On Sunday 15 March, the morning before he became the 121st governor of the Bank of England, Andrew Bailey absorbed the news from around the world. Within twelve hours, the White House had banned all visitors from the UK, Spain had introduced a national lockdown, France had closed all non-essential businesses, and Germany had re-erected its borders.
"That weekend," Bailey told me when we spoke on 7 July, "the situation was changing. You could see that the pace and scale of the impact was picking up very rapidly.”
On Monday 16, as Bailey’s first day as governor drew to a close, scientists at Imperial College London released a report which warned that an “unmitigated epidemic” of Covid-19 could kill 510,000 people in Britain. Bailey remembers reading it: "That, for me, was a major stepping stone.” The UK, he could see, was "heading towards much stronger restrictive measures."
What seemed clear to Bailey that evening had not been publicly accepted by Downing Street. The previous week, on Thursday 12, Boris Johnson had announced that the UK would cease contact tracing. The government would, in effect, no longer try to suppress the spread of coronavirus. "Many more families are going to lose loved ones," said the prime minister.
At the same time, the new governor and his fellow officials were preparing to act. Markets were already turbulent; the Monday before Bailey arrived at the Bank, the FTSE had suffered its biggest drop since the 2008 financial crisis, wiping £125bn of the value of UK companies in a single day. But the previous crisis had also given the Bank recent experience of dealing with disaster. Financial disorder was one contagion that would not be allowed to spread.
The Bank of England is an older institution than the office of prime minister, but Britain’s central bank only gained independence from the Treasury in 1998, when it was given the freedom to set interest rates. The 2008 crisis made it more powerful still by adding new bodies, such as the Financial Conduct Authority and the Prudential Regulation Authority, to regulate and monitor the financial sector. It had spent a decade preparing for the next crash.
In Whitehall, the Treasury soon caught up with the Bank. While Johnson and his team watched the virus spread, the senior teams at the Bank and the Treasury worked quickly to set up the economic and financial infrastructure to deal with its effects. By the time the UK finally locked down on March 23, those teams had already, behind closed doors, put many of the vital schemes in place.
Rishi Sunak has won praise for his coherent presentation of the Treasury’s plans, but he was not the architect of them. One outsider who worked closely with the Treasury in March says the architects of the financial stimulus were civil servants, "not the politicians, and not the political advisers." Sunak has benefited from the work of these civil servants, and their long-standing relationships with Bailey and other key officials at the Bank – but Bailey and Sunak, prior to the crisis, did not know each other.
Amid sweeping changes brought about by Dominic Cummings, the civil servants at the Treasury and Bank were lucky to still be in a job. Bailey was not the governor Dominic Cummings wanted, while the Treasury's top official, Tom Scholar, is the only top-rank permanent secretary Cummings has not yet pushed out of Whitehall. As a recent Treasury adviser put it to me: "The people that some people wanted to fire – their expertise has really come in handy."
Bailey and Scholar were veterans of the 2008 crisis. Their long association allowed them to work quickly to prevent far more severe economic consequences in March, averting millions of further job losses, a flood of business closures, a run on the pound, spiralling debt costs, and another credit crunch. They benefited from years of quiet preparation by officials across a civil service that Cummings sees as unfit for purpose, if not actively harmful. Johnson and Cummings spent March catching up to the virus. We are fortunate that other parts of the government were ahead of it.
On Monday 16, when Bailey arrived for his first day as governor at the Bank’s formidable neoclassical premises – ten storeys, a third of them below ground, with vaults containing five thousand tonnes of gold – his focus was on America. Over the weekend Jay Powell, his counterpart at the Federal Reserve (the Fed), had attempted to arrest a "dash for cash" by US investors.
The two types of financial asset most commonly bought and sold in investment markets are stocks and bonds. Stocks allow people to buy a small piece of a company in the hope that the company will rise in value; bonds allow people to buy debt, which pays interest and is eventually repaid. In normal times, when stocks fall in value, investors buy bonds, which are generally safer. When financial markets are gripped by fear, as in 1929, 2008 and the third week of March, the prices of bonds and stocks fall at the same time, as investors cash out. If left to spiral, the value of assets - and companies - can collapse.
To shore up prices in the US, Jay Powell had, on Saturday 14, committed to buying $700bn in assets. This was $100bn more than the Fed bought in November 2008 in response to the last crash.
"My view on Monday morning," Bailey tells me, “was, let's see what effect the Federal Reserve action has. The dash for cash prior to that had really been in dollar markets." The hope was that the Fed's actions alone could arrest global unrest. By Wednesday afternoon, that hope had faded.
While stocks across the FTSE 100 had fallen 30 per cent in less than a month, that could be endured. It was the value of the pound and the cost of government debt that really mattered to the Bank. In Bailey's first 48 hours, both markets seized up. Sterling fell more than six per cent against the dollar, having fallen seven per cent the previous week – reaching lows last seen in the 1980s – as markets began to price in a UK lockdown days before it happened. Meanwhile, the cost of selling the government's debt spiked. Between March 9 and March 19 the payment rates that the government had to offer investors doubled, and in some cases more than tripled.
The governor remembers watching the disorder unfold from his office on the Wednesday. "It was around 3.30," he says, "the markets hadn't closed." Eight members of the Bank's markets team arrived at his door. One of them, Andrew Hauser, later described that Wednesday as the moment of "critical market stress", with government debt markets having gone into "freefall". As one former Treasury official put it to me, the bond market temporarily "went crazy". The markets team had access to more indicators than Bailey could see on his screen, as well as real-time reaction from major market players. They confirmed what was increasingly apparent: without immediate action, the freefall would continue, and spread.
The Bank was only partly full – while the virus was still progressing through Downing Street, hospitalising Johnson on April 5, the Bank had moved to a rota system – and half of Bailey's senior team were out of office. But as the markets closed that afternoon he convened the monetary policy committee (MPC), the primary decision-making body in the Bank, for the next day. It would be only its fourth ad hoc meeting in 23 years of independence: the others had been after 9/11, in 2008, and during the previous week, when its actions had been muted. Now it would have to act.
The Bank and Treasury had already acted on one front. The previous day Rishi Sunak had, in his first coronavirus press conference at Downing Street, promised to "do whatever it takes” to protect jobs. In doing so he echoed a phrase used by Mario Draghi to calm markets during the European debt crisis in 2012. For Sunak, the event was another star turn after his acclaimed budget performance the previous week. Alongside an incoherent and seemingly insincere Johnson, the young chancellor impressed pundits and the public, speaking not only with gravitas but in full sentences.
The centrepiece of Sunak's offer that day was a newly created system that enabled large companies to access cash loans. The scheme, run by the Bank, was operational within a week. Within two months, £20 billion had been issued to companies, staving off bankruptcies.
Throughout his Tuesday 17 speech, Sunak was unafraid to take personal credit for this and other initiatives. He is indeed responsible for them, and largely acts independently of Johnson, who has confessed that he leaves "fiscal stuff" to Sunak. But the scheme was, as with most government action, the product of feverish work by unheralded officials. It was agreed by Bank and Treasury teams two days earlier, on Sunday 15.
It was not a given that the two institutions would work well together in a crisis. They had not done so in 2008. In that crisis the Bank had been reluctant to act rapidly alongside the Treasury. It was "not straightforward with [then-governor] Mervyn [King]", says a Treasury adviser from the time. At one point, King and the then-chancellor, Alistair Darling, were hardly speaking. For those in the Treasury, one of the few bridges into the Bank was the then-chief cashier: Andrew Bailey. He was, I was told, "the acceptable face of the Bank".
One of the officials Bailey worked closely with at the Treasury in 2008 was Scholar, now the permanent secretary. Another was Jon Cunliffe, a long-time Treasury mandarin who is now one of Bailey's deputy governors at the Bank; two of Bailey's other deputies, Ben Broadbent and Dave Ramsden, are also former Treasury officials. Equally, lead officials at the Treasury – such as Claire Lombardelli, the chief economist, and Katharine Braddick, head of financial services – used to work at the Bank. When Covid-19 forced the two institutions together, their key staff were already unusually interlinked.
Such familiarity made rapid co-ordination possible in Bailey's first week. That co-operation did not compromise the Bank's independence, as Paul Tucker, a deputy governor under King, recently protested. It simply showed that the Bank had evolved.
Bailey epitomised the new Bank. He had been a Bank lifer who, as private secretary to governor Eddie George in the 1990s, had "sort of seen everything", says Charlie Bean, another former deputy Bank governor. Bailey had gone on to work in monetary analysis, the Bank's core function. But as the Bank changed after the last crisis, becoming the City's overseer, it was Bailey who became its de facto regulator-in-chief, running in turn the two new supervisory bodies created after the crash.
"As governor you want someone who is reliable and a safe pair of hands," Bean tells me, "Andrew is the perfect man to have in there." For Stewart Wood, an adviser to Brown in 2008, Bailey is "someone who just makes things work."
Nevertheless, when Sajid Javid was appointing a new governor after the 2019 election, he came under pressure from Cummings to appoint "funkier alternatives", a former Treasury adviser tells me. Cummings favoured Andy Haldane, the Bank's chief economist. In 2014 Cummings had, in a rare act, praised Haldane for his "extremely interesting lectures" on complexity and risk. "I think it's very good that he's there at the Bank of England," said Cummings, "I hope that senior people there listen to him." Haldane is highly regarded for his intellect, but he was felt by senior Bank and Treasury officials to lack both the management skills and judgement to be a deputy governor, let alone governor. Javid's team agreed, picking the dependable Bailey.
Cummings has had no impact on the Bank. On Whitehall he has forced out Mark Sedwill, the cabinet secretary, and overseen the ousting of top officials at the Home Office, the Foreign Office and the Ministry of Justice. But he is yet to defenestrate Tom Scholar or his Treasury team, many of whom built their reputations under Gordon Brown and remain in post.
One of those key figures is Beth Russell, who was Brown's speechwriter in No 11 and No 10. The role was critical for Brown, who, says a former adviser, thought almost entirely in speeches. Brown would send Russell long messages on policy "on New Year's Eve, at 11.49pm". Russell is now the primary Treasury official behind the government's lauded furlough scheme. Another of Scholar's senior staff, Mark Bowman, was Brown's private secretary for four years. Cunliffe, the former Treasury mandarin and now deputy Bank governor, was Brown's envoy to the G8 and G20 during the last crisis. And then there is Scholar himself, who served as Brown's chief of staff when he entered No 10 in 2007.
As a young Treasury official, Scholar became close to Brown's team in the 1990s; he helped draft the terms of the Bank of England's independence. Scholar was long identified by Brown as the civil servant he would bring with him into No 10. Scholar duly went with Brown when he became prime minister, to fulfil the role Jonathan Powell had held for Tony Blair. But he only lasted a few months. Like Brown himself, Scholar found No 10 an alien and underpowered environment after the Treasury. As Wood put it to me, Brown as chancellor had "the smartest people in government working for him – [then] when you're in No 10 there was nothing there!"
Scholar soon returned to the Treasury, becoming permanent secretary in 2016, and thus exceeding the rank of his father, Michael Scholar, who had served as a key Treasury official in the 1980s. Andrew Adonis, the Labour peer, tells me that Scholar, like his father, has risen on an "economy of opinion, a profusion of facts, and an absolute minimum of personality".
If Scholar has used that approach to thrive in a series of Conservative governments despite his close role with Brown, his flexibility and discretion are unlikely to help him survive in government much longer. Although Scholar is only 51 and his predecessor, Nick Macpherson, was permanent secretary for over a decade, he faces losing his post after his term expires next summer. If not for coronavirus, he may already have been deposed – a total clear-out of the civil service has long been Cummings's intention.
In March 2005, in a post for a short-lived think-tank that he once ran, Cummings wrote that "a serious Conservative government would thoroughly purge the civil service and remove swathes of the top people". Their independence was to him a "fiction" and their expertise unproven. That purge is now underway, although during the pandemic it is Cummings who has been accused of fictions, and the expertise of senior officials that has proven useful.
The most successful part of Johnson's government since March has arguably been the one in which Cummings has had the least involvement. "For all the Cummings rubbish about everything being run by No 10," says a former Treasury mandarin, "what becomes clear in a crisis, especially an economic one, is that the only institution that has a capacity to respond is the Treasury."
But the Treasury cannot, at least when financial stability is on the line, act alone. When the UK's core financial markets came under severe stress in mid-March, it was the Bank of England that stepped in, preventing spiralling disorder before the vast majority of the country was even aware of it. Sunak's promise to do "whatever it takes" on Tuesday 17 had failed to reassure investors. The magic of that phrase in the past was not in its words but the billions in asset purchases it described. The day after Sunak's speech, assured though it was, Bailey was sitting in his office being told by the Bank's markets team that the MPC must meet, and act immediately.
"We had to go with something big," Bailey tells me, "and very rapid."
In March 2009, six months after the fall of Lehman Brothers sparked the 2008 crash, the Bank of England was stuck. It needed a new tool to revive the UK economy. Its main lever – the interest rate on sterling, which it could lower to make borrowing money cheap and saving less attractive – had already been pulled about as far as it would go. In March 2009, the Bank had cut the interest rate to 0.5 per cent; it had been 5 per cent in October 2008.
And so the Bank began to do something new: it created money and used it to buy government bonds. This is quantitative easing, or QE. Creating money sounds disorientating, but when done to buy government bonds (known as gilts) it is a natural extension of cutting the interest rate. Buying gilts complements this by lowering long-term interest rates as well, which should encourage investment.
The problem with QE – as Ben Bernanke, the former Federal Reserve governor, put it in 2014 – is that it "works in practice, but it doesn't work in theory." As the Bank itself put it in 2016, the channels through which QE works are "still the subject of debate", while the actual impact of QE is "quite uncertain". When it comes to stimulating the economy, it is not clear that it does in fact work.
But QE has had one observable effect since 2009: it has regularly calmed market disorder. This has made QE the favoured crisis response of central banks regardless of its wider economic impacts, or lack of them. Since it first bought £200bn in bonds in 2009, the Bank has restarted purchases whenever the UK economy has been rocked by events, as it was by austerity in 2011-12 (a new round of £175bn) and later by Brexit in 2016 (another £70bn).
On March 19, when Bailey met with the other eight members of the MPC in emergency session, they turned to what had become a well-oiled tool – and approved £200bn in purchases, £125bn more than in any prior MPC meeting. They also approved a quicker timeline for the purchases than ever before.
Bailey tells me he had two things in mind. "One was the immediate reaction to stabilise markets, and [the] second [was] to arrest what we were now seeing, which was a much bigger range of impact in terms of the economy. Fortunately they are not at odds with each other."
The impact was immediate. As soon as the MPC's decision was announced, the cost of selling government debt fell and the value of the pound rose, arresting the disorder in the UK's two core markets. "If they hadn't done that," says Charlie Bean, who served on the MPC for 13 years, "it would have been costly for the government to sell its debt".
The Bank's resort to QE was the most visible and effective action it took in March. But in Bailey's first week the UK also benefitted from decisions made by financial officials in the wake of the 2008 crash.
A series of measures, introduced globally but aptly applied in the UK, proved vital. Banks were required to hold more loss-absorbing capital, while also building up reserves with the Bank. These reserves would then be returned to the banks when a crisis hit, preserving the flow of credit. This is precisely what happened, freeing up £380bn for banks to lend to UK firms in March. Without the post-crisis reforms, we would "now be dealing with illiquid banks in life-preservation mode, cutting back all credit to hoard capital and to remain solvent – in other words, a credit crunch," says Jon Cunliffe, the deputy Bank governor.
There were other actions quietly taken by the Bank in March, not least the opening up of "swap lines" with the Fed on the night before Bailey took office. Swap lines, which allow the Bank to lend emergency dollars to UK banks as these banks dashed for cash, were another piece of emergency plumbing drawn up in 2008 that was made permanent after the crisis. They may be, as one top Bank official, puts it, "the most important part of the international financial stability safety net that few have ever heard of."
When the UK was struck by Covid-19, the country suffered not only from the government’s short-term ineptitude but from years of pandemic preparation that had never happened. But the catastrophe we did prepare for, and averted, was the collapse of the financial system.
In a lecture in late June, Michael Gove, the powerful minister in charge of the Cabinet Office, thoughtfully noted that civil servants are too often shuffled out of departments just as they begin to acquire expertise in their field. Yet Gove made no mention of the UK's recent economic resilience, or the officials who are largely to thank for it. If retaining those with knowledge is genuinely the aim of Gove and this government, the success of the Treasury and Bank in March is a case in point.
When the crisis hit, those teams deployed hard-won expertise and leveraged long-standing relationships. As Bailey said to me, "We'd been through crises together, many of us. We have strong working relations, and that's very important."
Gove rightly criticised "group think" in his lecture – "the tendency to coalesce around a cosy consensus, [and] resist challenge" – but during the Covis-19 pandemic that tendency has been more evident in No 10 than outside it. The UK discovered this to its cost when the government failed to lock down in early March, or to protect care homes thereafter: a pair of errors that Johnson's government has not even conceded it made. The flaw in Gove's speech was its lack of introspection.
When I spoke to Bailey, in contrast, I was struck by his caution and humility. He hesitated to make statements that were not supported either by others or by data. When he took positions he laid out his own ideas with scepticism, recognising that uncertainty abounds. His tone contrasted markedly with Cummings' self-published works. In a January blog this year Cummings put out a call for "some true wild cards" to join government, seeking out "weirdos from William Gibson novels" and "unusual economists". Six weeks later a contractor hired by Cummings was forced to resign after some of his more unusual views were made public.
In contrast, the story of the Bank and Treasury response in March is not one of extraordinary brilliance but of ordinary competence, a quality that has been conspicuously lacking in No 10's response. It is not the story of exalted individuals but of a crisis-weathered team that functioned well when it mattered.
The crisis they dealt with is not over. As Bailey put it to me, "the thing is still out there, people are worried." Despite the effectiveness of the UK's economic institutions, huge damage has been done, and much of it has not yet been felt. Further damage threatens: from a possible no-deal Brexit, from a potential second wave, from No 10's failure to learn – as the Bank and Treasury did after 2008 – from its own failings. From the arrogance of a few, and their power over the rest.