Can Mervyn King save the British economy?

http://www.guardian.co.uk/commentisfree/2012/jun/18/mervyn-king-save-british-economy

Version 0 of 1.

"It's only when the tide goes out that you learn who's been swimming naked." You heard that Warren Buffett folksiness a lot in 2008, as reckless banks and investors went to the wall. You can expect to hear it all over again in the next few months. This time, however, it will be said of governments, who have failed to prepare for the coming turbulence.

You don't have to be an insider or a banker to spot an ugly financial storm on the horizon; you just need to follow the news. In Greece, the rightwing New Democracy party is scraping together a coalition whose primary objective will be to sustain an unsustainable austerity programme. In Spain, the cash-strapped government is now being charged 7% interest on 10-year loans; in other words, one of the richest sovereign nations on the planet is getting a worse deal than you or I could score on the internet.

Many more days of this and Madrid will need a second bailout from the rest of Europe, only it's not clear that the single-currency club has the cash to provide one. At twice the size of Ireland, Portugal and Greece put together, Spain may be too big to bail. If so, this is the point at which a regional catastrophe becomes something far larger and far more frightening. This is the climax that the euro crisis has been threatening to build towards for the past two years. This is the nightmare that all those war games and ministerial summits and that trillion-dollar firewall were meant to stave off – and it appears to be materialising.

Just because Britain is not in the euro doesn't mean it will get off lightly. Far from it. The UK relies on the eurozone as far and away its biggest export market, and our outsize banking sector will also be badly buffeted by the ensuing chaos. Mervyn King, for one, is so alarmed about the possible fallout that last week he warned of a "large black cloud" hanging over Britain. Coming from the head of the Bank of England, who prefers to paint the economy with gentlemanly cricketing metaphors, this was frightening stuff.

So let's apply the Buffett test to Britain: how well covered are we, if the tide goes out for the second time in five years? The evidence is frankly worrying.

Take the dinner at which King was speaking, at the Mansion House. For most of the past two decades, it has been the event at which the governor and the chancellor have addressed the City's top bankers and either engaged in mutual back-slapping (I'm thinking of some of Gordon Brown's most cringeworthy moments) or, more recently, tried to console each other. What George Osborne did last week was completely different and utterly extraordinary: he announced two major new state lending programmes to get Britain out of recession and protect banks from volatility. Not only that, but one scheme, the funding-for-lending plan intended to get more cash from banks to the rest of us, had only been dreamed up a couple of weeks ago and is yet to have key details filled in. Among the basics yet to be nailed down is how much the plan is actually worth: £80bn or £100bn?

This must be what the posh-boy version of panic looks like. Osborne spent last year sticking to a plan for bank lending that was the original suggestion of the banks themselves. Having come up with the idea and agreed to the targets, the banks then flunked the most important one, on lending to small businesses.

The other problem has to do with King himself. Over the past few years, he has become more powerful than any British central banker in living memory. Indeed, given that the government is pursuing a policy of tight budgets and loose monetary policy, the head of the Bank of England is probably the man most responsible for getting Britain out of recession.

No wonder that King is the subject of public deference from Cameron and Osborne; he is in charge of the £325bn quantitative-easing scheme; and in a few months the Bank will essentially replace the Financial Services Authority as the UK's top financial watchdog.

Yet this is the official whose interest in banking regulation was so limited before the crash that, according to the FT, he would doze off in meetings on the subject. King was in charge of the Bank when the wheels came off the economy, and yet his institution's role in the crisis has still to be thoroughly investigated. Coming up to date, the Bank's economic forecasts, predicated on recovery being just around the corner, are regularly wide of the mark.

Any official has his or her flaws, but King's have inadvertently become more exposed by a government so austerity-minded that it has outsourced the job of macro-economic management to him. Britain is not alone in doing this. In the cuts-crazy eurozone, the European Central Bank's Mario Draghi often looks like the only adult around. In America too, Obama relies more and more on the Federal Reserve's Ben Bernanke.

Yet the tools that the Bank has are too limited and too crude to do much of what is being asked of it. Just how limited, how crude, we may find out this summer.