The Bank of England governor Sir Mervyn King "wasn’t interested" in worries about the Libor rate when it was discussed in 2008 and has “key questions” to answer tomorrow morning when he is cross-examined by the Commons Treasury committee, former members of the bank's Monetary Policy Committee have said.
It has emerged that King and US Treasury Secretary Timothy Geithner discussed concerns about the setting of Libor interest rates as early as May 2008, at a summit of central bankers in Switzerland. New documents released by the New York Federal Reserve late last week reveal that Geithner then emailed evidence of alleged Libor manipulation to King in June 2008 .
"The New York Fed analysis culminated in a set of recommendations to reform Libor, which was finalized in late May.
On June 1, 2008, Mr. Geithner emailed Mervyn King, the Governor of the Bank of England, a report, entitled 'Recommendations for Enhancing the Credibility of Libor,'" said a statement from the New York Fed that was released on Friday.
"As is clear from the work culminating in the report to Mr. King of the Bank of England, the New York Fed helped to identify problems related to Libor and press the relevant authorities in the UK to reform this London-based rate."
So what did King do? How seriously did he take Geithner’s report for “enhancing the credibility of Libor”?
Former colleagues of King’s on the MPC have told The Huffington Post that the governor was never “interested” in the controversy surrounding the Libor rate and has “key questions” to answer tomorrow morning, when he is cross-examined by members of the Treasury select committee.
“People told him about the Libor issue and he just wasn’t interested,” said David Blanchflower, professor of economics at Dartmouth College in the United States and a former external member of the MPC. “He didn’t share any of the information with the rest of us on the Monetary Policy Committee.”
“Why did he not do more with Geithner's email?” asked another ex-member of the MPC, who said King’s overall response of the financial crisis has been “very disappointing” since 2008.
“If I witnessed a crime, would I ask the police to investigate it or would I go to the leader of the gang that the criminal belonged to and ask them to draft a new code of conduct?" they said.
This particular member of the MPC tells HuffPost that Bank of England deputy governor Paul Tucker’s rather defensive testimony in front of Parliament earlier this month “looks very odd in the light of Geithner’s email. Did Mervyn approve the line Tucker took in his testimony [at the Treasury Select Committee]?”
Yet another former MPC member says that King is “either compromised or incompetent – or both”.
Blanchflower is particularly critical of the governor’s resistance to a “full inquiry into what happened. King didn’t spot the Great Recession until October 2008. He was obsessed with inflation and missed everything: the crash, the recession, the Libor scandal.”
He added: “This is a bright guy but everything he’s believed in - inflation targeting, the theories, the models and the rest - has crumbled around him. He’s now just trying to control the news [agenda] and defend his position.
"He is the autocratic monarch, the Shah of Iran, but he missed everything: the crash, the recession, the Libor scandal.”
Blanchflower acknowledged it would be difficult to replace King before his term ends in June 2013 without panicking the financial markets but said the government should consider “replacing him early. Announce it next week so that Mervyn has less power going forward. It’s time to sweep clean the top levels of the Bank of England.”