First Drafts - The Prospect magazine blog

John Gieve’s participation in our financial roundtable turned out to be virtually his last hurrah as deputy governor of the Bank of England in charge of financial stability. A couple of days after Prospect was published, news leaked out that he would be stepping down from the post next spring, two years early. What’s more, the news emerged in the most humiliating way possible for Gieve—on the eve of the annual Mansion House speech, when the Bank governor and the chancellor of the exchequer address the bigwigs of the City. It looked as if Gieve had been made the fall guy for the financial crisis.

His departure may gratify those who argue—like Mark Hannam, another roundtable participant—that regulators as well as bankers should face the chop when things go awry in financial markets. But there is a school of thought that Gieve did a more than reasonable job. Philip Stephens took up the cudgels on Gieve’s behalf in the FT on 1st July, pointing out that Gieve’s performance was perhaps more sure-footed than that of Mervyn King (who has recently been reappointed to his post as Bank governor). Gieve spotted much earlier than his boss that the severity of the crisis necessitated a major injection of liquidity into financial markets. King, Stephens points out, was at the time still hung up on the idea of not rewarding bankers who had taken foolish risks—even as a financial Chernobyl was unfolding around him.

That said, these differences don’t seem to have had much impact on the outcome. King got it in the end. Would things have been different had he taken Gieve’s advice sooner? In the roundtable, Gieve himself pretty much pooh-poohed the idea.

But if Gieve did a pretty good job in what were very difficult circumstances, it is also right that he should go early. The biggest lack in the crisis—from the perspective of the authorities—was early intelligence about stresses in the markets. The Bank now intends to correct that lack. Its expanded financial stability role will involve monitoring what banks are doing to gauge emerging risks. That requires someone with a deep knowledge of the markets, something that Gieve—a former civil servant—lacks.

King should now replace Gieve with Paul Tucker, a Bank insider with the necessary independence of mind and market expertise. This is clearly what he wants to do. But worryingly, the treasury may try to frustrate King. It seems to favour the alternative of appointing an old City hand—even though this would run the risk of the Bank being captured by the very people it is supposed to be regulating. Stephens’s article—which implied King may have been complicit in Gieve’s departure—may have unwittingly handed the mandarins some ammo in this fight.

The one thing surrounding Gieve’s departure which does deserve criticism is the way it was handled. Gieve was an able and loyal servant of the Bank and was entitled to leave with his dignity intact. Whoever leaked his departure in the way they did, and for whatever reason, paid him back in very poor coin.