Money maestro is cautious

Christina Fincher

Christina Fincher

LONDON - Bank of England Governor Mervyn King has praised former Federal Reserve chief Alan Greenspan as a great economist, but the two men stand poles apart in their response to financial crises.

Greenspan's willingness to ride to the rescue whenever things got tough earned him plaudits and the nickname "maestro".

Britain's central bank governor, in contrast, has been pilloried for his tardy response to this summer's credit squeeze and for turning a drama at cash-strapped mortgage lender Northern Rock into a crisis.

Speaking in London this week with Prime Minister Gordon Brown and Finance Minister Alistair Darling, Greenspan said there were signs that recent financial market turmoil might be coming to an end.

"To be sure, lenders in recent days have been reaching out for a longer term, lesser quality assets, and that is a good sign," he said.

As Greenspan conducts a whistle-stop tour of Europe to promote his new book The Age of Turbulence, a growing number of commentators are daring to criticise his quick reflexes and monetary largesse.

When the dust settles, history may judge differently.

They claim that his readiness to slash interest rates at the first sign of market distress caused the very asset bubbles and risky lending strategies that are giving today's central bankers a headache.

Greenspan cut rates three times following Russia's debt default in 1998 and again following the bursting of the dotcom bubble and 9/11 in 2001.

The fed funds rate hit an historic low of 1percent in June 2003 and was held there for a full year even as the economy recovered.

"Greenspan never liked pain and would always take the easy option," says Nick Parsons, the head of market strategy at nabCapital.

"If it was an insurance policy, it came at a high price," he said.

However, his attempt to hold the high moral ground wobbled two days later when the Bank announced - in concert with the Treasury and the Financial Services Authority - it had granted an emergency credit line to Britain's fifth-largest mortgage provider Northern Rock.

News of Northern Rock's difficulties - which King later said he would rather have kept quiet - sparked Britain's first bank run in more than a century. The sight of people, many of them elderly, queuing to withdraw savings prompted the government to step in with an unprecedented guarantee on all existing deposits. While risk-taking lenders needed to be taught a lesson, risk-averse pensioners did not.

The Bank of England's willingness to act as a lender of last resort was portrayed as a climbdown for King even though the loan carried stringent collateral requirements and a punitive interest rate.

King's announcement the following week of a series of three-month money auction was seen as an even bigger U-turn, even though the cost of the funds was so prohibitive not a single institution bid for them last week.

This week, the Bank of England offered commercial banks another chance to bid for about R140 billion in three-months in the second of its four scheduled auctions.

But last week's no-show has left analysts wondering whether King has egg on his face or whether his initial assertion that central bank intervention was not warranted has been vindicated.

"To be sure, lenders in recent days have been reaching out for longer term, lesser quality assets, and that is a good sign," King said.

They claim his readiness to slash interest rates at the first sign of market distress caused the very asset bubbles and risky lending strategies that are giving today's central bankers a headache.

As central banks in Europe, the US, Japan, Canada and Australia scrambled to inject cash into the money markets in early August, the Bank of England maintained a hands-off stance. - Reuter

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