Bank of England governor blames spending cuts on bank bailouts

Mervyn King tells MPs: 'The price of this financial crisis is being borne by people who absolutely did not cause it'


Mervyn King has risked reopening the bitter argument over blame for the financial crisis by saying that government spending cuts are the fault of the City and expressing surprise there has not been more public anger.

The governor of the Bank of England said that people made unemployed and businesses bankrupted during the crisis had every reason to be resentful and voice their protest. He told the Treasury select committee that the billions spent bailing out the banks and the need for public spending cuts were the fault of the financial services sector.

"The price of this financial crisis is being borne by people who absolutely did not cause it," he said. "Now is the period when the cost is being paid, I'm surprised that the degree of public anger has not been greater than it has."

King has repeatedly pointed the finger at the City since the crisis erupted in 2007, but this was the first time he blamed bankers for the coalition's spending cuts.

It became clear during the hearing that King and his fellow members of the Bank's monetary policy committee, which sets interest rates, believe the crisis will have a lasting impact on the economy.

Asked when living standards enjoyed before the crisis would return, King said: "The research makes it clear that the impact of these crises lasts for many years. It is not like an ordinary recession, where you lose output and get it back quickly. We may not get the lost output back for very many years, if ever."

King faced tough questions from Labour MPs who believe the Bank should not have supported the Treasury's cuts programme. Accused by Andy Love, the Labour MP for Edmonton, of giving George Osborne cover for spending cuts, King denied that meetings with the chancellor resulted in a cosy agreement to keep interest rates low to support austerity measures.

He said: "There has never been any attempt on any occasion to influence the monetary policy committee on what decisions it should take."

In a further provocation to the financial sector, King set out plans for an overhaul of City regulation and oversight that would allow banks to fail when they get into trouble. He told MPs it was necessary to move away from rules designed to prevent banks failing, with a safety net provided by taxpayers, to a system that allowed banks to fail in an orderly way.