the confused world of financial regulation in the UK the problems at Northern Rock have led to a lot of finger pointing and yesterday they were all pointing at Mervyn King. There is nothing more brutal than a group of MP's, sitting in a parliamentary sub-committee, all with an axe to grind, urgently seeking a skapegoat. The stakes were high: with an election possible weeks away, our parliamentarians were desperate to find someone to blame - Mervyn was the victim, blame was the game and scores needed to be settled.

The problem faced by Mervyn King in handling any crisis is to ensure that what he says sends the right signals to market. The fatal mistake is to assume that what he says is what he believes - the messages he wanted to get out during the preliminary stages of this crisis were (i) we believe in financial rectitude and (ii) we will not do anything to encourage excessive risk taking in the banking sector. To have intervened in the market too early would have sent all the wrong signals. However, once the panic set in and the queues started to form the message and the action had to change. The key here was not to act too soon - there was no doubt that all the savers in Northern Rock would be able to get their money out and irrespective of the rationality of people who thought it safer to walk around the streets of Necastle with their life savings in their pocket - there was some sense in letting the storm blow through. The governor of the Bank of England had learnt his trade from observing that other master of market subtefuge Alan Greenspan. He played hard ball with the market and he waited until the point came when he believed intervention would have an effect. Then the message changed and Northern Rock was thrown its life line.

Mervyn played, as they say at Vicerage Road, a blinder. Should he have acted earlier? The risk of adverse market reaction was too high. Should he have acted at all? Clearly yes when the risk of instability across the whole banking sector became too high. Did he get the timing right? Arguable, but we are where we are now. The markets have recovered, no one has lost their savings, the media has moved on, and UK plc survives.