Hanging by a Threadneedle

Moral hazard is not the only danger weighing on Bank of England governor Mervyn King these days. There is also the potential hazard of his losing his job at the head of one of the world's most powerful central banks.

A drumbeat for his resignation has started in the British press following the Bank's "embarrassing U-turn" (as the Daily Telegraph put it this morning) on bailing out British lenders—particularly the Northern Rock thrift, which was hit by a classic run on the bank.

Just last week, King (above, right, with Chancellor Alastair Darling) had told Britain's Treasury Select Committee that "the provision of such liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behavior." It was the old high-minded "moral hazard" argument so much in vogue these days.

That was all fine and well until panicky depositors (who also happen to be voters) began lining up outside Northern Rock branches, demanding the return of their money, which Northern Rock didn't have and had no way to get.

Then, apparently, politicians stepped in. Chancellor of the Exchequer Alastair Darling guaranteed the deposits at Northern Rock, and the Bank dutifully stepped up and flooded the money markets with about £10 billion.

Cue the critics.

"Is this it for Mervyn King?" Charles Pretzlik wrote in the Financial Times this morning. "Can the governor stay in these circumstances?"

"Northern Rock crisis threatens Governor of the Bank of England's position," echoes the headline over Russell Hotten's analysis in the Telegraph.

Hotten muses whether King "did too little too late to help ease Northern's problems because he simply underestimated what was about to engulf the markets."

"The Bank of England's initially principled stance now looks a touch confused," adds Stephen King in the Independent.

"If you criticize someone over moral hazard, and then bail out a bank the next morning, no matter what the circumstances, it does not look good at first sight. In this particular case, it looks even worse at second sight," chip in the bloggers at EuroIntelligence, which is run by Wolfgang Munchau and Susanne Mundschenk.

And it isn't just financial writers and bloggers who are speculating about whether King has been fatally wounded by the episode. Academics are wondering aloud as well.

Economics professor Patrick Minford of the Cardiff Business School in Wales described King's handling of the crisis as "wobbly."

"It's a crisis of confidence and the bank is confused," Minford added. "I don't think this has done King any good."

King is scheduled to come up for reappointment next month. Will he be able to rescue his reputation—and his dignity—before then? Former Bank of England economist Danny Gabay, of Fathom Consulting, is not very optimistic.

"I would be nervous if I were him," Gabay said. "You know what politicans are capable of when their own position is threatened."

by Mark Stein

^{Photograph of Alastair Darling and Mervyn King by Reuters.}