Leadership is not just a technical thing, a matter of hiring the right nerds to recommend the right policies. Leadership is knowing when and how to tell your people unpleasant truths. Since WWII few American Presidents have had the moral courage — or trust in us — to do.
Other nations are more fortunate in this respect. Or perhaps their people better deserve their leader’s confidence. Let’s look forward to the day when our leaders speak so forthrightly to us.
Speech by Mervyn King (Governor of the Bank of England) To the CBI, Institute of Directors, Leeds Chamber of Commerce and Yorkshire Forward at the Royal Armories, on 21 October 2008 — It strikes a fine balance between a realistic summary of this situation and hope that the government’s efforts will succeed. This excerpt shows the former, not the latter.
Since August 2007, the industrialised world has been engulfed by financial turmoil. And, following the failure of Lehman Brothers on 15 September, an extraordinary, almost unimaginable, sequence of events began which culminated a week or so ago in the announcements around the world of a recapitalisation of the banking system. It is difficult to exaggerate the severity and importance of those events. Not since the beginning of the First World War has our banking system been so close to collapse.
… The scale of central bank liquidity support during the crisis has been unprecedented, and all central banks have increased the scale of their lending in broadly similar ways. The UK taxpayer now has a larger claim on the assets of banks (in the form of collateral held by the Bank of England) than the total equity value of UK banks. Massive injections of central bank liquidity have played a vital role in staving off an imminent collapse of the banking system. Such lending can tide a bank over while it is taking steps to remove the cause of the concerns that generated a run or lack of confidence. But it can also serve to conceal the severity of the underlying problems, and put off the inevitable day of reckoning.
I hope it is now understood that the provision of central bank liquidity, while essential to buy time, is not, and never could be, the solution to the banking crisis, nor to the problems of individual banks. Central bank liquidity is sticking plaster, useful and important, but not a substitute for proper treatment.
Just as a fever is itself only a symptom of an underlying condition, so the freezing of interbank and money markets was the symptom of deeper structural problems in the banking sector.
… With the plan for recapitalisation in place, the focus of attention has moved to the outlook for the UK and world economies. Over the past month, the economic news has probably been the worst in such a short period for a very considerable time.
… Looking ahead, the outlook is obviously very uncertain – both for the world as well as our own economy. The MPC cannot simply extrapolate the past into the future. The prospects for oil and other commodity prices are difficult to assess. So too are the period over which bank lending will return to normal and the extent of the damage to business and consumer confidence. Moreover, the credit crunch affects not just demand but also the supply potential of the economy, complicating the assessment of the inflationary impact of changes in the level of demand.
… Let me take you back again to 1958. In the very first television interview given by a Governor of the Bank of England, Cameron Cobbold explained national debt to Robin Day on “Tell the People”, the highlight of ITN’s Sunday evening schedule fifty years ago. Here is the exchange:
Cobbold: The National Debt represents the sums of money which the Government have over the years borrowed from the public, mainly in this country and, to some extent, abroad. That is really the amount of expenditure which they have failed over the period to cover by revenue.
Day: Have we paid for World War II?
Cobbold: No. Day: Have we paid for World War I?
Cobbold: No. Day: Have we paid for the Battle of Waterloo?
Cobbold: I don’t think you can exactly say that.
… I hope banks will come to appreciate, just as the New Zealanders at Headingley in 1958, the Yorkshire virtues of patience and sound defence when batting on a sticky wicket. I have said many times that successful monetary policy would appear rather boring. So let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing. The long march back to boredom and stability starts tonight in Leeds.
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For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about America – how can we reform it?
- about the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
- links to Damage Reports from home and abroad
Situation Reports about the crisis
- The US economy at Defcon 2, 11 March 2008 — Where are we in the downcycle? What might the world look like when it ends?
- The most important story in this week’s newspapers, 22 May 2008 — How solvent is the US government?
- Another warning from our leaders, which we will ignore, 4 June 2008 — An extraordinarily clear warning from a senior officer of the Federal Reserve.
- High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
- A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
- A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008